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Tools for options trading

Posted By extesy 14 Years Ago
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Posted Tuesday April 03 2007
I would like RE to provide more tools for building options-based strategies:

1. Have ability to construct continuous contracts from several separate options on the same underlying. In this case total history to back-test strategy could be much bigger than any single option lifetime. Same applies to futures. Be aware that for back-adjusted continuous contracts old prices are changing with every new expiration month. In ideal case I'd like to have artifical symbol and customize it in a way so it automatically knows all real option names at any given date and roll-over schedule. In this case it will behave like any normal option except that it represent different real options in a different periods of time.

2. Be able to draw price chart of any complex option like calendar or iron condor having prices for all component options and commission scheme. This allows me to build a strategy based not just on simple calls or puts but on all kinds of option strategies.
Posted Tuesday April 03 2007
1. I'm intrigued by this idea, but I don't think I fully understand how it would work.  I know futures have the concept of continuous contracts, but I've never seen anything like that for options.  How would this be constructed?  I think one of the real problems with this would be OTM options that expire worthless.  Futures never expire worthless.

2. I agree, this would be very nice.  Some of the more advanced graphs using the interchangable models would be nice.  Adding basic strategies like verticals, diagonals, iron condors and butterflies would definitely be slick and useful.  Have you used some option specific packages for this before?  What did you like about them, what didn't you like about them?

One note, this may or may not be of use to you today, but we have an OptionCalculator class built into RightEdge that you can access from code.  Also, the IB plugin does support options.

extesy (4/3/2007)
I would like RE to provide more tools for building options-based strategies:

1. Have ability to construct continuous contracts from several separate options on the same underlying. In this case total history to back-test strategy could be much bigger than any single option lifetime. Same applies to futures. Be aware that for back-adjusted continuous contracts old prices are changing with every new expiration month. In ideal case I'd like to have artifical symbol and customize it in a way so it automatically knows all real option names at any given date and roll-over schedule. In this case it will behave like any normal option except that it represent different real options in a different periods of time.

2. Be able to draw price chart of any complex option like calendar or iron condor having prices for all component options and commission scheme. This allows me to build a strategy based not just on simple calls or puts but on all kinds of option strategies.
Posted Wednesday April 04 2007
billb (4/3/2007)
1. I'm intrigued by this idea, but I don't think I fully understand how it would work. I know futures have the concept of continuous contracts, but I've never seen anything like that for options. How would this be constructed? I think one of the real problems with this would be OTM options that expire worthless. Futures never expire worthless.

2. I agree, this would be very nice. Some of the more advanced graphs using theinterchangable models would be nice. Adding basic strategies like verticals, diagonals, iron condors and butterflies would definitely be slick and useful. Have you used some option specific packages for this before? What did you like about them, what didn't you like about them?

One note, this may or may not be of use to you today, but we have an OptionCalculator class built into RightEdge that you can access from code. Also, the IB plugin does support options.

1. When an investor replaces an old options position with a new one having a later expiration date (and same strike price) this called a roll-forward. Obviously this produces a gap in prices, but the solution is the same as with continuous futures contracts: back-adjust price series to remove all gaps. Rolling date is not necessary expiration date: it could be previous month when remaining time until expiration does not influence option price that much (hint: make roll-over date configurable). So if we have a set of options with expirations every month, we could take one month of quotes from each option starting 8 weeks before expiration and then remove gaps starting from the latest option going backwards. This page explains the process better: http://www.premiumdata.net/support/futurescontinuous2.php. This approach simulates strategy when client doesn't use LEAPS, but frequently rolls-over short-term options if he doesn't want to sell them or let them expire yet.

2. I am thinking about it as just an indicator class that accepts several option price series as inputs, applies some calculation model to make them behave like iron condor or butterfly etc (using predefined enum or completely customizable model) and returns new price series. In this case it could be drawn on chart or used in the strategy - anything user wants.

Although I've seen lots of charting/trading packages, I haven't seen anything that allows charting of complex options. If you implement this it will be pretty cool and unique feature comparing to all competitors. Some of my ideas are influences by ThinkOrSwim desktop client which is also cool and powerful but lacks some important things like automation and customization.
Posted Wednesday April 04 2007
Right, I understand the roll forward concept, however, with futures, they never go to zero and the distance between the forward contract and the next month is relatively reasonable.  I just get hung up when an OTM contract goes to 0 and then the roll over happens and something that was worthless is now worth something.  That seems like a hell of an adjustment.

Thanks for the article, I have seen this before, but never thought to apply it to options.  I think the only thing left to do is to try it and see what happens with OTM contracts.

extesy (4/4/2007)
1. When an investor replaces an old options position with a new one having a later expiration date (and same strike price) this called a roll-forward. Obviously this produces a gap in prices, but the solution is the same as with continuous futures contracts: back-adjust price series to remove all gaps. Rolling date is not necessary expiration date: it could be previous month when remaining time until expiration does not influence option price that much (hint: make roll-over date configurable). So if we have a set of options with expirations every month, we could take one month of quotes from each option starting 8 weeks before expiration and then remove gaps starting from the latest option going backwards. This page explains the process better: http://www.premiumdata.net/support/futurescontinuous2.php. This approach simulates strategy when client doesn't use LEAPS, but frequently rolls-over short-term options if he doesn't want to sell them or let them expire yet.

2. I am thinking about it as just an indicator class that accepts several option price series as inputs, applies some calculation model to make them behave like iron condor or butterfly etc (using predefined enum or completely customizable model) and returns new price series. In this case it could be drawn on chart or used in the strategy - anything user wants.

Although I've seen lots of charting/trading packages, I haven't seen anything that allows charting of complex options. If you implement this it will be pretty cool and unique feature comparing to all competitors. Some of my ideas are influences by ThinkOrSwim desktop client which is also cool and powerful but lacks some important things like automation and customization.
Posted Wednesday April 04 2007
ToS is a great package with a team of developers on it.  To think we can recreate that in RE in a short amount of time (and make it better) may be a bit of a stretch.  However, I think the features found on the Analyze tab are a possiblity.

extesy (4/4/2007)
2. I am thinking about it as just an indicator class that accepts several option price series as inputs, applies some calculation model to make them behave like iron condor or butterfly etc (using predefined enum or completely customizable model) and returns new price series. In this case it could be drawn on chart or used in the strategy - anything user wants.

Although I've seen lots of charting/trading packages, I haven't seen anything that allows charting of complex options. If you implement this it will be pretty cool and unique feature comparing to all competitors. Some of my ideas are influences by ThinkOrSwim desktop client which is also cool and powerful but lacks some important things like automation and customization.
Posted Wednesday April 04 2007
It's good to recreate what TOS does, but it's much much better to create something that nobody (including TOS) does. Wink Both features I've proposed are unique and not-so-hard to implement.

By the way, not everything in TOS team is as good as it might seem. For example, their "automated trading" of subscriptions is in fact manual entering of orders after they receive some signal from the selected subscription.

Edited: Wednesday April 04 2007 by extesy
Posted Monday April 23 2007
billb (4/4/2007)
Right, I understand the roll forward concept, however, with futures, they never go to zero and the distance between the forward contract and the next month is relatively reasonable. I just get hung up when an OTM contract goes to 0 and then the roll over happens and something that was worthless is now worth something. That seems like a hell of an adjustment.

The adjustment is big only if rollover date is at (or close to) expiration date. My suggestion is to make rollover date X (configurable value) days before expiration when the difference is much smaller. If some OTM contract is close to zero month before its expiration, then rollover contract will be also close to zero two months from its expiration. Same for ITM or ATM contracts. The key point here is to be not too close and not too far from the expiration date.
Posted Tuesday April 24 2007
OK, I'm beginning to see where you're coming from on this.  I've added a feature request to our tracking system with a reference to this thread.

extesy (4/23/2007)
billb (4/4/2007)
Right, I understand the roll forward concept, however, with futures, they never go to zero and the distance between the forward contract and the next month is relatively reasonable. I just get hung up when an OTM contract goes to 0 and then the roll over happens and something that was worthless is now worth something. That seems like a hell of an adjustment.

The adjustment is big only if rollover date is at (or close to) expiration date. My suggestion is to make rollover date X (configurable value) days before expiration when the difference is much smaller. If some OTM contract is close to zero month before its expiration, then rollover contract will be also close to zero two months from its expiration. Same for ITM or ATM contracts. The key point here is to be not too close and not too far from the expiration date.


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