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RE: About options

billb — Tue, 18 Jan 2011 13:48:36 GMT

Well, tick data is tick data regardless of the asset class. Keep in mind though, each option contract is a unique symbol. If you're looking to merge each contract into something unified, that would require a change to the plugin, yes.

[quote][b]ArielEM (1/18/2011)[/b][hr]A question regarding Option back testing and I apologize in case this has already been answered elsewhere in the forum.

Is it possible to back test options tick data using right edge? i‘m using IqFeed as data but the data displayed in RightEdge contains only the trades themselfs.
Can I enhance the IqFeed class to display changes in B & A?

Thanks,
Ariel
[/quote]

RE: About options

ArielEM — Tue, 18 Jan 2011 08:01:35 GMT

A question regarding Option back testing and I apologize in case this has already been answered elsewhere in the forum.

Is it possible to back test options tick data using right edge? i‘m using IqFeed as data but the data displayed in RightEdge contains only the trades themselfs.
Can I enhance the IqFeed class to display changes in B & A?

Thanks,
Ariel

RE: About options

billb — Tue, 15 May 2007 07:55:12 GMT

Interesting. There's still one last trick and that's have RightEdge build the option chain based on information received from the data provider.

[quote][b]phg (5/15/2007)[/b][hr]This is to note that, as of API 9.0, IB provides historical option-chain quotes. Here's a link to a forum message about it:

http://www.interactivebrokers.com/cgi-bin/discus/show.pl?tpc=2&post=67641#POST67641

Or look at the release notes. It still looks quite complicated to me to be able to make effective use of historical options quotes.

-Pete[/quote]

RE: About options

phg — Tue, 15 May 2007 07:43:47 GMT

This is to note that, as of API 9.0, IB provides historical option-chain quotes. Here's a link to a forum message about it:

http://www.interactivebrokers.com/cgi-bin/discus/show.pl?tpc=2&post=67641#POST67641

Or look at the release notes. It still looks quite complicated to me to be able to make effective use of historical options quotes.

-Pete

RE: About options

billb — Mon, 14 May 2007 07:49:29 GMT

Yes, the tricky part about "automatically" is how would we know what items to request? In other words, without knowing symbol details (as a user would configure in the Watchlist folder), how would RightEdge know that MSFT has a 22.5, 25, 27.5, 30 and 32.5 strike? Is this information provided by the data provider?

[quote][b]phg (5/12/2007)[/b][hr]I'm going to lobby for making this a two-part problem. Getting data for backtesting is one problem. The second problem, and frankly the more interesting one to me, is getting access to current option-chain information (through the IB interface). Not high priorty, but interesting.

Suppose a strategy relied on a signal from the stock price (current, standard stuff) to suggest writing a put. Would the option chain be fetched under the NewSymbolBar? Wouldn't it be better to spawn a new thread to handle the matter from there: fetch a (partial) chain, chose the strike and expiry and place the order?

Could the quote stream for the selected option then be added to the 'watchlist' dynamically? This question gets at the matter of monitoring the option with a 'strategy' that determines when to get out. This suggests the need for concurrent strategies: one for the stock and one to monitor the option.

I see some interesting problems to work out.

-Pete[/quote]

RE: About options

billb — Mon, 14 May 2007 07:47:19 GMT

You can get entire option chain data (historical) from OT? Wow, that'd be outstanding.

[quote][b]extesy (5/12/2007)[/b][hr][quote]The historical data is going to be tricky. I think it would help us a ton if we had a source for this data and then could come up with some ways to assemble it and support it natively in the data stores. I'm open to suggestions.[/quote]
How about OpenTick? You can get historical options data for free from them.[/quote]

RE: About options

phg — Sat, 12 May 2007 07:11:12 GMT

I'm going to lobby for making this a two-part problem. Getting data for backtesting is one problem. The second problem, and frankly the more interesting one to me, is getting access to current option-chain information (through the IB interface). Not high priorty, but interesting.

I see some interesting problems to work out.

-Pete

RE: About options

extesy — Sat, 12 May 2007 00:00:12 GMT

[quote]The historical data is going to be tricky. I think it would help us a ton if we had a source for this data and then could come up with some ways to assemble it and support it natively in the data stores. I'm open to suggestions.[/quote]
How about OpenTick? You can get historical options data for free from them.

RE: About options

billb — Fri, 11 May 2007 12:00:18 GMT

How long have you been selling puts? What happens in a bear market? Have you experienced one with your current strategy? What is the current method of risk management? Always accepting assignment probably works most of the time, but what about a case like NFI?

[quote][b]phg (5/10/2007)[/b][hr]This is a FYI. If you have access to the June 2007 issue of "Active Trader" let me point out the profile of an option trader on page 52. A trader of my stripe if ever there was one: stock selection is critical, the money is made selling premium and he accepts some assignments against which he sells covered calls. (But I am skeptical of the claimed 50-60% yearly return, for the record.)

-Pete[/quote]

RE: About options

billb — Fri, 11 May 2007 11:55:53 GMT

duane,

Sorry for the late response, I apparently missed or didn't receive the post notification.

Anyway, looking up the options chain isn't something that we currently support. We looked into getting this data it's very cost prohibitive.

If you have access to this data, my recommendation would be to read it from a system and use the output window to make recommendations with your calculations. (i.e. OTM put credit spread looks attractive because of current IV).

The historical data is going to be tricky. I think it would help us a ton if we had a source for this data and then could come up with some ways to assemble it and support it natively in the data stores. I'm open to suggestions.

[quote][b]duane1221 (5/9/2007)[/b][hr]Bill, I am an options trader, and what I currently do with other software (Ensign) is scan for underlying stocks that are good candidates for a particular options strategy. The I go look up the options chain manually, do some calculations to determine which strikes, if any, have the return/risk I am looking for. Then I place the trade.

Ultimately if RightEdge could allow me to automate the "looking up the options chains" and finding the correct strikes for the setup I want and then place the trade that would be what I would want.

For example, looking for a Bull Put credit spread, look for a stock that is moving sideways or trending up, then look at the options chain for the next month and look at strikes between 6 and 12% below the current stock price for a setup that meets my parameters

Being able to back test these strategies would be a big plus for me.[/quote]

RE: About options

phg — Thu, 10 May 2007 17:00:43 GMT

This is a FYI. If you have access to the June 2007 issue of "Active Trader" let me point out the profile of an option trader on page 52. A trader of my stripe if ever there was one: stock selection is critical, the money is made selling premium and he accepts some assignments against which he sells covered calls. (But I am skeptical of the claimed 50-60% yearly return, for the record.)

-Pete

RE: About options

phg — Thu, 10 May 2007 06:36:02 GMT

The question in my mind is, would the development of such a strategy require access to historical option-chain information? That could entail an immense amount of data. However, like duane1221, I'm interested in options. Three capabilities would seem of basic interest: a) how to fetch (and display?) an option chain, b) how to select a contract and c) how to place an options order.

-Pete

RE: About options

duane1221 — Wed, 09 May 2007 17:38:03 GMT

Bill, I am an options trader, and what I currently do with other software (Ensign) is scan for underlying stocks that are good candidates for a particular options strategy. The I go look up the options chain manually, do some calculations to determine which strikes, if any, have the return/risk I am looking for. Then I place the trade.

Ultimately if RightEdge could allow me to automate the "looking up the options chains" and finding the correct strikes for the setup I want and then place the trade that would be what I would want.

For example, looking for a Bull Put credit spread, look for a stock that is moving sideways or trending up, then look at the options chain for the next month and look at strikes between 6 and 12% below the current stock price for a setup that meets my parameters

Being able to back test these strategies would be a big plus for me.

RE: About options

phg — Fri, 05 Jan 2007 07:31:12 GMT

A good reality check. It is reasonable to target net 15% APR threshold consistently, perferably with no negative months. Better than buy-and-hold, consistent yearly and benefits from compounding. Even the most experienced options traders do not achieve 30% APR consistently (do not believe the hyperbole). It depends on mostly mundane stuff: good stock picking, sell only, use covered calls, be diversified and go with the probabilities. Selling brings in new money and that fuels new positions (compounding).

-Pete

RE: About options

billb — Thu, 04 Jan 2007 08:08:00 GMT

Well, when you say generate "steady" income with stocks and options, do you beat the indexes? are you trying to beat the indexes? How much better are you than the risk free rate? And I don't necessarily mean today (although maybe you've been trading this way for years and it works), I mean in your realistic expectation of a covered call (short put) strategy. Are you only short puts or is there a mixture of strategies?

Is it really just a smooth equity curve with compounding that will help you beat the averages?

Only 40% of people think there are more gains to be obtained from options than from stocks is a bit surprising. Why would you trade something with a "less positive" expectancy? I'd like to know the answer to that (and risk management is an acceptable answer).

[quote][b]phg (1/4/2007)[/b][hr]

Schwab surveyed 800 of its option-trading customers. 61% consider themselves risk takers but only 40% think there are more gains to be obtained from options than from stocks. Only 31% are trying to outsmart the market by trading options.

The big and interesting numbers are that 69% think options are a great way to generate income. 56% said option trading was part of their retirement strategy. These last numbers particularly interest Schwab; they think they can counsel customers on how to "get rich slowly" with conservative strategies like covered call writing.

I hate to think of myself as an old fuddy-duddy in the mainstream! But I do subscribe to the notion of trying to make money with both stocks and options, with a eye on generating a reliable (steady) if modest income. Time and compounding take care of the rest.

-Pete

[/quote]

RE: About options

phg — Thu, 04 Jan 2007 07:37:42 GMT

-Pete

RE: About options

billb — Wed, 03 Jan 2007 10:56:17 GMT

I'm not a WSJ subscriber any more. The option traders I've come across seem to run the gamut. What's the synopsis of the survey?

[quote][b]phg (1/3/2007)[/b][hr]If you have access to today's WSJ (1/3/2007), see page C2 for an interesting bit on options traders demographics. I certainly would not disagree with the main findings of this Schwab survey.

-Pete[/quote]

RE: About options

phg — Wed, 03 Jan 2007 09:31:37 GMT

If you have access to today's WSJ (1/3/2007), see page C2 for an interesting bit on options traders demographics. I certainly would not disagree with the main findings of this Schwab survey.

-Pete

RE: About options

billb — Wed, 13 Dec 2006 13:50:19 GMT

[quote][b]phg (12/12/2006)[/b][hr]

>> I don't think there are any predictive powers with options. It's all probabilities.
Doesn’t that come close to a contradiction in terms? Note also the commonly used terminology: for a given strike “the probability of the stock price being above X at expiration is y% probability”. That is surely a stock price forecast (prediction), phrased as a likelihood of a future state. If those odds are good enough to justify an option buy or sell, how could it possibly be the case that those odds become no longer applicable simply because one contemplates a buy or sell of the stock instead?

[/quote]

I, personally, don't think so. Given that delta works both ways and is continuous, I think it's the opposite of predictive. Let's say the option is at the money. It's like saying, there's a 50% chance it will be in the money at expiration and a 50% chance it will be out of the money at expiration. Take an option with a delta of .10, saying there is a 10% chance it will be in the money and continually revising that statement as the stock moves upward and downward isn't really going out on a limb. :D Predictive power to me is someone selling me an option with a delta of .10 that is 100% certain to be in the money.

[quote]

The pedigree of the numbers and the computations for options is pretty good. Aren’t they good enough to justify some experimentation? Yahoo will provide information about strikes free and, I assert, is adequately timely to make the derived stock-price-level prediction (probability) useable in practice. Deriving that probability is where the RE Options class may come in handy. A key point is, wouldn’t this be one good way to leverage RE’s capabilities?

(I am aware of the other elements you touch on in your post. All of them are useful things to have in the back of one’s mind. They are useful criteria when looking at individual cases, but hard to scan for reliably.)[/quote]

I'm not sure I completely understand what you mean here.

RE: About options

phg — Tue, 12 Dec 2006 19:49:02 GMT

RE: About options

billb — Tue, 12 Dec 2006 09:04:39 GMT

I don't think there are any predictive powers with options. It's all probabilities. I think the only time options predict anything is when the call buying swells on stock x and then the next day, some big news hits and you realize insiders were loading up. :D

If you've ever read Options Trader, there was a backtest simulation selling iron butterflies on the SPX 1 sigma out. 1 sigma is one standard deviation or 68%, so in theory, the price between the time he opened the positions and when they closed should be within that standard deviation 68% of the time. Amazingly *cough*, the win rate was 65%. :P Did I need a simulation to tell me this? Point being, I think the pricing for the most part is pretty damn accurate. Far in the money and far out of the money options are skewed (vol smile) because of fat tails events, or so the theory goes. I think if you truly wanted some predictive powers here, perhaps you could take the prices along the chain and match it against the underlying. See if the FOTM option skews bend more before something big happens.

Anyway, the rough calculation I use is delta. I think this is common and a pretty good rule of thumb. If the delta of the option or spread is .50, it has a 50% chance of landing in the money by expiration.

To twist the viewpoint back to strategies, if all options are priced against a lognormal distribution based on the volatility of the underlying, it seems like to gain the theoretical edge, you'd need to take all of the prices and construct various strategies to determine the mispriced options. This is where I go back to the machine to help me with this.

[quote][b]phg (12/11/2006)[/b][hr]

When trying to collect one’s thoughts about a topic, it sometimes helps to work on the phrasing of the question for which you think you are trying to get an answer. To twist the viewpoint a bit, what can option probability calculations tell one about stock-price probabilities? (Here’s a source (Power Options) I like for knowing about options probabilities.) For most options positions you might contemplate you can find out what the probability is that the stock price is above, below, or for spreads between certain prices.

One has to always keep in mind that options probability calculations exclude essential practical risks, such as event risk and market direction (just for starters). So those probabilities for real purposes are suspect from the get-go. With that caution in mind, one might ask the question “how reliably can options forecast a stock’s price level?” Or phrased differently, how reliably can options calculations predict a stock’s price will be above, below or between specified levels by a certain date?

It turns things upside down, but in the context of RE it starts you thinking along these lines: suppose I am running a strategy where at some bar three different linear strategies all signal sell at price X, but the options probability calculations say there is a 90% chance the price will be above that point a month from now. The tough but practical question is, what action (sell or hold) has the best expectation?

The corollary to that is, it is good that RE has options calculations capabilities, yet to be brought to bear.[/quote]

RE: About options

phg — Mon, 11 Dec 2006 19:50:52 GMT

The corollary to that is, it is good that RE has options calculations capabilities, yet to be brought to bear.

RE: About options

billb — Mon, 11 Dec 2006 14:32:53 GMT

I understand there's a way to go, but thought I'd throw it out there for conversation purposes. The version after the initial release is already in the planning stages with some of the bigger features pretty well hammered out. I don't think there's going to be too much in the way of options features. Just a topic at this point.

RE: About options

phg — Sun, 10 Dec 2006 19:52:20 GMT

Bill, I'm an options guy so most of the time I'm interested in talking about them (endlessly, some say [grin]). My thinking has no where near extended itself into how RE might morph into an options player. (Not to drop the ball here. I do see how RE might be used to signal patterns that might be setups for options plays.)

For now, my thinking is much more near term. Essentially all of my questions are about adding flexibilty to leverage the specatular infrastructure that is already in place. I urge enabling the product to be applied in unanticipated ways. Assume the trader has ways to deal with the situations a strategy is not designed to deal with. Can a sell-only strategy be implemented? Buy only? Provide alerts only (and EOD trader). Some of your customers will simply be interested in merely endlessly tinkering with the technology. You face the 'Hello World' challenge: the simple things the trader thinks he wants to do right away better be just that: simple. After that comes the Stocks and Commodities challenge: can RE implement the same strategies everyone else can, provided in a library for customers? Near term, I see hurdles.

RE: About options

billb — Sun, 10 Dec 2006 17:11:01 GMT

You pose some good questions, but I was thinking more along the lines of selecting a strike or strikes, selecting a month or months. RightEdge does have an options calculator capable of calculating the theoretical price (Black & Scholes as well as binomial) in addition to the implied volatility. This may or may not aid in buying "cheap" options and selling "expensive" options. For longer hold times, volatility skew between the months are usually worth noting when detected. This could be good for calendars or diagonals.

My situation right now is that RE is good for saying "hey, based on backtesting, here's the stocks that will give you an edge today". At this point, I have some work to do to determine which option strategy makes sense. I usually like vertical spreads, but sometimes calendars or even butterflies make sense depending on time until expiration or implied volatilities. I guess selling naked puts doesn't require quite so much work.

RE: About options

phg — Sun, 10 Dec 2006 12:16:59 GMT

[quote][b]billb (12/10/2006)[/b][hr]So as an options trader, I imagine you have a strategy based on the underlying. What would you find useful in something like RightEdge to help you further your strategy execution. As you know, there are a lot more things to consider with options than just the price of the underlying.[/quote]

Your statement may be brief but it poses a challenging question. But my thoughts run this way so far. The first step is selecting the underlying. The second step is selecting a trading strategy for it. Interestingly, for some things you can conclude that buy-and-hold is likely to provide the better total return for awhile. Suppose you find something in a nice uptrend. Naked puts will only capture some of that, even if you ladder up by hedging earlier, mostly good, positions (notice that I do not hedge the new position; it is less expensive to take catastrophy risk out of the old positions). A covered call might take away from you 'too soon'. The odds are against the option buyer. So the question becomes, what is the best strategy for taking advantage of certain kinds of uptrends? I'm thinking a RE stategy might mine the middle ground between options and buy-and-hold. I'm thinking niche, fitting a strategy to a situation.

RE: About options

billb — Sun, 10 Dec 2006 10:12:49 GMT

So as an options trader, I imagine you have a strategy based on the underlying. What would you find useful in something like RightEdge to help you further your strategy execution. As you know, there are a lot more things to consider with options than just the price of the underlying.

RE: About options

phg — Sun, 10 Dec 2006 05:52:31 GMT

The risk is $1000. In absolute terms, that's it. But you mention a key point. In other literature you will see it referred to as GTFO. That is always intended to emphasize that, with this strategy, it is nearly essential the one cuts and runs (gets..out) before any breaches. However, picking that point is its own headache.

RE: About options

billb — Sat, 09 Dec 2006 20:39:49 GMT

And another thing to note is risk management. With the 40 to 1 R/R, this assumes that you do nothing and "hope" that the position comes back. Once the short strikes are breached, I think it is wise to consider adjustments (including getting out). So assuming that you roll up or out when your shorts are breached, your maximum risk is probably not quite as bad as it seems.

Personally, I still can't live with that size of risk. Being short that much gamma causes nightmares and sometimes I'll see spots.

RE: About options

phg — Sat, 09 Dec 2006 19:46:37 GMT

Right on all counts. Consistency is absolutely key. (Consistency defined as reliable and repeatable.) Not much in absolute terms, but inexorable compounding is on your side. Where else can you put $1000 at risk with those odds? Put another way, it's worth doing for a dime at those odds.

RE: About options

billb — Sat, 09 Dec 2006 17:00:53 GMT

Your first statement is gold. Options are about statistics. No strategy is better than another as a general rule, because if it were, you could simply take other profitable side and make money consistenly. It's all about risk and reward. As you mentioned, the out of the money credit spreads yield an impressive success rate, but the R/R is 40:1, so you'd have to win about 98% of the time to remain profitable (I think my math is correct).

[quote][b]phg (12/9/2006)[/b][hr]billb suggested there be a separate thread about options. Let me get the ball rolling.

Options are about statistics. One place where risk/reward - probability of success versus expected return - can be fined tuned is options (only spreads) on the Russell 2000. You benefit from diversification, a near absence of event risk and significantly European exercise (no exercise exposure until the last day). Basically you trade these things by picking your probability of success. For example, this past Friday you could have sold a put at 760 and bought (hedged (spread)) at 750 for a credit of .25. That's $25 for a $1000 risk for a week with about a 95% probability of success. Furthermore, since you can do that each month that annualizes to 30%.

There are two significant downsides. One is, you get greedy and succumb to reaching for return, not heeding the increasing risk. The other is, for the statistics to be meaningful, 5% of the time it is going to go against you. It is essential to have an early, absolutely rigid exit point: at the limit this thing destroys 3 years of returns.

This is frequently turned into an Iron Condor by doing a credit call spead similarly far above the current price; it is extraordinarly unlikely the index will move to both extremes before expiration, so for all practical purposes your risk remains $1000 but with increased intake from this other side.

:rolleyes:[/quote]

About options

phg — Sat, 09 Dec 2006 14:13:51 GMT

billb suggested there be a separate thread about options. Let me get the ball rolling.

:rolleyes: