Random Thoughts

Posted on Di 11 September 2007 in misc • 1 min read

  • Neural Nets
  • Options tags: [] meta: _aioseop_keywords: Options, volatility strategy, trading system, investing podPressPostSpecific: a:6:{s:15:"itunes:subtitle";s:15:"##PostExcerpt##";s:14:"itunes:summary";s:15:"##PostExcerpt##";s:15:"itunes:keywords";s:17:"##WordPressCats##";s:13:"itunes:author";s:10:"##Global##";s:15:"itunes:explicit";s:2:"No";s:12:"itunes:block";s:2:"No";} dsq_thread_id: '181042176' author:

    Now that my next generation option volatility model has a 60 to 70% accuracy in predicting the direction of volatility, what the heck do I do with it? I spent the last few days thinking about this because a trading model that has a slight edge doesn't always mean profits. How do I translate this edge into a profitable option trading system and minimize risk?

    I've been using the OptionsXpress virtual trading account to test out volatility strategies using straddles and strangles. I learned that short straddles and strangles don't work very well even though my predicted volatility is supposed to go DOWN (I go long straddles/strangles with an UP prediction). A decrease in volatility sometimes means an increase in price, or vice versa. Besides short straddles/strangles leave you open to a whole lot of risk.

    So let's say I enter a short straddle (which makes me money if the market doesn't move) because next week's volatility is supposed to go down. I will still get burned if volatility goes down but the price goes up, which is a very likely outcome.