Options Trading Newsletter - Issue #127
Destruction... [Options Today...AI Validation on Strangle Strategy on GLD]
Destruction… [Options Today…AI Validation on Strangle Strategy on GLD]
Human has a tendency of self-destruction. History has already proven of such kind of behavior where civilizations has been destroyed however advanced or great they are. Most people tend not be be able to endure for a prolonged time, a state of peace, calm happiness and quo. Their destructive nature will somehow mess up or disturb the condition. Just like, you watching a calm lake of water and you couldn’t resist to pick up a stone and create ripples in the water.
It is always a cause and effect situation. The cause of a stone throw, the effects of the ripple, which may seem harmless, but can cause eggs of a rare fish being fertilised below, destroyed, resulting in a species being extinct.
So think twice for each action that you take, may disturb your current state of affairs, especially if things are going well, don’t ever do things to mess it up. Examples are aplenty, just like when we are doing very well in your investment portfolio and we start to divert from our risk management practice to double the risk or take trades which we would not normally do, just because we think we have profited a lot. Or in a relationship, when things are going well, you start to make unnecessary provocative comments. Or when you had good grades, you feel overconfident and do less revisions or skip classes.
So remember this, things does not stay the way it is because it just happens to be that way. It is always as a result of your actions and efforts. So the next time you want to do something different, think first if that will cause a better effect or worst effect to the current state of things.
“Do not disturb the water if you desire to see a clear reflection.” - Lao Tzu
SPX (4369)
SPX continued in the red for the third week now and people are not used to such behavior? Have things like the Michael Burry starting to short the market really a cause or it is just another excuse for the market to take some profits off the table alongside market expectation on a retracement on an overbought market. Well, I’d say market just got an excuse to sell now and a reason go move down to 4300 levels.
We see VIX has spiked up to highs of almost 19s from the 13s a month ago. As of end Friday, we see VIX level has improved closing lower as the market had a bit of recovery from the downside during Friday’s trading sessions. We could see SPX holding support for now until end week where J.Powell speaks at Jackson Hole Symposium.
Alongside the market pullback, we can also see GLD IV Rank getting up from 1 to around 11 end week. Highs was 14 when we placed some premium selling on the weeklies.
Short term, we are monitoring 4328 level as the immediate support, which is also the 50% Fibonacci retracement level. If it breaks this first level of defense, we could see lower levels down below 4300.
The trading range for the week is between 4250 and 4450.
NDX (14694)
Another 2.2% off for the week. That could see, 8% off from the last high being shaved off your tech portfolio on average. We got so used to green days and months that a 8% pullback seems abnormal to most? It’s a healthy retracement considering NDX had gone up 44-45% to the highs this year.
This week NVDA post their earnings on Wednesday after market close. That could also act as a catalyst if tech can continue to be bullish and if NVDA can meet its super bullish outlook from the previous earnings announcement, we could see it pulling tech back up from the 3 weeks losing streak. Nowdays, a single stock can do wonders not to say if combined by another 6…
If NDX continues to slide, we look at the 21 daily EMA as the magnet down and support monitoring.
The trading range for the week is between 14150 and 15050.
HANG SENG INDEX (17950)
HSI is spooked by the broader corporate debt defaults on the property sector with Evergrande filing for chapter 11 protection in the US and another property developer Country Garden at risk of default. The selloff last week was big with over 6% of the index gone, 1000+ points. Keeping a watch if HSI goes back above 18,000 level as the China government have again started steps to avoid more corporate failures on loans and also initiatives announcements to spur the weak economy.
OPTIONS TODAY [AI Validation on Strangle Strategy on GLD]
We spoke about “ONE FOOLPROOF AI TRADING STRATEGY” using AI and had a few more conversations with ChatGPT. It’s no longer crazy to chat with a BOT as some answers are not too bad and makes a bit more sense. But as I said earlier, a little bit of knowledge on the topic is still important so that the AI will assist you on the right direction.
We downloaded the 1 year GLD ETF price from yahoo.finance and uploaded the data to ChatGPT and asked it to do a validation of a particular option strategy and finally asked it to churn a report on its findings. The output below.
1SD Strangle Analysis on GLD
Introduction
Options trading strategies can vary in complexity, from simple call and put buying to intricate multi-leg strategies. One popular approach is the strangle strategy, which involves selling an out-of-the-money call and an out-of-the-money put. The idea is to profit from moves in the underlying asset, regardless of the direction. In this analysis, we evaluate the performance of a weekly 1 standard deviation (1SD) strangle on the GLD ETF over the past year. The key takeaway is to understand the probability of profit and potential risk factors.
Data Analysis
The data for the GLD ETF, spanning from 2022 to 2023, was used for this analysis. The primary metrics analyzed were the closing prices and the weekly standard deviation.
Figure 1: Weekly closing prices of GLD ETF.
We began by examining the weekly standard deviation of GLD's closing prices. This allowed us to identify the range within which the price was expected to stay with a certain probability.
Results
Our analysis revealed that most of the time, the GLD price remained within the 1 standard deviation bounds. However, there were instances where the price breached these bounds and never came back within.
There were 2 exception on the data over the period where GLD price moved beyond 1SD and did not fall back below 1 SD the week after. It also never fell back within 1SD until today. The resultant losses had these been assigned and held todate.
In total we have 50 trades of which 2 were losses.
Total wins = 48 x $70 (assumed premium collected) = $3360
Total loss = 2 / $2614.04
Net profit todate = $745.96
Assuming a capital of $5,000 which covers the buying power of the GLD strangle of around $3000+, the Return on Investment is 15%.
Improvement in Results Through Trade Management
While setting up trades based on the 1SD strangle strategy, it's crucial to have a trade management plan in place. One approach is to incorporate a cut loss mechanism. For this analysis, a cut loss set at 2x the premium received was considered.
On evaluating the trades, two specific instances ('2022-09-16' and '2023-05-19') resulted in significant breaches that would have led to potential losses exceeding the 2x premium limit. By incorporating this trade management strategy, these trades would have been exited, mitigating further potential losses.
Trade management, especially with options, is vital. It allows traders to define risk and make informed decisions based on pre-set rules, rather than emotions. In this case, the cut loss mechanism proved beneficial in managing risk.
There would be significant improvement in the total net profit from $745.96 to $3,080, ROI of 62%.
Results and Conclusion
The analysis of the 1SD strangle strategy on the GLD ETF yielded the following insights:
1. Out of 50 trades, 48 trades stayed within the 1 standard deviation range by the end of the week or the following week. This translates to a high probability of profit of over 90%.
2. Two trades ('2022-09-16' and '2023-05-19') would have exceeded a loss of 2x the premium received. Incorporating a cut loss mechanism at this threshold would have resulted in exiting these trades, thus managing the potential risk.
In conclusion, the 1SD strangle strategy on the GLD ETF showcased a high probability of profit over the past year. By combining this strategy with a robust trade management plan, such as the 2x premium cut loss mechanism, traders can effectively manage risks and enhance the potential for positive returns.
(the results are purely output from ChatGPT “Code Interpreter”, we have not independently validated individual trades, but the results of a strangle over a low volatility product like GLD, seems to be reasonable. We can continue to test strategies using AI to improve our trade success rates)
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DISCLOSURES
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.
Thanks. AI is becoming more interesting.
Your breakdown of the GLD strangle is fantastic. Very insightful and easy to follow. Great analysis too!