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I have hit something that I can't figure out. Maybe another set of eyes can help.
I have the data for a short ESx5p1700 and two long ESv5p1625 starting 8/17/15.
A positive in the Draw Down column means profit. A negative means a loss or draw down.
They cover the drop on 8/24 well. But what happens later concerns me.
Obviously you should take the profit on 8/24 and get out. But if the futures drop on 8/24 wasn't enough to trigger profits on 8/24 then holding and waiting for a profit runs into a snag. You are hit with a margin call on 9/11.
Here are the IM and the futures price. Why does the IM rise so much starting 9/10/2015?
Here are options prices charted.
The only thing I can think of is that the long options are at 35 DTE on 9/11 (shorts are at 70 DTE) and that is why IM jumps a lot. The longs are getting too close to expiration to offer coverage to the short and their premium is dropping faster than the short.
The IM starts moving higher on 9/02 even though futures are higher. But also on that day the net Price goes from 7.00 to 9.00. The short goes from 35.40 to 24.60. A drop of 10.80. The two longs combined go from 28.40 to 15.60. A drop of 12.80. The 2 longs drop faster than the one short so the spread loses money on that day.
I think you figured it out correctly. When your long puts come too close to expiration they do not protect the short puts anymore. On the day margin of your position went up (and on the days thereafter) volatility came down. When volatility comes down the probability that puts with few DTE go into money deminishes quickly. Whereas the short put has a lot of time left.
I made the similar experience for other commodities.
As the strategie itself seems to be successfull for most of the time, the problem remains the margin explosion ending in the margin call.
What about adding an additional exit, f.e. on the percent of margin used 75% or using another criterium like, exit if the current P/L is about 3 times the initial premium.
A 3 times premium loss is not what anyone wants, it will eliminate 3 or 4 winning trades, but if it does not occur very often, it should be ok.
I am unable to backtest this, but wouldn´t something like this be successfull on the long run?
Like many of you I had some losses on Aug 24. I have been manually backtesting different ideas to help avoid or at least partially mitigate the loss without costing me a large % of profits. I assume someone has written better software for the task of testing Options on equities and FOPs. So I started another thread thread to discuss that as to not get off topic here.
I got interested and decided to see if I can find a better tool for Option backtesting than what the ToS platform has in Thinkback, it is OK but looking for something faster. A quick Google search and this is what I found below. If anybody has used …
Here's the latest version of the XLS-SPAN spreadsheet.
Thanks to ron99 who had the idea to reduce the CME pa2 files to only the products that someone would be interested in to reduce the scan time when backtesting. He also got the code started …
This version reduces the size of the CME file so that it runs much faster. The full CME file is about 470,000 lines long. By only using the lines needed for the commodities you trade you can reduce the lines to below 80,000.
The CME has 2,551 futures and options symbols. Most of us trade less than 30 symbols.
The other change to the spreadsheet is that the resulting data goes to another sheet and has more data than before. Then this data can be summarized on another sheet using Pivot Table.
I have been using this to backtest strategies. This new version greatly reduces the time needed to run options. The only drawback is that the CME only offers data files for 2013, 2014, 2015. We have requested more years but haven't heard back if they will offer more years.
I have some results of my research. I will post the results in several posts as there is a lot of data.
I ran multiple covered option strategies. Here is selling one option and buying option(s) one month in front of the short option.
Note the possible monthly ROI is exiting at 50% drop in premium using 7.00 per option for the cost. These are all IMx3.
A negative number in the draw down column is a loss. Positive is a profit.
Red numbers are options on margin call.
As you can see they all either went on margin call or came really close. The draw downs were 50%+. Using 2 longs worked better for covering what happened on 8/24 than one long.
The problem with this strategy is that the longs' premium erodes faster than the short. This causes margin to increase and the premium erosion to be flat or go backwards.
This does work if you want to cover a short option from a potential big crash for a short duration. If you had on short ES puts before 8/24 and you bought 2 longs for each short on 8/22 or 8/23 that were one month in front of the short's month you would have been protected and actually made a good profit on 8/24. The lower the delta of the spread the higher the protection and profit.
