See The Power of Diversification: Time Frame, Market, Method

In this session, we review two major concepts. The first is “being wrong generating profits”. The images below show one of the worst versions of our momentum trading systems in /CL (crude oil futures). Then we zoom in and test one of the worst periods during that history. This is the worst of the worst. We test these periods first to know the benefits of using options instead of the underlying market.

As you can see… the results from turning the futures trades into options trades makes this a far more attractive strategy. That concept carries over in a big way when we look at “being Right and making More”!

Scroll through the key images and commentary from this session below and watch the full 1-hour recording at the end.

Oh! We also spent some time on multiple time frame diversification. That spaghetti plot near the end is worth a few minutes of your time!

The One-Period Donchian Channel (one side only for new signal. Outside bars are held as the previous signal)

This is the study period. It’s one of the worst periods of performance. The goal is to check this area to see what happens to the options trades.

Moved the signals into a spreadsheet (same data as above — futures, not futures-options)

Below are the returns of the specific options trade (30 DTE, .30 Delta, Entry and Exit with Signals )

Below is an overlay of one futures contract (red) vs. one option contract (blue)

As you can see, this is a very active signal. Not something I would want to trade — but it was very good to see the value of options still working even when a lot of time decay (positive Theta) isn’t occurring during the relatively short holding periods.

This is a signal-only overlay of multiple Donchian channel look backs. While the general shape is the same — there is a large variation in the magnitude of returns and drawdowns. Settings tested were 1,2,3,4,5, and 10 Donchian channel, long and short, CL (not options).

Notice how the returns that end near the top weren’t always on top… What impact does that have on your decision to pick something that was more profitable in the past?

    

And finally — here is the longer-term study of the price channel settings that I am trading. This only includes two markets (CL and GC) and the same time frame. I suspect that more markets, time frames, and approaches will iron out a lot of those wrinkles. Stay tuned for updates!

Chat Log

00:24:18 John B: What options are you selling?
00:31:51 John B: Not a UBS, right? Just options in one direction.
00:37:36 Jon: Doesn’t the challenge lie in how the perf reports are interpreted? So in terms of not the shape of the equity curve but the ratio of avg win/loss, ratio of time in winners/losers etc…All backed up with average time in trade and choice of option DTE accordingly
00:55:01 Chris: CL + GC single short option… runs around $9,200 margin at TDA
00:55:27 Jon: That’s good – that would be about 15k in IB
00:56:04 Jon: Mind you, that is for a 90 dte, 35 delta
00:58:55 Chris: The stuff Andrew was testing will usually be around .05 delta, maybe slightly less.
00:59:17 Chris: So that would probably require less margin at IB too.
01:00:00 Jon: yes agreed
01:00:26 Garrett: how do you determine the right amount of diversification that doesn’t become too much to manage?
01:01:07 Chris: Sure… by a factor of 4-5 at least.
01:05:24 Garrett: For this style, 15 seems like a lot to check daily with price channels, profit targets and stop losses, execution etc. maybe just because I have a 9-5 🙂
01:13:06 Kirk: Thanks Andrew
01:13:13 RICH: thanks