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Early Review on Positive Convexity Trading...

"INNOVATION IS TAKING TWO THINGS THAT ALREADY EXIST AND PUTTING THEM TOGETHER IN A NEW WAY."

-Tom Freston

It's been a couple of weeks since I built out the optimization model and now that market volatility has finally arrived - as I have been predicting - we can take a good look at how it has performed.

The optimization model was built out of a curiosity I had about how to best structure trades and it produced a bit of an unexpected result...

http://tancockstradingblog.blogspot.com/2015/08/optimizing-equity-returns-using.html

http://tancockstradingblog.blogspot.com/2015/08/follow-up-on-qihu-short-trade.html


First, let's review how some of the original trades - that used options as protective overlays - posted on here have performed.



  • 6 Trades; 4 winners & 2 losers
  • Average return of positive 0.9%
  • Average position life of 20.8 market days
  • Average winning trade is up 6.9% on underlying moves of 9.8%
  • Average losing trade is -11% on underlying moves of 14.9%

Now, let's look at the optimized trades:

  • 3 Trades; 2 winners and 1 loser
  • Average return of positive 12.9%
  • Average position life of 5.7 days
  • Average winning trade is up 21.2% on underlying moves of 11.9%
  • Losing trade is -3.8% on underlying move of 5.4%

Wow.  That's a huge difference.  Looking at the results, the convexity benefits are clear and undeniable.

It's important to note that this is an extremely small sample size and the recent market volatility has certainly been tailor made for an options portfolio.  However, I think it would be a mistake to dismiss the results on these premises because the 'traditional' trades have had the same volatility and the results just don't stack up.

 Obviously, I'm going to continue to track this but the initial results are very promising.

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