In working with the new optimization model, I've definitely noticed some interesting things as I mentioned in yesterday's post detailing the QIHU short trade.
First off, I had originally intended on setting up QIHU as a long position as it looked to be in a bullish pattern and that's what I used when describing the new model. However, when calculating the expected return to the September options expiration, the exponential return model produced a significantly negative projection of -4.68%.
In seeing this, I ran the model to short the position using both a traditional equity approach - with an option overlay as protection - and as a traditional long. However, I used a constraint in the long model that gave me a short position using options as the return driver and the stock as the overlay protection. The contrast between the model outputs is definitely worth examining.
Here's the output from the traditional short position:
Expected values from this trade ranged between $250 - $500 with a total trade cost over $17k. Also, notice the value of the trade with a hypothetical stock price of $50, it's roughly $2,750.
Now, here's what the model produced for the option short:
The expected values for this trade range between $500 and $1,100 with a total trade cost of less than $10k. Also the profit on the trade with the stock at $50 is over $6k.
In fairness, the first trade has a lower max loss figure by about $500... but the second trade clearly illustrates the leverage gained from using options as the return driver.
First off, I had originally intended on setting up QIHU as a long position as it looked to be in a bullish pattern and that's what I used when describing the new model. However, when calculating the expected return to the September options expiration, the exponential return model produced a significantly negative projection of -4.68%.
In seeing this, I ran the model to short the position using both a traditional equity approach - with an option overlay as protection - and as a traditional long. However, I used a constraint in the long model that gave me a short position using options as the return driver and the stock as the overlay protection. The contrast between the model outputs is definitely worth examining.
Here's the output from the traditional short position:
Expected values from this trade ranged between $250 - $500 with a total trade cost over $17k. Also, notice the value of the trade with a hypothetical stock price of $50, it's roughly $2,750.
Now, here's what the model produced for the option short:
The expected values for this trade range between $500 and $1,100 with a total trade cost of less than $10k. Also the profit on the trade with the stock at $50 is over $6k.
In fairness, the first trade has a lower max loss figure by about $500... but the second trade clearly illustrates the leverage gained from using options as the return driver.
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