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"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...

IT'S DEJA-VU ALL OVER AGAIN... -Yogi Berra After writing the piece on hedging theta, I realized that there is more that can be - and more importantly should be - covered.  So here comes part two... hopefully, it's better than most sequels. First, here's a link to the original... http://tancockstradingblog.blogspot.com/2015/08/hedging-theta-decay.html Anytime you are long an option you are also long volatility; regardless of whether it's a call or a put.  As I've written before, being long volatility automatically makes you short theta... or you could even say that you're short time as the value of the option has an inverse relationship to time... but let's not get too philosophical. In the previous piece, I wrote about one strategy that can be used to hedge short-term theta decay... the vertical bull-put or bear-call spread.  However, especially in relation to the optimized positive convexity strategy, there is another strategy worth exploring... the butte...

Last week, I posted a piece titled, 'Calculating the Convexity Effect...'  For whatever reason, it was never posted to my Google feed so I'm posting the link below in case anyone is interested... http://tancockstradingblog.blogspot.com/2015/08/calculating-convexity-effect.html

THE BEST LAID PLANS OF MICE AND MEN OFTEN GO AWRY... -Robert Burns, 'To a Mouse' 1785 The last few trades I've detailed on this blog have utilized options as the return drivers and linear equity as the overlay protection.  This transformation was brought about by a seemingly simple question of how to increase efficiency.  However, I am now faced with a new challenge as a result of being short the market and - now - also short theta. So what happens if my best laid plans for a technical market correction go awry?  If prices move against me, my positions are protected by equity exposure which will hedge the loss on the options, so I'm good there.  But what happens if equity prices don't move?  Even if equity prices stand still, time most certainly does not.  That's when time becomes your biggest enemy. THETA - EXPLAINED & VISUALIZED... Theta is the price an option holder pays to own an option every day... if there is no change is any of the other pricing...

This is another follow-up on the QIHU short trade that was generated through the optimization model I recently built. In yesterday's post on the QIHU follow up, I noted the leverage gained by using options as a return driver.  I've talked about option leverage before but now I want to view it in the context of a multi-asset position - like the short QIHU trade which has 4 components... 1 stock and 3 options. I started my career in traditional fixed income asset management doing portfolio analytics and risk reporting.  One of the key risk concepts of fixed income is convexity.  Convexity is the second derivative of the bond pricing model that accounts for the non-linearity of returns for changes in - mostly - interest rates (duration and convexity on non-investment grade debt tends to be more empirical).  Convexity is a major benefit to the holder of an asset... being long convexity means that you're making more as the value of your investment increases than you lose ...