Options Quant > Trading Signals

Trading signals delivery

Systematic trading means following a back tested trading plan. If there is a need to rebalance the options portfolio, trading signal for the next trading session is e-mailed after NY close (4:00 PM EST/EDT or 21:00 UTC), unless it is an options expiration day. On options expiration days (generally, on the third Friday of the month, unless it is a market holiday) we are waiting for the opening price for the S&P 500 Index. Trading signal is posted after market open on these days (around 10:00 AM EST).

This program trades infrequently, 1-3 times per month. Hence there is no need to stay all day long in front of your computer screen. This makes our program suitable for traders in all time zones, as well as for those having a regular, full time job. Orders are placed during the next trading session, after the regular session open (9:30 AM EST), or during the Globex (23.5 hours) session. We recommend entering/exiting trades by limit orders inside the bid/ask spread (half way between bid and ask or else - depending on how much of the profit you are willing to exchange for faster fills). Placing orders takes less than 5 minutes a day.

Our trading system does not make directional bets, but rebalances portfolio when necessary. When a new position is initiated, or the existing position is rebalanced, portfolio delta is low i.e. the portfolio is relatively insensitive to price movements. Hence, if the index price moves until the next session open, you can still place the options orders with the same strike prices as per trading signal. Exceptionally, if there is a large futures price jump before the regular trading session open, we will post a new, corrected trading signal.

Options Quant trading program generates signals both for SPX stock index options and options on S&P 500 e-mini futures. Unless the options contract and the underlying futures contract expire in the same month, SPX stock index options and options on S&P 500 e-mini futures have different strike (exercise) prices. Due to the better liquidity, tighter bid/ask spread and lower margin requirements, we prefer the S&P 500 e-mini futures (ES) options. There is no need for expensive options data feed - you can monitor CME E-mini S&P 500 options prices in real time from this link on CME's web site (requires free subscription).

Below are given trading signal examples for the ES e-mini options.

Example #1

Example #2

Example #3

All positions are normalized for a $25,000 opening account balance.   The maximum historical drawdown, month end to month end, based on back testing, is around 10%. Although we collect a relatively small premium, we do not attempt to sell more options contracts to increase the percentage profit.

Increase your profit by using T-Bills as a collateral. Since the worst historical drawdown for both programs combined is around 20%, up to 70% of our portfolio is unused and can be used for buying 3-Month US Treasury Bills (TB). Treasury Bills can be used as a collateral (initial margin) for short options positions. By investing 70% of our portfolio in 3 Month T-Bills, we add 1-4% per year to profit from trading (assuming the T-Bill yield is 2-6%).

Adjusting options portfolio. In case of an adjustment trade, there will be two orders per position leg to place: one order to close the existing position, and one order to open a new position (see trading signal example #1) - so called "options spread". For example, if the existing put position is short, we should first "buy put to close" the existing position, and then "sell put to open" a new options position. This is termed position rolling.

Be patient. Do not expect to make a fortune over night. Since our profit comes from options time decay, we should hold our short options positions open until expiration, or until rebalance. Historically, after a drawdown occurs (usually during a period of sharp price movement), the market tends to move sideways (consolidates) for some time, which helps our system recover from losses. Also, you do not need to worry about the price movement and watch it all day. Remember, our trading system does not attempt to time the market. Time erosion is what makes us money and is our best ally!

Liquidity Issues. Our trading programs are best suited for smaller accounts. If you try to place too large an order in a large (institutional) account, you can find it difficult to get fills half way between bid and ask. This is why we recommend individual traders to trade their own accounts, placing orders contract by contract. Trading this way, there will be no single large order in the market at any given time and chances to obtain better fills are better. Options market liquidity will probably limit the system tradability to accounts in the $200,000-300,000 range. There is not a similar problem with Forex trading - please see our FX Quant 10 trading system. You can trade a $1B account equally easily as you trade a $10k account.

You can try our trading system risk-free in a free simulated trading account.