The Option Trade in Apple That is Working Right Now, In This Market, Exactly

Discussion in 'Options' started by CML_Ophir, Nov 14, 2018.

  1. CML_Ophir

    CML_Ophir

    The Option Trade in Apple That is Working Right Now, In This Market, Exactly
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    Date Published: 2018-11-13

    Disclaimer
    The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.

    Preface
    We can ride the evergreen patterns, and we have, for years. But when the market shifts, we need a minimum amount of data to adjust, and succeed -- now we will. This is our time with Apple.

    It's time to take advantage of volatility. Fear, uncertainty, doubt, unclear news headlines -- these are all trade-able events, at anytime, without concern for earnings. Today we look at exactly what has worked for Apple (AAPL).



    Take well bounded risk, small, and direction-less, and let a tweet, a news headline, an Apple headline, a day of pessimism or a day of optimism, whatever -- move the market, as it has so often in this new volatility regime.

    The Short-term Option Volatility Trade in Apple Inc
    We will examine the outcome of going long a short-term at-the-money (50 delta) straddle, in options that are the closest to seven-days from expiration. But we have a rule -- it's a stop and a limit of 10%, and, we back-test re-opening the position immediately, as opposed to waiting for 7-days later.

    Here is the stock chart for Apple since October 1st -- focus on the volatility, not the direction -- these are daily candles.

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    Chart from CMLviz.com


    We can volatility and a general downtrend, in fact, a 14% drop in less than 6 weeks. But let's not worry about direction, let's try to find a back-test that benefits from that volatility that is in fact up 92% in just six-weeks and takes no stock direction risk at all. Here it is, first, we enter the long straddle.

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    Second, we set a very specific type of stop and limit:

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    At the end of each day, the back-tester checks to see if the long straddle is up or down 10%. If it is, it closes the position, and re-opens at the same time, another long straddle, but this one now re-adjusted for what is the newest at-the-money strike price.

    We have a full blown tutorial write up on this type of stop/limit behavior in the Discover Tab: Stops & Limits Roll Timing What does "open again at normal time" vs "immediately" mean?

    The Results
    We back-tested this only over the last six-weeks. We are hyper focusing not on a long drawn out pattern, but rather this time, right now, this period of volatility.

    AAPL: Long 50 Delta Straddle

    % Wins: 58.8%
    Wins: 10 Losses: 7
    % Return: 92%

    Tap Here to See the Back-test
    The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger).

    Notice that this has triggered a trade 17 times in the last six-weeks and while the stock has dropped 14%, the option strategy, which takes no directional positioning, is up more than 92% in six-weeks time. This is a fast moving, re-adjusting straddle. The idea is simple:

    Take well bounded risk, small, and direction-less, and let a tweet, a news headline, an Apple headline, a day of pessimism or a day of optimism, whatever -- move the market, as it has so often in this new volatility regime.

    Setting Expectations
    Since we use end of day open and closes, while this strategy has an overall return of 92%, the trade details keep us in bounds with expectations:

    ➡ The average percent return per trade was 11%.
    ➡ The average percent return per winning trade was 29.9%.
    ➡ The percent return per losing trade was -16%.

    Not only are we seeing a high winning percentage, but also that the average win is twice as large as the average loss. Further, this trade takes no stock direction risk at all.

    WHAT HAPPENED
    When the market shifts, we need a minimum amount of data to adjust, and succeed. This is how people profit from the option market -- it's not luck, it's preparation.
    Tap Here, See for Yourself

    Risk Disclosure
    You should read the Characteristics and Risks of Standardized Options.

    Past performance is not an indication of future results.

    Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.

    Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.

    Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.