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Q. Tom Chen. Zade Zalatimo. Gustavo Vello. Ray Franzi. Yves Geniaux. Dynamic Options Trading Strategies. DOTS. Market Timers Group Friday, February 26, 1999. Principle of DOTS. Testing out model with money!. Forecasting volatility with the ARCH model
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Q. Tom Chen Zade Zalatimo Gustavo Vello Ray Franzi Yves Geniaux Dynamic Options Trading Strategies DOTS Market Timers Group Friday, February 26, 1999
Principle of DOTS Testing out model with money! • Forecasting volatility with the ARCH model • VIX: implied volatility of S&P100 30 days • Compare the forecasted volatility to VIX Market Timers Group
Testing out model with money! • Strategy 1: If Vol(f)<VIX, sell call options • or stay in S&P 100 • Strategy 2: If Vol(f)<VIX, sell put options • or stay in S&P 100 • Strategy 3: Combination of calls and puts • if Vol(f)<VIX, sell calls and/or puts • or stay in S&P 100 Market Timers Group
The Goal of DOTS • Maximize Returns • leverage, risks • Benchmark to S&P 100 • stay in S&P if no action • Benchmark to T-Bill • stay in T-Bill if no action Market Timers Group
Performance of DOTS A 12 year simulation (including out-of-sample test in last year) Market Timers Group
Performance of DOTS A 12 year simulation (including out-of-sample test in last year) Market Timers Group
Limitations of DOTS • Find the right moment • be patient • Theoretical approach • bid/ask spreads • Trading costs • hurdle rates Market Timers Group
Use Both R and Vol Forecasting Improving DOTS • Conditional optimized trading • Good regression model: • adj. R-sq: 5-12% for US and developed markets • Hit Rate: best model 77% for US • highly “predictable” due to the market conditions Market Timers Group
Use Both R and Vol Forecasting Market Timers Group
Conclusion • Dynamic: push the efficient frontier • Options: leverage at the right moment • Trading: based on good forecasting • Strategies: betting against the market Market Timers Group
DOTS Brought to you by The Market Timers Group