Author Topic: Overview  (Read 981 times)

Offline TradingAdmin

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Overview
« on: February 14, 2017, 05:15:17 pm »
What is it that we want to do trading options, what are we after, what is the goal, what do we want to achieve?  From personal experience there are a number of key requirements:

  • I want to be able to select a market.  How do I know which commodity contract to look at?  Where do I find my next trading opportunity?
  • Next, I need to be able to create a trading plan.  There are a whole lot of actions involved in this:
    • Select a trading strategy
    • Analyse the market
    • Plan my trade (how much profit, how much risk)
    • Optimise my trade - that is simulate different market conditions and plan how to handle each (mitigate the risk)
  • Monitor (or track) my trades - daily progress

Options Explorer assists me with all of these actions.
  • Selecting a market:
    There are in general two methods. 
    • The first is we approach this from a Volatility point of view.  We have certain favourite market strategies depending on the volatility (Implied Volatility - IV) that the commodity is trading at.  Thus we use the IV as a guideline to select a market
    • The second is that we have certain rules or certain conditions and we filter tradable options by, applying our rules to the market to select the options, and thus the futures, that we would like to investigate
  • Select a Trading Strategy:
    Again we have two ways
    • We ask Options Explorer to suggest a strategy that will work in this market condition and create us a trade complying with this strategy.  We then optimise the strategy until we are happy with it, or
    • You create your own trading strategy.
  • Analyse and Plan:
    There are some powerful tools included to allow us to analyse the market, view where the big players in the market has positioned themselves, find the prices that the options are trading at and plot for us our position, the profit we'll make, where we will make that profit (what does the market have to do), where will we take a loss, how big is the potential loss, etc.
  • Optimise:
    Options Explorer allows me to simulate the likely price movements going into the future and allowing us to add more trades if the market moves like that.  For each perceived market position we are able to add positions onto our original position, or sell out of certain individual trades, to analyse and plan how we will handle each possible scenario.  In other words it allows us to create a detailed Trading Plan
  • Monitor:
    We are able to save all our trades, we are able to create simulated accounts (unlimited) and we are able to add saved trades to our simulated accounts.  We may then open these simulated accounts on a daily basis as more information becomes available to monitor or check the performance of our trades against what the market did.
I order to offer us all this functionality there are a few supporting functions that we need to attend to - such as our data imports and general commodity information that we may need to update..

Over the next couple of posts, we'll look at each of these software features in a bit more detail

Offline TradingAdmin

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Re: Overview
« Reply #1 on: February 14, 2017, 06:33:33 pm »
Selecting a Market - by IV

This is a commodities Heat-map:


(Before we continue, note that the colour scheme is customisable by the user - thus you are free to use whatever colours suits your style for the heat map)

I mainly focus on SELLING options.  Thus in my colour scheme,
  • GREEN means - good opportunity to SELL, thus HIGH IV
  • RED means - danger, LOW IV, stay away, not good opportunity to SELL  (however may be good to BUY, if you are into that)

What this feature does, is it rates all of my commodities for me on a scale from HIGH IV to LOW IV.  At one glance I am able to select a market based on whether the commodity's options at the moment are priced high or priced low (please note that this is high or low in terms of IMPLIED Volatility (IV - where the options currently are trading at) and not in terms of Historical or Statistical Volatility)

This selection strategy implies I have certain favourite trading strategies, based on the IV, that I like - and I am selecting my market based on this condition - I need (in my case) a high IV for that is where my strategy works best (selling options).  I can see that high IV markets are Lumber, Oats, Feeder Cattle, Cocoa, Cotton, Copper.  Moderately high markets would be Wheat, Gasoline, Hogs, Heating Oil and some financials..  Coffee and Crude Oil are really cheaply priced if I want to consider buying options.

On top of this information, the points themselves give me some additional information for each commodity.  For example with Cocoa and Cotton I can see that the options above the current price are priced high (in other words the Calls) while those below the current price are priced low (the Puts), while with for example Wheat, both the Calls and the Puts are priced high.  In other words the market is pricing in extra risk to the upside for Cocoa and Cotton!!

From here I may right-click on my points on the heat map, which will give me previews (charts) of my commodity markets:



And from here I may select a market to trade in.  Note how my commodity graph background colours contain the same IV information - those with a green background are HIGH IV markets, the blue is a MODERATE IV market.  For example Cotton is in an established uptrend, the last price movement just took out a Rh (previous high) on my price chart.  If I have a trading strategy for a Bull market and High IV, this is a potential market to analyse...  (I may right-click on the graph and from there open the Options Analysis tool - this will take me directly to my powerful Analysis functions)