Wednesday, 18 January 2012

Option trading back on the agenda

My search for trading strategies uncorrelated with our current trading continues. And in a flash of "inspiration" (?), I had a look at how Oxeye, a FTSE options trading firm, had been fairing. The answer is that August last year was really bad for them (-18%), but that the period since had been pretty good with returns of +8.18, +5.24, +7.90 and +6.43 for +30.7% for the last four months of the year.

But contrast, we have found August to be great while the the period since August has been increasingly difficult, as volatility has died and we are just not getting the winning trades that we were back in the summer. If you just combined us with Oxeye, August would have been fine, indeed a small gain despite the option losses. Then the option trading would have done well as our trading trailed off. Overall, a good pick up in return relative to risk from the combination of the two strategies.

So my new research plan is to consider an option writing strategy as an overlay for the futures trading. When vol is low, as it remains now, the furtures trading does relateively poorly, while the options are fine. And when vol increases. the options do poorly and the futures does better - or at least that is the theory anyway.

Rough estimates suggest that this is considerably Sharpe ratio enhancing, but the details of how we might do it remain uncertain. Nonetheless, we sold some Feb calls and puts today to start us off.

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