Option traders and Realism Index

C2
1

Hi Matthew,



I understand that the Realism index is still in its infancy and needs a lot of tweaking, and I can see that it’s very representative for people who trade stocks, futures, and forex, since you cannot “out trade” the average volume, but I tell you, it seems that the majority of option systems are getting the short end of the stick on this one. Let me explain; just because options don’t have the trading volume that their underlying have, doesn’t mean they don’t have the AVAILABE SIZE to be traded in real life. You’ll see that many liquid stocks, some that are part of a major index (DD for example), have little trading volume but massive size available to trade. So if you don’t mind, I’d like to offer you my 2 cents on how to make RI realistic enough for option traders as well.



When an option trade gets executed in a hypothetical account, RI must check the size being executed versus real life availability on the bid ask. That is the only way to make RI honest enough for option trades being executed. Let me use my system and the most recent closed trades as an example (I’ll critique myself here); if you look at the FMD put trade with a size of 360 puts closed, even though it was closed in two “smaller” chunks (160 contracts the first chunk, and then a minute later 200 contracts were closed), it still did not represent real life size availability since at that moment only 50 or so contracts were offered on the first chunk and 80 or so on the second chunk for the taking (I don’t know the exact #s) . Thus this trade would receive 50/160 or a 31% RI value and the next chunk would get 40% (80 contracts available/200 executed). You then do a weighted average value for the 2 chunks to give it a final RI value on the combined closed trade, which will result in a value of 35.86.



I strongly advise that you add a column in the closed trade log that gives every closed trade its separate RI value. Now the potential subscriber has a powerful feel of how real every trade would have been if it were to be taken in a real account. I think that will truly resolve the issue of RI being unfair to option traders. Good day.

2

I agree to some degree. When considering the option trading. It is better to consider the bid/ask size instead of the vol. For example, OIH 115 put.The vol is only 1794. However the ask at 1.25 offer more than 1700. So the buy to open 1700 OIH 115put is pretty much reasonable although it counts almost 100% of today’s vol.

3

Yes, that’s correct. And here’s another idea that matthew can add to make the Realism Factor even more robust and accurate; Suppose you’re long 200 xyz options and that option is currently 3.50 bid/3.80 and you want to close (sell) the position now but “miraculously” you got filled some how on your collective account at 3.70 to 3.80 because few options traded at that price, do you think subscribers or even yourself can get those fills in real life?? Of course not. Therefore, Matthew can add a feature inside the vendor’s account that allows him to choose one of two options (no pun intended);



1. If you want to accept the unrealistic real life fill (3.70-3.80) that’s fine, but it comes at a costly price by receiving a very low RF value for that particular trade (using the calculation that I previously suggested).



2. Or, collective2 can automatically give your system the actual bid available at that moment (3.50) and earn a much higher grade (larger and more realistic RF value).



That I believe would then serve multiple purposes; potential subscribers will intelligently judge your system and promptly subscribe and you feel great that you’re meeting their need by honestly representing your system not to mention making a name for yourself and your trading methodology, a win-win situation for everyone.



Tarek Katbi