Does the statistics from IB ,include drawdown?
If I may understand this system correctly (because it showed up on my radar too), is it just primarily a naked short selling options strategy? If all options really go to 0, isnāt it kind of a fool proof way to make money long term? I donāt get how there can be a risk in either a bull or a bear market (excuse my ignorance, i donāt trade options) Thanks!!!
Not all options go to zero. Only those that expire out of the money. Go through a basic guide for options.
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Nice discussion on this system here. I was wondering too how good it is performing with short selling options. But you can see there are some huge peeks down and up in the track record, which means there was a lot of risk taken.
Trading naked short options is risky, but trading with a proven rule set which tells you when to close or roll losing positions and when to take profit along with right position sizes that is not riskier than trading stocks in my point of view.
Iām also selling mostly naked options with my system Regular Income ( https://collective2.com/details/107003652 ) but I donāt trade position sizes larger than 1% of the trading capital. Iām trading small positions but many positions at the same time on several underlyings. That is minimizing the risk of big drawdowns a lot even if a position is going to be a loser.
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100% TOS doesnāt mean c2 verified the balance. All 100% TOS mean since nov 16, 100% of heās trades are verified by IB to c2. So he could have 500k (he sells avg 150-200 options on qqq or spy) or he could have 10 million in heās acct.
An existing account must have at least USD 110,000 (or USD equivalent) in Net Liquidation Value to be eligible to upgrade to a Portfolio Margin account (in addition to being approved for uncovered option trading). Existing customers may apply for a Portfolio Margin account on the Account Type page in Account Management at any time and your account will be upgraded upon approval.
I subscribed to this system for a while. My advice is not to trade it unless you have an acct size of 500k or greater, and if you trade it, then only trade this one system. The reason is that the VaR risk is so high that all your excess liquidity will get tied up in the trade, and you wont be able, or at least you should not trade outside the system. For example, his model portfolio is 1.7 million, and his average trade size is 200 SPY puts, and 200 QQQ puts. Lets say the profit on this trade is $10,000. However he is devoting 1.7 million of liquidity to this 10k trade. I dont know about the rest of you, but I can make a hell of a lot more than a lousy 10k with an account size of 1.7 million. So if you had an account size of $170,000 then you should trade 1/10th of his trade size of 20 SPY, and 20 QQQ. In my opinion these are too small of a trade to really warrant locking up all that excess liquidity when you could be trading other stocks, crude oil, gold, vix, etcā¦ This is a system designed to give institutional investors who are always long the indexes the opportunity to generate a bit more alpha selling premium. I wouldnt recommend this system to an active trade with an account size of 100k. This works for an institution of $50mil and above. The system takes I would say on average 1 to 3 trades per month, and has a strong track record, but I personally think there are much more profitable ways to trade with less drawdown risk than this system. If you are willing to put 500k, and only trade this system then you outperform the index a bit, but in terms of sharpe ratio Im not sure the added risk makes sense. Especially, at these levels of all time highs. The system creator holds his positions overnight, and does not hedge, so you are truly naked. For those of you putting that savings nest egg to work, you are always one big drawdown away from being wiped out. While this is a tail risk event, and not highly probable, we are in a market that is expensive, and those risks are there. The system has listed a nice track record since the market bottom of 2009 to the present, which has been a very strong bull market, anyone could simply buy the index, and go away and achieve great results. However, if we enter choppy markets, with higher volatility this is definitely not the system you want to be trading. The short put strategy has worked so well since 2009 because the volatility index has become so compressed, and the Fed and CBās across the world keep reassuring everyone that everything is going to be ok. However, with VIX at all time low, and markets at ATH, and a Trump administration that is a bit uncertain, this is not the right strategy in my opinion. I traded this system throughout 2016, and made money. I also traded it as a confirmation for what has really made me lots of money which is the short VIX trade. So when I would see R Option short puts, I would feel better about my short UVXY trade, I would not always take the R Option trades because again, they suck up all of your excess liquidity. For smaller accounts, this is not worth the liquidity and drawdown risk, you are better off taking directional bets while placing stops. You can make much more money shorting VIX, or trading the ES-Mini contract. Even one ES-mini contract with stops using a simple MACD crossover when I backtested showed better results than the short put trade. However, if you are a passive investor, willing to put 100k on autotrade, and only trade this system then this might be the way to go. The system creator is knowledgeable, and responsive, but ultimately it is your capital.
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Hello Ronin,
Your comments are greatly appreciated, on the other hand it is important for me to provide the manager view on some of your comments.
A. There are well known successful managers investing approximately 1/5th of the size you advise. Based on the performance page R Option Minimum Capital Requirement is 100,000 USD which is enough if you understand the risk of the system and the properties of scaling.
B. Based on public data, the average win is about 9.3k however it does not requires the entire capital/margin to produce that return. The systemās history shows and average of 4.7 trader per month. The realized net return in dollars for January '17 was 49.6k and Feb '17 return, net of all fees, was 35.3k. Subscribers with a 10% scaling took home 4.9k in Jan and 3.5k in Feb net of all fees. Furthermore, the correlation with SP500 is 0.47 and the beta is 2.11 based on the performance page.
C. The manager created āR Option Miniā to help subscriber to scale R Option. The new system which started with a 60k account outperformed āR Optionā which was another reason for the manager to create that system.
D. The original model in which R Option was designed was a market timer. Timing exposure at SP500 and Nasdaq stocks.
F. The modelās first trade was in 2006 and traded without interruption during the financial crisis outperforming most funds that the manager analyzed those years. No matter how good or bad historical performance is, the manager was trained to believe that historical performance is not indicative of future returns. The manager, who is not a registered investment adviser, understand and encourage diversification.
Thank you for your comments
I appreciate the comments. I dont know anything about 2006, as the trading record on C2 goes to 2013, and anything before that would not have been C2 verified. From 2013-present weve been in a raging bull market, with unprecedented volatility compression. Whether this remains the case in the future at these levels is something that traders need to understand, and system subscribers just got a taste of this when SPY recently tested 231.46. It sounds too good to be true to be a āmarket timerā short SPY puts strategy in a choppy volatile market.
As for the performance, there is no doubt that the performance is good, and the system manager is experienced, I never disputed that. I simply gave my view as an active trader, of the pros and cons of such a system. If the system manager is using model portfolio of 1.7 million if Im not mistaken, it is well over 1 million, then a person with 100k should take 1/10th or 1/17th of the trade size. The system creator is actually taking rather small positions relative to his overall account size, a trade size of 200 SPY puts, and 200 QQQ puts is small for an account of this size, which says something about the conviction, and timing effects. In part B. he is saying the average win is 9.3k, relative to an account of 1.7 million is only roughly 50 bps per trade. So all of this should be taken into context, and we should discount from the 50 bps, things like drawdown risk, and the opportunity cost on having all your excess liquidity tied up into the trade. If the system creator has conviction to be short SPY puts, then my suggestion was to short the VIX, and make 300 bps in a day, rather than be exposed to drawdown risk for a week, or more, and be exposed to overnight risk so that you can make a lousy 50 bps. However, I am mainly speaking to the active traders on this site.
Due to margin requirements, first off, you need a portfolio margin account to trade this system, and you must have at a minimum 100k. However, you cannot trade this strategy and use to the full extent this 100k. You can not even put your excess liquidity into treasuries, as you have to maintain that excess liquidity to cover the trade. So my point was that if you trade R Option with 100k, then you are bound to trade this and only this system. Your broker will not let you take additional liquidity risk, while you are exposed to a short SPY put position. If you are a trader that wants to trade different asset classes you cant. When the system is flat, you still can not take positions as you dont know when the next trade will be initiated, and simply need to leave that liquidity at the ready.
So my point is that if you want to trade this, the downside is that youāre bound to this system. Its important that traders understand this, as many dont. If thats ok, they want to just put their 100k on autopilot, and leave its fate to this system then I wish them luck. This is a good, passive system that is in reputable hands, but my view is that you should scale lightly with the system, set it on autotrade, and forget about it.
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Hello Amir,
I hope you are doing good.
Thanks for sharing, there are extra comments that need to be clarify.
i.e. Average winner is 9k from day one, when the account was much smaller.
On the other hand, I think itās good that clients read other point of view?
Is it helpful for you?
Regards,
Mario
Hi Mario,
I said lots of good things about you and the strategy. No it doesnt help
me, but I didnt know all the details when I started your strategy, and am
just being helpful to others to understand it. Many of the traders on C2
dont understand margin requirements, I didnt fully understand the impact of
SPY short puts and their impact on margin until I started your strategy.
My main point is that your strategy should be traded as a stand alone, and
traders should not trade other strategies simultaneously from the same
account. I only used your strategy to confirm short VIX trades, and the
one time that I put you on autotrade I suffered a 10k drawdown, lol. Im
still positive 42k for the year, but 10k is 10k. I would not have taken
the loss, and stuck with the trade if this was my only position, but I was
exposed to other positions as well, and the bulk of my liquidity was tied
into your short puts trade. There was significant risk there.
I think on the last trade you capitulated to pressure from subscribers
messaging you about "when are you going to take the next trade?ā and put on
a hasty trade even though you knew that the timing was not right. I should
not have put on autotrade, but im not complaining. I know you are a great
trader, and am still waiting to see how your e-mini system, or futures
trading works out to possibly join.
Hello Amir,
I did not know you are Ronin.
I am sorry you took that loss and happy you are up with the strategy and is
helping you. Thatās my goal.
I appreciate you writing, it is good for others and itās clear to me that
you are helping and at the same time you find more insights about R Option.
Can you modify the name of the strategy on the title of the post? Removing
the āsā.
You need to know that I donāt chose when to enter into a trade, itās upto
the model to give the signal.
I know you said nice things.
When i trade C2 systems I always consider the max exposure from each system
in the worse case scenario. I donāt know what the manager can do next. I
do not leverage C2 accounts.
Regards,
Mario
Scaling size should be determined also according to acceptable drawdown, not only margin requirements.
For example, the DD in 2014 was $150,000 (according to the equity curve) for scale of 100%. For those who had an account of $450,000, itās not a small DD. If subscribers traded same size with a smaller account, the DD could be dramatic.
The max DD was 41.7%. This is already very substantial. Trading same size on a smaller account means the DD one expects to suffer will be much greater than this.
Realistically, I look at it in the following way:
- Figure out what is the max DD the system is likely to have. In this case, since the system has a track record of a few years, one may use the historical max DD. For systems with a shorter track record Iād use a larger number (I think a poster called Leslie had a nice way to do that). For simplicity, we will round it down to 40%.
- Figure out what is the max DD you are willing to suffer. Letās say itās 20%.
- Set your trading scale accordingly.
- If you want to trade with 100% scale and are willing to be exposed only to 20% DD, this can be done with an account of 3.4 million dollars.
- If your account is $340,000, you need to scale to 10%.
- If your account is $100,000, accepting $20,000 max DD means you need to scale down to 3%.
- Under those assumptions the lowest possible account is $34,000 if scaling to 1% (I didnāt go through the trades to see if they are all realistic with such scaling, perhaps itās not the case).
All calculations above are not relevant of course if you expect max DD be larger in a bearish market.
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Keep up the good work, make that money!
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great work mario. keep making it rain money.
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As one of you suggested, I created a Mini Version of R Option to remove the pain of scaling a large account. I want to thank you for that suggestion. I have realized that R Option Mini can help more people because on the smaller account size.
Now, I have a question for you: How can I make this viral?
R Option Mini had a great month I am wondering if a referral program can work. Would any of you be interested? As you know I have been trading for institutions for the last 10yr however most of my experience is serving institutional clients needs. Would you share ideas on how to make R Option Mini viral?
Maybe advertise on facebook, by the way, good work
I was looking into that but for finance ads in USA is very expensive. Now I understand why those ad companies make so much money. Thanks for the feedback
