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Targeting Delta and DTE in option trade plans
Last Activity 12/1/2022 8:14 AM
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kmcintyre

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Subject : Targeting Delta and DTE in option trade plans
Posted : 2/15/2020 2:07 PM
Post #46759

I trade options that are very liquid. One measure of the underlyings option liquidity is the existence of weekly options and nerrow strike increments.

$0.50n for underlyings under $100. $1 increments for underlyings between $100 and $250. etc.

I manually compose my list of stocks and ETFs that I want to trade.

I am also very particular about the deltas of the legs I buy and sell, and the DTE of the chains I pick from. I have spent significant time researching which deltas and DTEs provide the largest Profit Per Day (PPD) and Expectancy.

Option trade plans use the concept of degree of money-ness and degree of expiration. The "ddegree" is based on whatever chains and strikes the options module believes should be available.

(or at least that is how I read the Users Manual...)

I have nevber embraced option trade plans because I do not think I can control the delta and DTE of the trades being entered.

So am I wrong?

Is there a way to tell an option trade plan to sell an iron condor, closest to 50 DTE, using Monthlies (not weeklies). Sell the strike closest to 30 delta and buy the strikes closest to 5 delta?

(Well, I know there is not. So the question really is, can I use a TP to place trades equivalent to the above? And how reliably will the TP model the trades I want to take?)

If the TP can't model the entry conditions I am looking for, than I can't use the options module to simulate Strategy returns for use in the GA Signals block.

Thanks for any insights.

Cheers


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jpb

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Subject : RE: Targeting Delta and DTE in option trade plans
Posted : 2/15/2020 2:51 PM
Post #46760 - In reply to #46759

I haven't found a way to achieve what you are looking to do in OT.

In fact, I haven't found a way to:
- properly calculate number of contracts
- select the best contract to trade based on rules
- monitor a trade in the trade plans
- reliably close a portion of the open position at various levels

Every attempt I've made with the various legs and the use of percentages results in closing more than expected and singing you from long to short, attempts to price an option at the underlying symbol price or it opens up the underlying symbol instead of the option.

My latest attempt is still in testing. I'm simply trying to get it to select the option that is in the money with a strike price as close to the current market price and has at least 40 days to expiration. I'm not having very good luck for something this basic. And I'm struggling to have Auto Trade do anything with options. AT runs but so far in the past month it has issued 0 trades even though the Focus List shows trades firing.

I'd love to hear how anyone has gotten OT to mechanically trade options.
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Mel

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Subject : RE: Targeting Delta and DTE in option trade plans
Posted : 2/15/2020 10:37 PM
Post #46762 - In reply to #46760

The proxy for delta is how far ITM you are. Backtests with different amounts (+1, +2, +3) tell you what is the average profitability. What you are ultimately interested in is profit, not delta.

You can calculate the number of contracts te same way you do for shares. Given a $ risk and a stop (either based on the position or the underlying, you can divide to get the number of contracts. Harder to deal with is IV, but the IV OT calulates seems pretty good if it is near the money.

Use ITM 0 or 1 for your backtesting. To select the "best" contact you need to use the option finder, not do it automatically. Since I trade directly with IB, and don't scale out, I have no advice for monitoring trades or scaling out.

[Edited by Mel on 2/15/2020 10:38 PM]

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Hafnium

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Subject : RE: Targeting Delta and DTE in option trade plans
Posted : 2/16/2020 2:10 AM
Post #46763 - In reply to #46760

When you Auto Trade Options in OT you have just multiplied the complexity of your setup by a factor of 2 or 3 - but its definitely possible. I've done it in the past with OmniPilot, and am currently doing it with Auto Trader / ATM

My experience is with AutoTrading Directional Option Strategies Only -So, my answers are not applicable to Keith's question concerning Targeting Delta and DTE. Also, I have not tried scaling in or out based on levels.

How to Do It? - There is a trimmed down version of Option Finder built into the Option Trade Plan. That means that you can instruct Option Finder to Find the best strikes/expirations based on your criteria (you give option finder a target, a time period to the target, and what optimization metric you want. Min/Max $gain, %gain, Risk, Risk/Reward, etc....) It picks the strikes and expiration. Just be aware that turning this on increases strategy processing time by multiple (takes 2 or 3 times longer). If running ARM strategies this becomes significant from a timing perspective.

What the Trade Plan Option Finder functionality can't do however - is pick the option method. For example - it can optimize the strikes for a Long Call, or it can optimize the strikes for Max Gain on a Debit Spread. But it can't choose the option method for you. ie.. It will not choose say a Debit Spread over a Long Call or a Credit Spread. It only optimizes the method, not the Choice of the method.

I also would not Auto Trade Options (lesson learned from experience) without using the built in Trade Filter and setting some safety parameters (max Bid/Ask Spread, min OI, Min Margin - to your taste). You could probably get by Auto Trading Options without the Filter if you only trade a Select Few, very highly liquid stocks. The Significance of this point is that - You must turn ON Option Finder to enable the Trade Filter. Thats a subtle point but turns out is very important if you think about it. I suggest that you develop your strategies with Option Finder off, then near the end of development turn it on.


Finally, It took me around 3 to 4 months to create several ARM6 strategies that I "felt" were good enough to Auto Trade with (most of them are variations of the ARM6 strategies that Nirvana has provided to club members). It then took me an additional 2 to 3 months of testing Option Trade Plans to implement those strategies properly (first on OT paper account, then with GX Trader Paper Account, finally on a GX Trader Live Account). BE AWARE - There is a "bug" with respect to position sizing with options. The % of Equity Position sizing works fine with Long Options (buying a single call or put). However - if you trade spreads, ATM calculates the position size correctly, but when the trade is actually submitted to a live account, only 1 contract position is submitted. I reported this bug to Nirvana about 2 weeks ago. The work around (although crude), it to use fixed position sizing for spreads. You will note that the Debit Magic ATM method uses Fixed Sizing (for conservative) or Size to Equity (for aggressive).


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jpb

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Subject : RE: Targeting Delta and DTE in option trade plans
Posted : 2/19/2020 3:55 PM
Post #46770 - In reply to #46763

Mel & LD,
Thanks for sharing your experience with options trade plans.

I'll go back over my settings and see if I can find out what I'm doing wrong. I did discover the search and settings at the bottom of the order definition tab and that has helped narrow the option selected to trade.

The one thing I'm struggling with yet is the quantity to trade. Is this controlled with Trade Calculator or the allocation within the Method (or is that based on the setting in Auto Trade)?

Are you setting the quantity to trade as 100 shares = 1 contract or are you able to just use the value 1 to mean one contract? The labeling of the fields in Trade Calculator completely confuses me.

Another question I have is related to Roll. Do either of you use it to roll from one contract to the next? I think that's what it's there for but it also looks like it sets the minimum days to expiration for finding an option but I've never tried it to see if it exits one and tries to enter another further out.
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Hafnium

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Subject : RE: Targeting Delta and DTE in option trade plans
Posted : 2/19/2020 8:55 PM
Post #46773 - In reply to #46770

Hi jpb

I can only answer your questions as it pertains to auto Trading Options. Discretionary /manual trading is very different - perhaps Mel can help here. This requires the proper setting of the Trade Calculator.....

If you are AutoTrading Options - there are 2 settings controlling the trade size.

A. AutoTrade Setting of "Method". Then the ATM method controls the position sizing (the allocation tab).

B. AutoTrade Setting of "Trade Size". Then the AutoTrade Setting controls the position size. There are only 2 choices. Fixed $ and % of Equity. (you are autotrading without ATM).

C. I assume that you want to Auto Trade Options with the AutoTrader. If you want to AutoTrade with "Omnipilot", then, if memory serves me correctly, the allocation size was actually chosen in the Trade Calculator... so, yes it can be confusing.

D. In the autotrade settings - choose "Round to 100 shares/contracts".
100 shares is equivalent to 1 option contract.

Be careful however. if you choose "Round to 100 shares/contracts" in the AutoTrade Settings - make sure you deselect that setting in Portfolio Simulator (if you have it selected) . Having them both set to Round to 100 shares sometimes causes some weird issues with the trade size. Best to just only select it in 1 place.

As for the Roll selection. - Yes, you are correct in that the setting is there to roll the contract from the expiring contract to the next one. However, in all of my Option Testing - I have only seen it work twice in my simulations (and about 10 times it did not work). When it did work, it actually exited the trade on day 0, then re-entered the trade the next day with the updated contract. So, my lesson learned was to not actually use the roll feature. That feature only works if
the Expiration and the Roll settings will allow the roll to happen prior to expiration. For example, With an expiration set to say C+2, and a Roll period of say 5 days. You will rarely see the Roll happen if Expiration is set to "C". I still do not fully understand how it works - but Ed did explain it to a group of us and it did seem to be useful if you used it correctly.

One of your earlier questions was how to set the length of the option that you wanted to buy. The easiest way to do this is simply to set
Expiration to "C". and Roll to X, where X is the amount days you want the Option to have. So, if I wanted an option to have 21 days min of life, then set the Roll to 21 with the Expiration set to C. Also, you may or may not want to choose "weekly options".

Once again, I leave the Trade Calculator questions to someone else more knowledgeable of manual trading settings.

[Edited by Hafnium on 2/19/2020 8:59 PM]

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