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Dynamic Options Trading Strategies: Leveraging Volatility for Maximum Returns

Explore Dynamic Options Trading Strategies (DOTS) to optimize returns while managing risks by leveraging volatility. Learn forecasting methods, strategies, limitations, and enhancing techniques with R and Vol forecasting. The goal is to push the efficient frontier with smart trading decisions.

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Dynamic Options Trading Strategies: Leveraging Volatility for Maximum Returns

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  1. Q. Tom Chen Zade Zalatimo Gustavo Vello Ray Franzi Yves Geniaux Dynamic Options Trading Strategies DOTS Market Timers Group Friday, February 26, 1999

  2. Principle of DOTS Testing out model with money! • Forecasting volatility with the ARCH model • VIX: implied volatility of S&P100 30 days • Compare the forecasted volatility to VIX Market Timers Group

  3. Testing out model with money! • Strategy 1: If Vol(f)<VIX, sell call options • or stay in S&P 100 • Strategy 2: If Vol(f)<VIX, sell put options • or stay in S&P 100 • Strategy 3: Combination of calls and puts • if Vol(f)<VIX, sell calls and/or puts • or stay in S&P 100 Market Timers Group

  4. The Goal of DOTS • Maximize Returns • leverage, risks • Benchmark to S&P 100 • stay in S&P if no action • Benchmark to T-Bill • stay in T-Bill if no action Market Timers Group

  5. Performance of DOTS A 12 year simulation (including out-of-sample test in last year) Market Timers Group

  6. Performance of DOTS A 12 year simulation (including out-of-sample test in last year) Market Timers Group

  7. Limitations of DOTS • Find the right moment • be patient • Theoretical approach • bid/ask spreads • Trading costs • hurdle rates Market Timers Group

  8. Use Both R and Vol Forecasting Improving DOTS • Conditional optimized trading • Good regression model: • adj. R-sq: 5-12% for US and developed markets • Hit Rate: best model 77% for US • highly “predictable” due to the market conditions Market Timers Group

  9. Use Both R and Vol Forecasting Market Timers Group

  10. Conclusion • Dynamic: push the efficient frontier • Options: leverage at the right moment • Trading: based on good forecasting • Strategies: betting against the market Market Timers Group

  11. DOTS Brought to you by The Market Timers Group

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