How to Find Statistical Edges in Options Trading

DISCLAIMER: All information contained in this presentation is general market commentary and should not be considered investment advice. No claim is made as to the accuracy or usefulness of any information provided. Trading involves a high level of risk. Futures, foreign currency exchange, and options involve an even greater level of risk. Consult your financial advisor before making an investment decision.

Andrew Falde 2011

Today’s Objectives

Compare “statistical” trading to “high probability” trading

Learn how to use Excel formulas to determine reliability

Find examples of good risk/reward trades using the custom indicator

Discuss risk allocation and Greeks as it relates to building an options inventory

Layering Strategies

Trend Following

Occasional homerun Lots of small losses while waiting for the extended moves

High Probability Income

• Frequent base hits• Rewarded for holding risk

Statistical Arbitrage

Deciding on Trades

• What the experts are saying

• What I think will happen

• What happened the last 5 or 10 times

• What happened the last 500 or 1,000 times

Fundamental

Discretionary

TechnicalStatistical

Example: What actually happens…

Workbook

What Can We Do With This Information

• Butterflies at the median target• Iron Condor around the 50% range•Receive 70% to 90% ROR with only 14% statistical risk!• …

Indicator

Risk Allocation / Greeks

High Probability Income,Trend Positions,Etc…

Short TermShort Term

• Good Risk/Reward• Gamma is volatile• Keep trades small

Core Positions

• Delta leaning w/ trend• Neutral Vega• Positive Theta

Learn More

Rick Martin - rmartin@smbcap.com

• If you already have a basic concept of excel formulas, programming, and want to learn about developing and back testing automated strategies on your own

Andrew Falde - andrew.falde@gmail.com

• If you want to discuss a concept, get basic statistical information, build an excel calculator or Trade Station indicator