2023-02-27 Wrinkle-brain Plays (Mathematically derived options plays)

Submitted by hardyrekshin t3_11bbfts in wallstreetbets

Tickers of Interest - TL;DR

Gamma Max Cross

  • LAZR 03/17 8P for $0.80 or less
  • BHC 03/17 9.5P for $0.40 or less
  • ABBV 03/17 152.5P for $2.25 or less
  • TZA 03/17 28P for $2.15 or less
  • RRC 03/17 26P for $0.45 or less

Delta Neutral Cross

  • PARA 03/17 22.5C for $0.70 or less
  • CHPT 03/17 10.5C for $0.60 or less
  • HOOD 03/17 10C for $0.25 or less
  • USO 03/17 67.5C for $1.70 or less
  • ROKU 03/17 63C for $3.55 or less

Trading Thesis - Why These Crayons Taste Better

Technical analysis and indicator based trading tend to use past price performance in order to predict important price levels today.

This analysis is based on the current option open interest. With that option open interest, it calculates portfolio-level greeks--notably Delta and Gamma. More importantly, once the portfolio level greeks are established, I can now simulate the change in greeks at different price points. From there, I can find the price levels where portfolio-level gamma is the highest, and the portfolio-level delta is close to 0.

For some tickers, the underlying price reacts strongly off of delta neutral, gamma max, and sometimes both.

It's the reaction off of these price levels in the past that is being used to drive trading signals.

The plays and target entry prices given are calculated using a binomial option pricing model that reflect the expected size and duration of the reaction from gamma max or delta neutral. A lot of these plays are profitable by underlying moves in stock. The best plays benefit from the directional move as well as the increase in IV.

Notes - Something to give you a new wrinkle

  • If the price has moved past the entry price, exercise caution. Something changed between the time these plays were generated and market open.
  • Look to sell half your position on a double, and freeroll the rest to exit at your discretion.
  • I tend to risk up to 1% of my total capital on any trades I take. If my conviction is lower, I'll only allocate 0.5% or even 0.25% of my capital to the trade, and dollar cost average in.
  • The trades were calculated before market open, and so are based on information up to yesterday. Keep that in mind when deciding to enter well after the fact. New price movement may invalidate the original thesis.

FAQ - Because others have already asked.

  • These plays are mostly puts. Are you a gay bear?
    • No. It so happens that the companies have had some recent run-up which implies they are overextended. These trades are primarily some form of mean-reversion either toward or away from an important price level.
  • Are you entering all these plays?
    • No. There have been a dearth of plays in the WSB morning talks, and so I opened up my bag of tools slightly wider to point out more plays with a probable edge to help lead apes to more gain porn. Go through this curated list of plays, pick the ones you like based on whatever additional analysis you use, and get that gain porn.
  • You mentioned a new play on the same ticker in the past. What does that mean?
    • The new play should replace the old play. The old play is likely now invalid and if you haven't entered in, don't chase the price. Remember that a new day's worth of data has been produced and the newer play reflects that data, the older play does not.
  • Where are the crayons? I only see words.
    • Click the links above.
  • Have you back-tested this?
    • Yes. Results show a moderate Sharpe Ratio (1.7), with an expected win rate of 63% of trades (7% margin of error)
  • What is the historical performance?
    • The realized Sharpe Ratio is 1.88 with a 66% win rate. Based on the trade performance so far, there is a 95% chance the expected win rate will be between 60% and 78%. (Stats as of 2023-01-31)
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Comments

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wordsofmassdiruption t1_j9yqhe1 wrote

Careful with those LAZR puts. Luminar Day on Tuesday, big announcements slated.

3

hardyrekshin OP t1_j9zfrox wrote

Thank you for sharing.

Is there any chance this is a sell the news event?

3

wordsofmassdiruption t1_j9zw1mj wrote

They just announced the Mercedes deal that they said would raise their business by “an order of magnitude”. They are announcing 4th quarter earnings and are supposed to make a few more major announcements. With 200k call options between $7.50 and $9.50 expiring Friday, the catalyst of good news could easily cause a decent squeeze. Held with high volume above the options that expired on Friday, so seems like it has a good chance it can repeat this week. Just saying not sure a put is the way to play this one.

3

hardyrekshin OP t1_ja05uo4 wrote

Valid point. And thank you again for sharing the supplemental DD.

3

wordsofmassdiruption t1_j9zzf3r wrote

“At Luminar Day we will unveil our technology roadmap, as well as our near-term and long-term financial plan, including Q4 and full-year 2022 financials.”

3

tehs1mps0ns t1_ja3ga7q wrote

In your backtests, what were your exit rules? You said your win rate was based on options expiring in the money, so was your p/l solely based on closing price at expiry?

2

hardyrekshin OP t1_ja3wqg4 wrote

I don't post P/L. I do post win rate.

But otherwise, yes. It's based on whether or not expiry price > entry price.

2

tehs1mps0ns t1_ja4828g wrote

Ok forget about p/l. So I what I should understand is the sharpe ratio of your backtest portfolio (1.7) is based on the price of the underlying at expiry, and no other exit strategy such as trailing stops, etc. I'm asking to guide my own personal implementation. Thanks!

2

hardyrekshin OP t1_ja4gwff wrote

Yep.

I have no doubt you can improve on the sharpe ratio with more intelligent exiting.

2

VisualMod t1_j9wzv40 wrote

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>TL;DR: https://options.hardyrekshin.com
1

VisualMod t1_j9wzvk3 wrote

>I have not back-tested this strategy specifically, but I believe that it would be profitable based on the historical performance of similar strategies.

1

viveksnh t1_ja5j8mi wrote

Typically, what's the entry to exit timeframe?

1

hardyrekshin OP t1_ja5oz58 wrote

It varies.

Some trades are entered and exited in as little as 3 hours.

Other trades take 2 weeks to realize gains.

Need to see the chart to get a sense of the magnitude of the reaction to expect.

1

Radiant-Discount-899 t1_ja8939d wrote

Thanks for sharing this!. Few questions.

  1. What is the tool/library you use to get the gamma and other greeks.
  2. How are you determining the expiry date for the play?
1

hardyrekshin OP t1_ja8a679 wrote

  1. MiBian

  2. Slope of theta. Ideally want to be out of the play before the slope increases.

4

Radiant-Discount-899 t1_jaag270 wrote

Thanks for the response!. I have another question

The notes says Black Scholes model is calculates for European Market and not US Market options? You still think it applies for US as well?

1

hardyrekshin OP t1_jaah0aq wrote

It applies as long as there is no arbitrage condition.

2