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

Testing out model with money! Principle of DOTS Forecasting volatility with the ARCH model VIX: implied volatility of S&P100 30 days Compare the forecasted volatility to VIX 2/26/99 Market Timers Group

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 Strategy 3: Combination of calls and puts if Vol(f)<VIX, sell calls and/or puts 2/26/99 Market Timers Group

The Goal of DOTS Maximize Returns Benchmark to S&P 100 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 2/26/99 Market Timers Group

Performance of DOTS A 12 year simulation (including out-of-sample test in last year) 2/26/99 Market Timers Group

Performance of DOTS A 12 year simulation (including out-of-sample test in last year) 2/26/99 Market Timers Group

Limitations of DOTS Find the right moment Theoretical approach be patient Theoretical approach bid/ask spreads Trading costs hurdle rates 2/26/99 Market Timers Group

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 2/26/99 Market Timers Group

Use Both R and Vol Forecasting 2/26/99 Market Timers Group

Conclusion Dynamic: push the efficient frontier Options: leverage at the right moment Trading: based on good forecasting Strategies: betting against the market 2/26/99 Market Timers Group

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