Model Sequences for Optimizing location and duration
For most this strategy is somewhat atypical, because it uses multiple disciplines, including implied volatility, but while you’re using your TD Ameritrade account or Interactive Brokers, you can simply display Implied Volatility to determine whether IV is structurally lower or higher.
In the event it is lower and you are looking for a reversion of Implied Volatility, the Calendar strategy is a great combination to use because it has the added benefit of having what is called Theta Decay or positive Theta. You will need to study the greeks if you don’t fully understand how an options value is derived. I’m not going to go into why, there are plenty of resources out there which discuss the implied volatility portion (vega) of an option and time value (theta).
That being said we can get into how the combination is constructed and also how we designed the model sequences in such a way that you can easily determine where to place your call or put option combinations.
The Calendar Strategy is one of my favorites because there is finite risk, theta decay, and an implied volatility feature, but the thing is you need to have a target. We’ve designed the Close Forecast for the “Forecast Period: W1” to be analysis provided for the front week, and “Forecast period: W2” for the back week. By using the various High, Low, or Close Forecasts for each duration, you can determine the optimal location to place your strike price.
If the Close Forecast is above current price, it would be wise to set up your Calendar Strategy in such a way that it is what’s called Delta positive, because the specific market is likely to rise. In this way, you can profit from either movement towards your strike price, theta decay, or implied volatility increasing, with finite risk!
Here is another piece of advice, as mentioned with stock trading you can perform what I like to call “Machine Learning Arbitrage” even with the Calendar Strategy. You can have 1 Calendar combination with positive delta, and one combination with negative delta. You can do so by finding a position with a positive Close Forecast and another with a negative Close Forecast. This I suppose we can call arbitrage as related to a specific option combination, where both have a high probability of win depending upon where your profit target is.
The typical profit target location for this strategy is somewhere around 15% to 25% of total risk. The other risk associated with this strategy is actually having to close the position if the profit target is not reached. In this case there are several rolling strategies, where you can use the various forecasts of Quantum Edge AI to roll to.
If you have any questions you can email me at peter@quantumedge-ai.com.
