For the daily option traders, you’re probably thinking where is my trading strategy (we will be studying various strategies on our Quantum Edge AI journey: Straddles, Strangles, Iron Condors, and one of my favorites, the Calendar; but for today, the Strangle Strategy.
The Strangle Strategy is a classic for traders who want to take a Delta Neutral position, and achieve a higher income generating spread by hedging the Short Call and the Short Put simultaneously.
The real question is where do you place the strike prices of your option contracts and for which week do you trade?
The main reason why the models are structured in these sequences is to benefit from multiple option grids, pinpointing the optimal option contracts for the Short Call and Short Put by evaluating the High Forecast and the Low Forecast for multiple Forecast Periods in order to specify which strike prices and durations are optimal.
For newcomers I will describe Quantum Edge AI model outputs below, first by going into the Forecast Types, and the Forecast Sequences.
High Forecast
The “High Forecast” is an Artificial Intelligence output which specifies what is calculated to be the maximum value of price during a specific duration of time. For example, if the Forecast Period: W1 states the High Forecast to be 250, and it is currently Monday at 9:45 AM, the price is likely to reach that point from now to the end of the week on Friday at 4:00 PM.
Close Forecast
The “Close Forecast” is the model output which specifies the calculated close price within a location in time. There are 3 Close Forecasts, one for this week (Forecast Period: W1), one for next week (Forecast Period: W2), and another for a 5 Day rolling period (Forecast Period: 5D), which specifies exactly 5 days from the specific inference point.
Low Forecast
The “Low Forecast” is an AI model output which specifies the calculated low price within a specific duration in time (the same durations listed above and below). This is to be used as a target, so not to be used for Stop Loss. The Stop Loss must be placed below the Low Forecast for optimal usage.
The model sequences consist of “W1”, “W2”, and “5D Roll”:
- “W1” is Week 1, which as noted above, is the current week where the specified duration of time is the current time up to the point of Friday at 4:00 PM. In option trader parlance, the “Front Week”.
- “W2” is Week 2, which specifies the second week or as traders commonly call, the “Back Week”, where the specified duration of time is the current time up to the point of next Friday at 4:00 PM.
- “5D Roll” is 5 Day Rolling Period, which specifies a location 130 bars or 5 Days (130, 15 minute intervals) from the last 15 minute inference (Machine learning terminology for calculating the prediction).
So back to the Strangle Strategy…
When trading options, we have options (this may be why they are called this), but I digress. You can choose to “Leg In” to the option strategy by placing one of the positions first, and hedge your gain with the next “Leg”, or you can simply close the first leg at a profit.
Another option is to place them simultaneously, the Short Call at or above the High Forecast and the Short Put at or below the Low Forecast. Depending on how often you would like to trade, you can be trading around these inferences during the RTH session or you can set the trade at 9:45 AM Monday for the week with or without a profit target and with or without a stop loss (entirely up to you).
Other ways to trade this position include “Rolling” of the combination or of a specific contract. You would do this because you’ve made a certain gain on one of the contracts, but you still want to be able to hedge the other. Doing this hedges the existing Call or Put position while maintaining a relative Theta Decay (consistent gain from time lapse). For this position, use the High Forecast or Low Forecast for the “Forecast Period: W2” and sell the option at those specific locations. Then once the front week option position becomes “Out of the Money” or OTM, you can close and roll to the next week using the same “Forecast Period: W2”.
Thank you for reading, and if you have any questions feel free to contact using the button at the bottom left of this page!
