Trading option to exit and reenter on pullback

[adam ali]

Thanks, Billy. With the market range-bound since February I was hoping there might be a shorter-term timing tool that would help catch the 2-3 day swings in the IWM we've seen.

[Billy]

Thanks, Billy. With the market range-bound since February I was hoping there might be a shorter-term timing tool that would help catch the 2-3 day swings in the IWM we've seen.

Adam,
When I trade mean-reversion strategies, an excellent indicator is powerratings from tradingmarkets.com
http://pr.tradingmarkets.com/
I can't access it right now, but you have access to 5 free tickers a day. Try IWM, chart it and see that the signals have been perfect. However my experience is that it leads you to huge drawdowns at trend reversal/inflection points, just like happened in early September 2010 when it took 3 weeks after the start of the rally for the overbought/sell signals to disappear.
Billy

[adam ali]

Got it. While I sort of figured the answer was the same, i.e., I'm chasing after something that really doesn't exist or has too great an opportunity cost, I thought I'd pose the question anyway. Thanks for your patience in exploring this idea with me.

[Sandy]

My concern is if we get rangebound market for long time. Yr 2004 and 2005 was rangebound years. One needs a lot of patience to sit and wait until exit signal.

[Pascal]

Thanks, Billy. With the market range-bound since February I was hoping there might be a shorter-term timing tool that would help catch the 2-3 day swings in the IWM we've seen.

If I may add my 2 cents here: there is an opportunity to trade IWM short term. This is why I state the LT/ST signals separately. For example, since 2007, a ST signal higher then 1% produced a 3 days gain of 1.31% for a 67% success rate. A ST signal lower than -2% produced a 3 days short gain of 2/24% with a success rate of 73%.

I attach below the two tables that are taken only since April 1, 2009 (POMO trading).
The POMO trading ST signals higher than 1% produced a 3D gain of 1.35% for a 72% gain (similar to what we have above). However, a ST signal higher than 2% produced a 3D gain of 2.5% and the table below shows only 2 missed trades. You will also note that tehse signals come "in packs". Did you notice that the last strong ST buy signal came in January. This tells us that the uptrend is exhausted.

On the tables below, the second column is the ST signal and the third column is the three days gain.

ST Long signals



The short signals is what interest us today. I only took those lower than -2%. They also come in pack. Since POMO days, a ST signal lower than -2% produced on average a 0.97% 3D short return (19 cases out of 28 or 68%).

ST Short Signals



Since short signals come also in packs, what this is telling us is that the market is up for seasonality reasons (Holidays, end of Month), but that Tuesday could be shaping up as a major shorting opportunity.

[nickola.pazderic]

As noted previously, I've been trading in this mean-reversion manner since silver collapsed-- but with SPY, not IWM.

I made regular solid returns on the options during three "round trips."

However, this Monday, I had my single greatest ever, total dollar gain shine green on my black/blue ToS screen.

I knew I could sell my entire position but I held, reasoning that a breakdown to the 200 DMA was more likely than not.

Since then, I sit through a draw down that has seen the value of my puts move about 25 cents below my purchase price. In essence I'm precisely where I would be had I have sold the puts on Monday.

This is especially true insofar as I took the rally yesterday to follow the Robot for the first time and establish a short position at precisely the entry point in IWM, as directed by the Robot.

Pascal's comments on his backtests gives me reason to reconsider my doubts about my decision not to sell on Monday 23. I also hope the Robot and conversation here will allow me to operate with greater precision.

Many thanks,

Nickola Pazderic