2. 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

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

4. 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

5. 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

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

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

8. 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

9. 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

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

11. 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

12. Brought to you by The Market Timers Group
DOTS
Brought to you by
The Market Timers Group