401k trading plan analysis

8/10/2019 401K trading plan analysis

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Creating a Trading Plan for my 401K

Purpose

Take a strategy that seems to work in OT and explore ways to trade it in a 401K type account

with limitations on short selling.

Parameters

There are several things I wish to accomplish with this plan:

1. Use Leverage of Options to increase Rates of Return on my capital

2. Use Long Options only because my 401k allows only Long Option Positions (except for the

covered Call)

3.

Balance (at least somewhat) Longs and Shorts to reduce Market Risk4. Use enough symbols to get enough signals to keep a fair amount invested in the market

5.

Use enough symbols to be properly diversified

6.

Limit Losses to reasonable well thought out levels

7. Use a money management Plan that is reasonable but is ‘better’ than just buying 100 shares

of each

8. Use Signals from OT that have been tested to work at reasonable and stable levels

Setup

With Omnitrader, I’ve created a strategy that is giving reasonably good results duringbacktesting. Using the tools within OT, I have tested it many times and many ways and am getting fairly

stable results. Here is an example of a portfolio analysis with trade sizes that I may actually use (with

the exception of the higher end fixed risk etc. where it has me buying 100000 shares of something!) This

is backtest and forward test each of 500 days as shown in the portfolio view. (It used the Nasdaq 100

symbols):



Even with no leverage and a fixed 100 shares each time, the strategy made money in the backtest and

forward test of 15%/year or more which is borne out by the fixed trade column with a gain of $118,000

gain over 4 years which is 15%/year.

Looking at the more esoteric money management techniques, I immediately notice that the number of

trades is way down and the money invested nears 100%! This obviously means that so much money is

used on each trade that not all trades can be taken. A bigger account may help here, but I want to

increase leverage and not increase account size.

My account size is fixed, so I must use what I have. But, with Long Options, I can increase leverage even

within a 401K account.

Here are the equity Curves:



Test Plan

- I will test Deep ITM options with a Delta of around .8 or more and at least 30 days until

expiration to try to get majority of move.

- I will test Deep ITM options with a Delta of around .8 or more and at least 60 Days until

expiration to try to limit time decay but get majority of move

- I will test ATM Options to increase leverage – expect higher gains but higher losses as well

-

I will test with enough options to approximate that fixed % Equity (I can try other money

management ideas in a similar fashion later)

- This will give me the majority of the move for winning trades

- This will allow me to exit at a stop point with some value left (for the ITM Options)

- This will give me leverage in all cases

- I will use trades from the OT strategy Report

Sample Trades

Omnitrader Reported

WhatIf Options

Date Symbol Shares Entry Exit Date $Gain $Need %G/L Num Option

Delta Price $Need Exit $Gain % Analysis

4/22/10SNDK 485 39.61 40.78 4/30/10$557 $19000 2.9% 30 Jun 33C

.77 5.65 $16950 8.00 $7050 41% 12 X Better

27 Jul 32 C

.78 6.17 $16659 9.3 $8451 50% 15 X Better

52 Jun 39C

.5 3.20 $16700 4.3 $5720 34% 10 X better

6/15 SNDK -378 47.8 42.46 6/30 $-2026 $18068-11.21% 20 Jul 44C.81 8.37 $16740 3.8 $-9100 -50% 4 X Worse

15 Oct38C

.78 12.12 $18180 8.0 $-6180 -33% 3 X Worse

58 Jul48C

.5 3.10 $17980 .60 $-14500-80% 7 X Worse



11/22 SNDK 460 41.13 50.37 12/23 $4241 $18919 22.42% 35 Jan 37C

.80 5.50 $19200 13.4 $27650 144% 6.5X Better

22 Apr35C

.80 8.50 $18700 16 $16500 88% 4 X Better

60 Jan41C

.5 3.00 $18000 9.5 $39000 216% 9 X Better

4/5/10 MSFT -663 29.13 30.79 4/14 $-1113 $19313 -5.77% 58 May 32

P -.82 3.10 $17900 1.70 $-8120 -45% 7 X Worse

43 Jul32 P -.83 4.10 $17600 2.74 $-5848 -33% 5 X Worse

180

May29P -.5 1.00 $18000 .38 $-11160-62% 10 X Worse

7/22 MSFT -701 25.51 24.45 8/16 $729 $17882 4.08% 59 Aug28

P -.82 2.43 $18000 3.60 $6903 38% 9 X Better

53 Sep29P

-.86 3.40 $18000 4.65 $6625 36% 9 X Better

173 Aug

26P -.5 1.04 $18000 1.66 $10726 59% 15 X Better

9/14 MSFT 711 25.04 24.26 10/01 -$426 $17803 -2.4% 67 Oct

22.5 C .88 2.68 $18000 2.00 $-4556 -25% 10 X Worse

41 Jan 21

C .84 4.40 $18900 3.70 $-2870 -16% 7 X Worse

257 Oct 25

Call .5 .70 $18000 .20 $-12850-71% 30 X Worse

The above has 6 Trades on 2 Symbols – 3 winners and 3 losers. 4 are long and 2 are short. To

reiterate, the WhatIf Options have 3 possible Option strategies which are:

- Deep ITM with Delta of about .8 and about a month until expiration

- Deep ITM with Delta about .8 and 2 or more months until expiration

- ATM with Delta about .5 and about a month until expiration

AnalysisUpon looking at the trades using different Options and compared to the Stock , I noticed that

the Money allocated by the stock (and therefore the Options) was 10% of equity instead of the 5% I

had selected. It is probably the way the trades were analyzed in the Real Mode OT before I changed to

the Portfolio Mode. It would be too much to trade this % in reality, but I don’t think it will change the

validity of the results.

It is obvious that the Options bring leverage into play in a big way – both for the good and the bad. This

is just what I want. The only question is which Options to buy to give me the best balance of Reward to

Risk. Here is a side by side comparison:



Stock ITM 30+ ITM 60+ ATM 30+

557 7050 8451 5720

-2026 -9100 -6180 -14500

4241 27560 16500 39000

-1113 -8120 -5848 -11160

729 6903 6625 10726

-426 -4556 -2870 -12850 Total

Total Total ITM 60+ ITM 60+ ITM 60+

$1962 $19737 $25466 $16936 Gains = $55446 Losses

= -$38510 W/L = 1.4 Gains = 31576 Losses = 14898 W/L = 2.11

This test shows that the ITM 60+ strategy yields the best results. It seems that this is the optimum

tradeoff between leverage and time decay. With winners and losers included and both longs andshorts represented, it seems that this money management strategy beats the typical OT Buy/Sell

straight Stock by 12 Times! And the W/L is over 2:1!

I guess to be complete, I should throw in an OTM option for each trade just to compare. My

thought is that Time decay and slippage will outweigh the benefits of leverage and very large

Option trades would be necessary, but let’s see.

One Last TestBelow are the results of the OTM test (These Option Prices are my ‘best approximation’ and

subject to large variations because of the Thinkback limitations):

Omnitrader Reported

WhatIf Options

Date Symbol Shares Entry Exit Date $Gain $Need %G/L Num Option

Delta Price $Need Exit $Gain % Analysis

4/22/10SNDK 485 39.61 40.78 4/30/10$557 $19000 2.9% 180 May 42

C .30 1.00 $18000 1.79 $14220 79% 25 X Better

6/15 SNDK -378 47.8 42.46 6/30 $-2026 $18068-11.21% 90 Jul 50 C

.35 2.00 $18000 .20 $-16200-90% 8 X Worse

11/22 SNDK 460 41.13 50.37 12/23 $4241 $18919 22.42% 160 Dec

43C .35 1.13 $18080 5.8 $74720 413% 18 X Better



4/5/10 MSFT -663 29.13 30.79 4/14 $-1113 $19313 -5.77% 268 May 28

P -.33 .67 $17900 .17 $-13400-74% 12 X Worse

7/22 MSFT -701 25.51 24.45 8/16 $729 $17882 4.08% 339 Aug24

P -.32 .53 $18000 .23 $10170 57% 9 X Worse

9/14 MSFT 711 25.04 24.26 10/01 -$426 $17803 -2.4% 450 Oct 26

C .33 .40 $18000 .03 $-16650-92% 39 X Worse

Totals

14220

-16200

74720

-13400

-10170

-16650

$32520

This compares to the other strategies by being slightly above the previous best in total return

($32520 verses $25466). The extra gain, however, comes from the one big winner which is

typical of OTM Option strategies. Also, one of the previous winners turned into a loser because

of the time decay and OTM characteristics, so we went from a 50/50 % system to a 33/66 %

one.

I believe that the ITM Option strategy more closely mirrors the results reported in OT. With

slight variances in the actual trade results, the OTM Option strategy could lead to significant

losses while the OTM strategy should more closely follow what could be expected with the

straight stock albeit with leverage.

Conclusion

Original System:

- The Max Losses of the basic OT strategy are reasonable:



as are the Max Gains:

- Also, the win rate is near 50% with a 1.7 to 1 W/L rate. These numbers hold up over various

test periods and market conditions as well as various Symbols, so the system appears to be

robust in its basic form.

-

Rate of Return 25%/Year (using 10% equity/trade and % equity money management)- Max consecutive wins = 11; Max consecutive losses = 16

- Average Loss = 5% of capital at risk. If use 10% equity each trade (what OT did) – risk

$20,000 to start each trade - If lose average amount each time, lose $500 each loss - If lose

16 times in a row, lose $8000 or 4 % of equity

-

Average Gain is about $800

Trade Distribution is very ‘normal’ lending credence to the system results:

(Ordered Max

Gain to Max Loss)



(Ordered by

Trade Date)



To enter the trades using long Options, I want to keep the integrity of the trades as close as

possible to the tested system which means enter and exit at the signals generated by OT.

Option Implemented System:

The Deep ITM Options with over 60 days until expiration seem to keep the system

characteristics intact, but with leverage applied.

- Still a 50/50 % system because ITM options move similar to the Stock

-

Very little loss due to Time Decay because 60+ days out- A W/L Rate of 2.11 verses 1.7 in original – (Interestingly enough, 1.7/.8 delta = 2.12 – maybe

a relationship???)

- Max Gains and Losses would be a factor of 5 to 10 times greater depending on specifics –

Avg loss about $5000; Avg Gain about $8000 on the 10% equity actually tested!



- If use 5% equity each trade – risk $10000 to start each trade – Average Loss would be

around $2500- If lose average amount for 16 straight times, would lose $40,000 or 20% of

equity

- If use 3% equity each trade – risk $6000 to start each trade – Average Loss would be $1500 -

If lose average amount for 16 straight times, would lose $24,000 or 12% of equity

Final Plan1. Use a Suitable List of Stocks in OT to prospect (subject of another paper?) Nasdaq 100

worked fine but look for better

2. Use OT with my Volatility Cycle Range System to trigger trades

3. Enter trades using options that expire 60 + days out and are ITM with a delta of about .8

4. If possible (i.e. enough trades to choose from) balance longs and shorts to reduce market

risk

5. Use %equity to find Trade amount – either 3% or 5% of current equity per trade (I think 5%

is ok, but may change later)6. Exit the Options when OT signals an exit signal

7. Make an Excel Spreadsheet to track Trades

401k trading plan analysis

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