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Well… I’m at a stage where I’m considering the strategy a complete iteration 1. Took much longer than expected as I tested several strategies as part of R&D (bullish and bearish collars, futures contracts and few weeks ago I started diagonal spreads.
My sweetheart strategy was diagonal spreads. In this time the team I’ve been part of ran into obstacles which, while they’re being navigated, there’s a real possibility we won’t be able to launch. So I’ve pivoted back to my personal strategies (double diagonal spreads).
In a double diagonal spread, I’m maintaining a bullish diagonal spread with calls and I’m maintaining a diagonal spread with puts on the same underlying (options tracking Bitcoin as quoted in USD).
The results: >30% in annualized return during an observation period of Jan’22 to Jun’23. Bitcoin dropped more than 35% during the observation period and my strategy was never under water. I expect that had the inverse actively taken place, I would’ve made just a little bit more, as the advantaged options rolling strategy would’ve been with outs rather than calls (a short, rolling strategy is advantaged when the market continues to move away from your strikes so you can roll for a profit more frequently).
The main advantage to my strategy is two fold.
Firstly: my longer term, deep ITM long options deal in intrinsic value which slowly converts to time value as an ITM option loses ground. You can see this as the delta falls. For the same reason, the option winning ground, has a growing delta and wins faster. This edge turns out to be quite meaningful so long as you can minimize the frequency of your trading (wider spreads in longer-dated options on Bitcoin.
Secondly: based on my research I’ve designed what I consider to be a sweet short options rolling strategy. My biggest risk is the market moving in a direction too fast, unexpectedly. In such a scenario, you risk the delta of your short option exceeding beyond your long option, covering you. Furthermore, even if the risk doesn’t happen, the market moving quickly or the introduction of significant risk into the market would mean your short option would need to be bought back at a loss. Ofcourse, the new instrument you roll into a short position on should cover this loss but you won’t always be this lucky. So you control for gamma by managing short options before they expire within 2 Fridays, and you use a crystal ball to determine what strike to sell and instrument on at any given point. This part is easier than you might think and I feel it is my edge so I won’t give it away but everyone familiar with this trade should understand the concept anyway. You’re picking a strike that is unlikely to be crossed during your exposure.
I had a blast putting the spreadsheet together. There were 135k rows of options chain data for every 0:00 hour of each day during the observation period. I designed 1 of each long call, short call, long put, short put, summary, and outside summary (the sheet I extract info to for the purpose of printing or pasting values to an outside spreadsheet to share results with others)
There are many cells which broke close to 1,000 times along the way and became circular references but have been navigated. I log small changes to make so I can just make them all at once as it take my 4 processors 2-4 minutes to recalculate the spreadsheet. Changes to array-formula cells (multi conditional inclusion or decision cells) are changed one at a time and tested with potentially extreme variables to ensure soundness before being used in the rest of the sheet or introduced to the rest of the sheets.
Next stages will be to track bollinger bands and moving averages to research how the strategy performs in various market conditions and in relation to different volatility settings in an effort to tighten or losses constraints when I know I’m managing the strategy in these conditions.
I hypothesize:
H1. Widen my call strike in a bull trend and widen put strikes in a bear trend - or maybe not if research supports.
H2. It would be a good idea to roll my long options a week or two earlier than I normally would if bollinger bands are squeezing tighter (beyond a threshold) and i might not want to roll such a long dated instrument right after near term vol spikes.
H2. Similarly, maybe I should widen the strikes of my short options right before a vol spike, and/or roll to a closer strike right after a vol spike.
Happy to discuss questions or challenges from others. Also happy to share my public-facing summary sheet upon request. Please ask questions here so others can see. Don’t share emails or phone numbers here for connecting or sharing and scheduling challenges or defences.