Labels

Monday, October 31, 2016

VIX Algo with Defined Risk

1. Divide capital into 12 equal parts;
2. Every month   Sell  VXX 10% ITM Call with DTE according to the probability distribution of 10% irreversible decay (see figure below) and the Kelly criterion (KC);
3. Buy ATM  Call.
* 5 trading days= 7 calendar days
--------------------------------------------------------------------------------------------------------------------
Expected return:
ROC 25%  DTE ~ 400
ROC 35%  DTE  ~200
ROC 55%  DTE  ~150

KC=0.8-0.2/0.25=0 -> 80% probability of win is the lower bound  for trading with DTE ~400.

KC=0.85-0.15/0.2=0.1  -> 12 equal parts is reasonable partition of the bet capital.
--------------------------------------------------------------------------------------------------------------------

No comments:

Post a Comment