EXCLUSIVE- We just did an update to the Option model. This new version has flipped to red today. The action of the previous version of this model in the last 2 days made me realize that although this was the optimal result, the model was missing some of the most important trades. The option model itself (the blue line) was not the guilty one, and in fact, we didn’t change anything about it; the issue was the strategy built around it. You see, in the explanation about the model I gave, I said that the strategy was using some offset around the slow line to prevent it from flip-flopping when around the threshold. This means that for selling, the fast line needed to cross the slow line and go a little bit further, and on the way up, it had to go back over the same line plus another extra distance. This is what we call hysteresis, and it’s the lowest hanging fruit in terms of hit rate when using an EMA crossing strategy. I also said that we added a threshold that was a function of how far in terms of standard deviation we were from the 3-month SMA. This was to prevent flipping to red when in fact the model was very low, as correction there is usually not major. This was the guilty part of the strategy. Although this helped to boost the return a tiny bit, such a strategy was preventing the model from flipping to red in some important cases, particularly at around a meaningful top. Here are two examples:
Updated Option Model: Enhanced and Debugged - Part 2
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