The Project
OTHER NEUTRAL STRATEGIES
- Iron Condor
- Short Straddle
- Short Strangle
- Butterfly Spread
- Calendar Spread
- Ratio Spread
WHAT IS THIS WEBSITE ABOUT?
This project arises after an extensive period of exploration and research in search of various ways to profit in the financial market world. I must admit that I found many strategies, but not all of them turned out to be profitable in the long run.
Many strategies are based on indicators, oscillators, or price action; however, I couldn't identify one that allowed me to evaluate the probability and effectiveness of a strategy in the long term.
For this reason, I started looking for strategies based on patterns, completely discarding technical and fundamental analysis, and focusing exclusively on market behavior during certain time intervals.
We know that in the world of options, there are bullish, bearish, and neutral strategies. And we also know, backed by long-term statistics, that the market tends to move mostly sideways.
Despite occasional bullish and bearish moments, most of the time the market is characterized by its sideways movement. This phenomenon can even be extrapolated to intraday, where within the same day, there is a time period in which the market tends to stabilize and behave sideways. When does this happen? It occurs when human nature seeks rest and nourishment. Let's say between 11:00 am and 1:00 pm. However, it is also applicable to other time ranges.
Well, starting from these premises (sideways movement and time range), I began by looking for a neutral strategy in the world of financial options. One of the best-known is the so-called Iron Butterfly.
What is the strategy about?
Based on the sciences of mathematics and statistics, a strategy is formed by hundreds of repetitive operations under the same predefined parameters and circumstances that will lead to obtaining a long-term mathematical expectation. If that mathematical expectation is positive, the strategy will be winning; otherwise, it will be losing. In short: repeat, repeat, repeat.
In summary, the constant repetition of these operations according to the established strategy becomes the core of its success, highlighting the importance of constancy and discipline in the implementation of this approach. This repetitive and structured approach is essential to achieve desired goals and minimize the influence of short-term fluctuations.
BACKTESTING
The data is collected daily and from the corresponding time for each strategy. The interval is approximately every 6 or 7 seconds. Each entry consists of:
| STRATEGY # | TIMESTAMP | PRICE | SPX LAST |
| IB 9:40 | 09:40:05 | 1850.50 | 4735.25 |
| IB 9:40 | 09:40:11 | 1845.00 | 4736.20 |
| IB 9:40 | 09:40:17 | 1840.30 | 4736.25 |
| IB 9:40 | 09:40:24 | 1847.50 | 4736.65 |
With this data obtained during the session, we will be able to obtain a graphical line of the behavior of the iron butterfly for the selected hourly strategy.
Formation of the strategy
- Define in advance the days when there are important news and this affects market volatility. (Eg: days with unemployment reports, inflation, FOMC meetings, etc).
- Choose a schedule and open an Iron Butterfly with the same wing widths.
- Define the corresponding Take Profit and Stop Loss.
PARAMETERS
1. Strategy Selection
Within the world of options there are many strategies. Bullish, bearish, and neutral. Since the market tends to stay longer in a sideways position, one was chosen that would cover the neutral bias. And within the list of neutral strategies, the Iron Butterfly was chosen.
2. Underlying Asset Selection
When defining the underlying asset to which to direct the strategy, an index was sought instead of a stock, future, or ETF. It had to have good liquidity and volume, so the Standard & Poor 500 was chosen.
3. VOLATILE DAYS
After backtesting for over a year, it was detected that there are 4 or 5 events or reports that cause market volatility to move more strongly daily. These days NO operation will be opened:
4. SCHEDULE
While the main Iron Butterfly strategy that was tested was to open at 11:30 am (since it was a time when volatility and movements begin to decrease), it was decided to start backtesting other 3 schedules: 9:40 am, 10:30 am, and 11:00 am. This favored the fact that different patterns, movements, and scenarios could be obtained, which would later generate interesting results.
As for the width of the wings, a distance of 40 points was arbitrarily decided. Later, and following the project line, it would be interesting to add other wing widths, other schedules, even with other opening conditions.
