CBOE long @ 197.04 - it may be the perfect stock for me

4 days ago

CBOE is short term oversold. That is enough reason for me to buy it. But there's more. This might be the absolute perfect stock to use my "first profitable close" exit strategy on. Both exit strategies work well. My original one produced a 42-3* win rate over the last 2 years (backtesting) with all 3 “losers” being the last 3 trades that haven’t become profitable yet, while the first profitable close strategy was 43-2*.

This is a stock that rarely stays oversold long, and bounces back quickly in most cases. In an albeit short 2 year backtest, the highest number of lots I'd have held at once was 4 and the average was 1.4, meaning almost always, they were being sold the next day.

In fact, the average holding period for the 45 trades taken in that time would have been 1.55 days and 69% of the trades closed in 1 day, using the first profitable close. Remarkably, the longest I'd have had to hold a lot before it became profitable in the entire 2 year backtest period was 5 days and that only happened twice.

Now as I mentioned in my VZ idea yesterday, there is usually a tradeoff with this exit strategy. Lower average profits and slightly lower profits per day held in exchange for quicker cycling of capital. But I mentioned that isn’t always the case, and CBOE is a perfect example of that.
The big reason is the HUGE difference in trade length. ORIG exit strategy tied up capital 9x as long, on average, as FPC (first profitable close) did.

Avg. hold period ORIG = 14.1 days (longest hold - 106 trading days)
Avg. hold FPC = 1.6 days (longest hold - 5 days)

Overall gain per lot traded favored ORIG over FPC, +2.8% vs. 1.2%...BUT...gain per lot per day held (quantifies the tradeoff between hold length and profit) was HUGELY in favor of FPC here due to the dramatically shorter hold period.

FPC = +.78%/lot/day held
ORIG = +.20%/lot/day held

Both of those numbers are very good, but the FPC one is off the charts.

A +.78%/day held return is a 197% annualized return. That’s moonshot microcap returns, not stodgy, safe, dividend paying options exchange company returns. Now realistically you're not actually going to have a 197% return because you don't get these trades every day. But it's a measure of how fast your money is making you money. Usually ORIG marginally beats FPC in this situation, but the speed at which CBOE can return capital profitably makes the FPC exit a much better play with this one.

I haven't done an all-time backtest on this, but you can bet I'm going to this weekend. I suspect the difference between the two won't be as dramatic over the long haul, but it's worth noting that there were no long, grueling downtrends in CBOE over the last 2 years, and FPC outperforms ORIG during those. I'll post the results of that as an update to this idea either over the weekend or on Monday, depending on how busy my weekend gets.

By the way, I bought a double lot because it was oversold yesterday too and I missed it. The last time it was oversold 2 days in a row was May '23. I will add to the position whenever it is oversold and I will sell any lot at the close of the first day it becomes profitable.

So try to resist following me on this trade, since this isn't financial advice. It's edutainment. You should DYOR before investing or trading any of your own hard earned money. Have a good weekend everyone!

Stay profitable, San Diego. -Ron Burgundy

yesterday

Note

As promised, I carried out my comparison backtest of my original exit strategy (ORIG) vs. first profitable close (FPC) on CBOE going all the way back to its IPO in 2014 and I was not terribly surprised by the results. FPC is definitely the way to go on CBOE, in particular.


Overall, the success rates of the 2 exit strategies paired with identical algo-driven entries, were virtually identical from a win/loss perspective.

ORIG = 372-3* (all 3 “losers” were opened since Oct. 30th)
FPC = 373-2* (same as above)

So win rates of 99.2% and 99.5% are virtually identical. Given that this stock isn’t especially volatile, the similarity between the two isn’t surprising.
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From an average gain perspective, ORIG wins handily, as I also expected.

Average gain (ORIG vs. FPC) = 2.87% vs. 1.10%
Median gain (ORIG vs. FPC) = 2.41% vs. 0.83%

Either way you look at it, ORIG’s profit per trade was about 2.5-3x FPC. That might make you conclude ORIG is better, but you have to dig a little deeper to see why FPC wins, and it isn’t close, in terms of how I trade.
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Average holding period per lot in # of trading days:

ORIG = 27.4 days
FPC = 7.3 days

Median hold periods:

ORIG = 10 days
FPC = 1 days

Those median numbers are not misprints. Out of 375 trades over about 10 years, 57% closed profitably in 1 day and 90% closed profitably in 9 or fewer days with FPC. So FPC returns capital to work almost 4x faster, on average, and 10x faster based on the median trade. ______________________________________________________

The truest test is the % return/lot/day held. Again, this combines both how much an average trade made with how long it took to make that return. For comparison, the long term average return of the S&P 500 is around 10.5% per year, which is a return per trading day of .042%,

ORIG return/lot/day held = .105%
ORIG return/lot/day held = .151%

FPCs per day return is about 50% higher than ORIG, even though ORIG had much higher return per trade, because FPCs trades closed so much faster. By the way, those per day returns of almost 4x the S&P daily return are for a stock whose Beta has never been above .75 in its entire 10-year history.
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Finally, and not inconsequentially, comparing the max and average number of units of capital tied up here also favors FPC.

ORIG = 13 max / 4.39 average
FPC = 10 max / 2.34 average

Max capital outlay always occurs during big drawdowns with my trading method, so reducing max and average capital outlay essentially equates with smaller drawdowns. Reduced downside portfolio volatility is ALWAYS desirable. The max outlay isn’t as different here as it is in some stocks, simply because CBOE is so much less volatile than most and the big drawdown here was a "straight down" kind of drop.
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I think FPC shines brightest in times of high volatility, or in stocks that are inherently more volatile, so for comparison, I did a similar backtest for a very volatile stock that I trade (IREN).

With IREN, FPC had a daily return of .197%, a 50% better value than ORIG, with its median hold period being 2 days. That’s a nearly 4x better daily return than the B/H return for the S&P in a stock that is down almost 61% since its IPO (same as the backtest period).

Also, with the more volatile stock, the value of better capital outlay metrics is even clearer - ORIG would have also made money, but required a max of 35 units and an average of 17.5 units of capital (in a stock that is only 3 years old and has never even been through a macro crisis), while FPC had a max of 13 and an average of 6.08. That’s almost 3x less capital needed. And for a stock that fell at one point from around 20 all the way to just over 1, during the backtest period, that’s the difference between losing hope and making a very nice profit. You do NOT want to be trying up a lot of capital during THAT kind of bloodbath and watching your drawdown esplode.

The more I investigate FPC, the more I appreciate its value. Another time, I’ll touch on its specific performance during long downward runs in a stock (or maybe even bitcoin) and how its value as a risk and volatility reducer is especially valuable in those situations. I’ll also examine how quicker capital turnover affects position sizing. If you have any questions or comments, feel free to share and I’ll reply as quickly as I can.

yesterday

Trade closed: target reached

Closed both of the lots (purchased a double lot at the close yesterday) at 199.82 for two 1.41% gains in one trading day.

yesterday

Note

Every day, every trade using it and every backtest, I like FPC more. I will begin using it in most situations in the future, I think. One of the other benefits of a system that lets me close most of my trades in one day and requires far less max capital allocations to positions is to allow me to either:

a) have more different positions at once. This increases my ability to diversify, and thus reduce risk, while using the same total amount of capital.

or

b) use larger lot sizes because the capital is less at risk of being tied up for long periods of time. I'm still working on the math on this, but my starting point (assuming the same number of positions) is 2-3x larger positions since the capital is returned >3x more quickly. Those larger positions would then theoretically improve absolute dollar value returns by 2-3x.

yesterday

Note

Trade summary for my records

Wins 2 (double lot)
Losses 0

Avg. gain per lot = 1.41%
Avg. hold period per lot = 1 trading day
Avg return/lot/day held = 1.41%
Annualized return = 1.41%/day x 252 trading days = +355%