Stock Selection for Credit Spreads

StrataSearch will find what you tell it to, but what should that be? Will the same criteria work across different Sectors? Different time periods? Here we discuss the ins and outs of OneClick Searches.

Stock Selection for Credit Spreads

Postby WebX99 » Fri Aug 03, 2012 2:16 pm

I like to do bull and bear credit spreads. This involves using options.
I know StrataSearch does not have option data. However option prices are dependent on the movement of stock prices.

With a credit spread, I will get a fixed return if the stock goes up, stays the same or even goes down 5-10 percent.
Usually my breakeven point on a credit spread is 5-10% below the price of the stock at the time I enter the trade.

With options and credit spreads the option model software will give us a probability of the stock price reaching my breakeven.
And many times this probability is in the 5 to 15% range. So the probabilities are in my favor. :mrgreen:

However I want to put the probabilities further in my favor by using technical analysis where if the conditions are met, the chances of the stock falling to my breakeven are even further reduced.

So, I am reaching out to the community to gather in some ideas since I am a newbie here. I don't want to start out on the wrong path. :?

Goal: select stocks that are most likely not going to fall down to my breakeven. This is different from most systems were stocks are expected to rise in order to make a profit.

I notice there is a option on One Click to select "mimimal drawdowns". This seems like a logical place to start.
However if there are better ideas or better ways to start, please let me know.
Are there any settings that I should take advantage of?
Should I test for Bull Credit Spreads separately from Bear Credit Spreads?

I appreaciate your time and help! :D

Rick
Columbus, Ohio
WebX99
 
Posts: 22
Joined: Thu Aug 02, 2012 1:12 pm

Re: Stock Selection for Credit Spreads

Postby Overload » Sat Aug 04, 2012 9:45 am

Keep in mind that the "Minimal Drawdown" is just an example, but you'll really need to create your own custom OneClick Setup to do what you're looking for.

One option might be to use a stop, such as the GTCStop() formula, which will exit trades at your breakeven point. To do that, you'll need to enter a GTCStop() formula as an Exit Rule in the AutoSearch Setup that's referenced by your OneClick. Make sure you set it to be used "Always".

Another option is just to set up your search criteria for systems that have characteristics you're looking for. For example, you might set up a filter to only save systems that have an "Average Position Maximum Drawdown" of a certain value, favoring systems that have even better performance values for that metric.

Hopefully this gets you started with some ideas.

Pete
Overload
 
Posts: 2248
Joined: Wed Nov 30, 2005 12:14 pm

Re: Stock Selection for Credit Spreads

Postby taowave » Sun Aug 05, 2012 4:49 pm

Hi Web,
You really need to look at the distribution of the returns for a chosen system as opposed to the profitability.
As you know,there is a very big difference in selling spreads as opposed to being long/short the underlying.Your payoff profile is significantly different,and what could be a profitable systen trading the underlying may not perform well when short spreads.

A simple example is trend following.A system may be profitable due to a couple of monster moves and many controlled losses.That system,though profitable when trading the underlying would not necessarily fair well with your strategy.

When you backtest systems,you will need to look very closely at the distribution of returns as opposed to the absolute returns.

Allan



WebX99 wrote:I like to do bull and bear credit spreads. This involves using options.
I know StrataSearch does not have option data. However option prices are dependent on the movement of stock prices.

With a credit spread, I will get a fixed return if the stock goes up, stays the same or even goes down 5-10 percent.
Usually my breakeven point on a credit spread is 5-10% below the price of the stock at the time I enter the trade.

With options and credit spreads the option model software will give us a probability of the stock price reaching my breakeven.
And many times this probability is in the 5 to 15% range. So the probabilities are in my favor. :mrgreen:

However I want to put the probabilities further in my favor by using technical analysis where if the conditions are met, the chances of the stock falling to my breakeven are even further reduced.

So, I am reaching out to the community to gather in some ideas since I am a newbie here. I don't want to start out on the wrong path. :?

Goal: select stocks that are most likely not going to fall down to my breakeven. This is different from most systems were stocks are expected to rise in order to make a profit.

I notice there is a option on One Click to select "mimimal drawdowns". This seems like a logical place to start.
However if there are better ideas or better ways to start, please let me know.
Are there any settings that I should take advantage of?
Should I test for Bull Credit Spreads separately from Bear Credit Spreads?

I appreaciate your time and help! :D

Rick
Columbus, Ohio
taowave
 
Posts: 584
Joined: Sat Dec 02, 2006 12:39 pm

Re: Stock Selection for Credit Spreads

Postby WebX99 » Mon Aug 06, 2012 12:23 pm

Pete and Allan,

I have recieved your replies and appreciate the time you took to help.

I will work with your ideas. I am sure I will have more questions as I proceed.

Thank you both :D

Rick
WebX99
 
Posts: 22
Joined: Thu Aug 02, 2012 1:12 pm

Re: Stock Selection for Credit Spreads

Postby WebX99 » Mon Aug 06, 2012 12:38 pm

Overload wrote:
One option might be to use a stop, such as the GTCStop() formula, which will exit trades at your breakeven point. To do that, you'll need to enter a GTCStop() formula as an Exit Rule in the AutoSearch Setup that's referenced by your OneClick. Make sure you set it to be used "Always".
Pete


Pete...I am trying to think this thru...

If I use stop losses, how does this affect my Average Drawdown statistics? Would I get different statistics with and without the stop loss?

I am hoping to us Technical Analysis to reduce the securities normal drawdow and incease my probability of success. If a stoploss reduces my average drawdown this may may not be helpful if I am hitting my stop loss frequently.

Thanks,
Rick
WebX99
 
Posts: 22
Joined: Thu Aug 02, 2012 1:12 pm

Re: Stock Selection for Credit Spreads

Postby Overload » Tue Aug 07, 2012 10:32 am

You should consider stop losses like any other trading rule. You simply exit when a loss of X% has been hit. Yes, it may reduce your average drawdown, but it may also increase the percentage of losses. Only additional testing will tell if it's a helpful tool for your scenario.

Pete
Overload
 
Posts: 2248
Joined: Wed Nov 30, 2005 12:14 pm


Return to OneClick Searches and Scoring

cron