Short Premium Research Dissection (Part 5)

Section 2 ends with:

    > We’ve already covered a great deal of analysis, and we could surely
    > continue to analyze market movements/general options strategy
    > performance forever.
    >
    > However, I don’t want to bore you with the details you’re less
    > interested in, and I feel we have enough data here to start
    > developing systematic options strategies.

I’m not bored because I think raw data like this can be the beginning to meaningful strategy elements (e.g. starting the structure above the money as mentioned in the second paragraph here). Also as discussed in that final paragraph, getting an “accurate documentation of research flow along with everything that was [not] considered, included, or left out” is very important to boost credibility and to make sure real work was done no matter how confusing or boring it may seem. In college, I worked with a lab partner to know the actual work was done. Here, I’m not looking over the author’s shoulder to see her spreadsheets and backtesting engine. How else am I to know the data being presented is real?

I paid good money for this research, which precludes any “less is more” excuse. I am reminded of the third paragraph here. Don’t complain about being overwhelmed by data unless you give me a logical reason why that’s a problem. I want to see as much research as possible to feel confident it’s robust rather than fluke. I want to know the surrounding parameter space was explored as discussed here and here.

A full description of research methodology is very important. I wrote that at the very least, it should be included once per section. The sections in this report are comprised of many sub-sections—sometimes with multiple tables in each. To clarify, then, I would like to see the research methodology in every sub-section if not alongside every single table or graph. Like speed limit signs posted after every major intersection to inform cars regardless of where they turn in, research methodology should be redundant enough to see no matter where I pick up with the reading. The methodology can easily be a footnote(s) to a table or even a reference to an earlier portion of text.

Part 3 of her report continues the discussion of short straddles with the importance of a consistent trade size. She writes:

    > If a trader uses a fixed number of contracts per trade, their actual
    > trade size would decrease as their account grows, and increase as
    > their account falls (generally speaking).

This makes sense for trade size as a % of account value, or relative trade size. Trade size itself, which I think has more to do with notional risk or buying power reduction (BPR), is proportional to underlying price and unrelated to account value.

I would like to see an explanation of BPR for short straddles. We will continue next time to see if this is relevant.