Automated Option Trading : create, optimize, and test automated trading systems [PDF]

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Automated Option Trading : create, optimize, and test automated trading systems – Book

The comparative analysis is based on the simulation of two trading strategies that are similar to the strategy described in section 4.4.1, except for the capital allocation principle. A total of 6,448 portfolios had been created for each capital allocation method during the entire simulation period.

For both strategies, the capital was allocated using the convolution of two indicators—expected profit and index delta. For one of the two strategies, the convolution was calculated for each separate combination and the capital was allocated according to the principles of the elemental system (as was done in all examples described earlier).

For another strategy, the convolution value was calculated for the whole portfolio and capital was allocated using the portfolio system principles. Since values of index delta are directly proportional to the risk of short option combinations, the convolution of the two indicators was calculated as a ratio of expected profit to index delta.