Volatility Strategy Performance Track Record Update

As Rob outlined in the recent November 2021 live update session for members, the EWO Volatility Strategy is now being traded with ban updates risk management approach. This change has been made on the basis of persistent feedback from subscribers, who are finding that the current approach of adjusting trades at expiration is challenging.

Changes to Risk Management Style

In summary, historically a EWO Volatility Strategy trade (an OTM Strangle) will be setup with the intention to wait for a break out from the consolidating triangle pattern that typically exists at the time. If however, the pattern has not broken out by the expiration of the original option contracts purchases, then the trade may be adjusted to roll out more time to allow the expected break out to happen. This of course does happen periodically and so therefore, every expiration Friday of each month we have some positions that are expiring worthless. Understandably some subscribers find this a psychological challenging process to go through on a regular basis and something that becomes a negative for their trading mindset. In addition, it has also become clear that for subscribers with smaller accounts, committing trading capital to a number of these positions means that they may not have sufficient liquidity available to enter new positions.

Consequently, we’ve undertaken detailed analysis and determined that, where minimizing theta decay is our objective, the optimal place to make a decision on trades that have not broken out is in a window of 21-31 days after entry. Consequently, at that point we now review each open Volatility Strategy trade and make a determination about whether to close the position or roll out and buy more time.

Detailed analysis has shown that making the change above should not make a significant impact to the long term profitability of the strategy, however it will make a dramatic difference to the win rate achieved and consequently the experience of subscribers. Historically the win rate has been in excess of 75% based upon the fact that positions with an initial loss often remain open and are adjusted until the loss is recovered or turned into a profit. The trade off for changing this approach to exiting losing positions at or around 21 days means that the number number of losing trades will increase dramatically. Based upon our detailed testing, under this modified approach, we expect the win ratio to the fall from 75% to approximately 39%. This is done with the expectation that the average loss in each losing trade will be in the range of 15-20%.

Changes to Reported Track Record

Based upon the changes being made above, reporting our historical track record would be a complete misrepresentation of the subscriber experience going forward. New customers rely heavily on the hypothetical non-compounded track records in their decision making process to become a subscriber. Based upon historical track record they are expecting 7 out of 10 winning trades only that the reality is 3 or 4 winning trades out of 10.

Consequently we have made the decision to update the historical track record by updating the exit for all trades that were still open after 21 days by closing out the position at the days closing option value position as if the position had been exited at the close of that day. Where trades were open at 21 days but had been adjusted, they were not closed as different circumstances were prevailing and the trade was been managed as such. The modification was made by a computerized script which made the changes completely objectively and consistently. In other words we did not “cherry pick” optimal conditions to exit individual trades. In fact, numerous trades that had historically been adjusted and became winners were converted into losing trades through this process. While this is disappointing to say the least, in the interests of transparency, we believe that it is more important to accurately represent the likely future experience for subscribers in our hypothetical track record. Equally we believe it is important that such adjustment of the track record and changes to the approach are also recorded, hence this information and the live stream that was presented to all subscribers at the time the change was made.

Trade where the exit was adjusted can be identified on the website because they carry the message that states. “This trade is being exited in accordance with revised strategy management guidelines for Strangles that haven’t broken out within the first 21-31 day period.”

Review the Live Stream Recording for More Information

If you’d like to understand the changes made to the risk management and trading style for the Volatility Strategy in more detail, please click this link to view the recording on YouTube https://youtu.be/qeclIkZYGJE. In addition, the previous adjusted track record is available for review upon request.

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