1990issue C121-2
Constructing hybrid trend and option-income rules
Constructors can encode trend-following exposure and an option-income overlay as one mechanical procedure. Lock the index price, a discrete trend-strength score, and book state first. The only legal outputs are reverse, add, or hold, so entry, exit, and abstention can be tested together.
- Lock the current index price, the signed trend-strength score, the trend-following side, the option-income overlay, and the last-trade anchor before any action rule runs.
- The only goal actions are reverse long, reverse short, add to a long, add to a short, and hold.
- With no timing signal, an adverse move of about 1% reverses the trend-following side. A continuing move of about 3% since the last trade can add to that side.
- When a strong timing score conflicts with the index move, both facts enter the decision and the reverse filter is capped at 2%.
A single mechanical procedure
The archive workflow joins a trend-following side and an option-income overlay inside one mechanical procedure. That procedure is a closed set of if-then rules. It turns market inputs and book state into a single trading action.
The construction is a mechanical trading system. The trend-following side is the directional book already being carried, recorded only as long or short. The option-income overlay is the option-writing stance of an option income strategy sitting on that book, recorded as none, up bias, down bias, or delta-neutral.
Market inputs and book state
The procedure takes two market inputs: the current underlying index price and a discrete estimate of future trend direction.
That estimate is the trend-strength score. It is a signed integer from 5 for a very strong up reading through 0 for no signal to -5 for a very strong down reading. The score is a rule input rather than a narrative view.
Rules also read three state facts: whether the trend-following side is long or short; whether the option-income overlay is none, up bias, down bias, or delta-neutral; and the last-trade anchor, which is the underlying price at the last system trade. Later percentage change is measured from that anchor.
Legal goal actions
The only goal actions are reverse long, reverse short, add to a long, add to a short, and hold. Those are the only legal outputs of the procedure.
Reverse, add-on, and conflict rules
If the index moves about 1% against the current trend-following side and no timing signal is present, the procedure reverses that side. That adverse percentage move is the adaptive reverse filter.
When a timing signal is present, the same reverse can be taken earlier or later according to that signal rather than at the 1% threshold alone.
In a continuing trend, the existing trend-following side may be increased after the underlying moves about 3% in that direction since the last trade. That further favorable percentage move is the add-on interval.
A conflict case is a strong timing score pointing one way while the index is moving the other way. Both the price change and the signal then enter the decision, and the reverse filter is capped at 2%.
Encoded examples
Encoded examples reverse a short to long after a price change greater than 0.01 with a non-negative trend score and no option-income overlay, and add to a long after a price change of at least 0.03 under the same directional conditions.
All readings on this track · 14 readings
- 1989When broker advice replaces your rules
- 1990Constructing hybrid trend and option-income rules
- 1992Long-call cash sleeve as an option-income case study
- 1993One job per lookback in a breadth-based option-income procedure
- 2001Expire-worthless folklore and option-income risk
- 2005Conservative option writing after a climate and structure check
- 2007Unhedged option income with volume and the midterm trend
- 2007When option income ignores the implied-volatility range and liquidity
- 2008Horizon-first income spreads and expiration-week volatility
- 2014Seasonal oil calls across a tracking fund and an energy equity
- 2017Shoulder-season crude, the gasoline rebuild, and a put-income overlay
- 2017Seasonal energy window with a defined-risk call
- 2017Constructing short guts for option income decay
- 2018Seasonality as a holding-regime choice in commodity markets