Java demo of Karen Supertrader with Interactive Brokers with Buy trigger

This is the farthest I have come on this strategy. I also talk why I now use Java as well as MySQL too. I even address what is still outstanding. All the source code is available for my Quant Elite Members buy going here

Initial source code to Karen Supertrader with Bollinger Bands options model

First model and coding attack of this very popular options trading strategy. I am using simple Bollinger Bands as described in the research I have found. All files with source code available for my Quant Elite Members

Bollinger Band equation from http://www.great-trades.com/Help/bollinger%20bands%20calculation.htm

Note that I am attempting to automate this strategy using my workflow as described below with Matlab. This also looks very legit as the SEC raw filings are below as well.

I wish the exit strategy was disclosed with a little bit more details at the interview. I believe there are exit rules related to both time and value of the options.

After a certain time of entry, like one month, a position may be closed, for a profit (sure) or for a loss (not sure?).

As the value of the options decreases to generate a proft around 15%, the position may be closed. For options that do not face danger (continue to maintain a high probability of success), they will be allowed to expire worthless.

As the value of the options increases to preset potential loss, new options of further out of the money and/or out in time are sold to cover the losses. There are no stop loss schemes used in the system.

This is my understanding. Anyone who has more insights are welcome to commment.

GREAT article! I really enjoyed watching the video with Karen, Tom, and Tony. On thing I don’t understand are Bollinger Bands. What are they and how does Karen use them? What does she mean by 2 standard deviations with the BB?

Thanks!

BB is a common concept used in trading methods that involve applications of statistics. SD determines the upper and lower boundaries of the Bollinger bands if other factors are not changed. 2 SD gives about 95% of probability of ranging within the BB boundary for stock prices. Note this is theoretical only. You can google it for more details.

I believe Karen uses BB in option strike selections since she seeks high probability of success. If the strike price is located outside the BB with 2 SD, the probability reaches over 95%.

Investment strategy raw filings http://www.formds.com/issuers/hope-investments-llc

You missed her single most criteria before any of her traders does anything: they presume the market has crashed already. She’s not dealing with the SPX value of any given day at its face. She takes the days SPX price, subtracts 100 from that, and then goes downward another 12% from that still. So she’s basing everything on the fact the market has “already crashed”, which gives her time to react if in fact it does go down sharply.

Sell far out-of-the-money, high probability options depending on market volatility

In 2011 & 2012 when volatility was higher (VIX >= 15), sold puts with 2 SD (5% ITM Probability)

In 2013 when volatility was low (VIX around 11 to 13), sold puts with 1 SD (15% ITM Probability) to 1.5 SD (7% ITM Probability)

Sell calls with 10% ITM probability

Option Cycle Selection

14 days to expiration for calls in general for 2013

56 days to expiration for calls if price can be projected and good premium can be obtained from far above the projected price

Use trend analysis including 2 SD Bollinger bands, resistance, and FIB retracements

56 days to expiration for put

See other updated requirements in summary link above

As an aside, you can always use delta as an approximation of the probability a strike will expire ITM. Despite the discrete calculation, every platform Think or Swim, Option Vue, Option Monster, IB, etc…all have subtle fluctuations in delta calculations due to smile approximation, individual strike IV calculation, models used, smoothing, etc.
Additionally, use can approximate the probability of touch by using 2*delta.

Study group for this strategy: https://groups.yahoo.com/neo/groups/supertraderkarenstudy/info

Probability method in Think or Swim http://mediaserver.thinkorswim.com/transcripts/touching.pdf

tpreston: Stephan, I’ve found that the front month implied vol is a good indicator of stock volatility going out 30 to 40 days. tpreston: It’s not perfect, but I find it better than using historical volatilities. tpreston: I find it much harder to forecast volatility in individual stocks than indexes. stefanp: “I’ve found that the front month implied vol is a good indicator of stock volatility…” you mean the average ATM call and put volatility tpreston: Stefan, yes, average atm vol