Apex Trading

Advanced Option Trading Strategies
and Concepts

Note: Contact Paul for current information about implementing this strategy due to the recent changes in the Treasury Bond Market.

1. “Apex Trading”

“Apex Trading” is the name I created for a particular strategy that sells and adjusts far out-of-the-money deferred month options on US Bond futures. These options are relatively insensitive to moves in US Bond futures.

The schedule for selling these options is dictated by the return desired (“target return”) either on the actual funds used or on the amount of nominal funds. Adjustments keep the apex of the account’s performance curves centered over the current price of the US Bond futures contract. Over time, this gives profits from time decay an opportunity to exceed losses resulting from trends and from back-and-forth whipsaw action in US Bond futures.

Apex Trading doesn’t attempt to forecast where US Bonds will be tomorrow, next week or next month. Instead, it makes money “following” the market. It builds positions over time and balances positions as the market moves.

In other words, it responds to what the market is doing right now. By contrast, other trading systems make a market forecast by using some kind of logic that’s external to the market. These other systems fail to make money over the long run precisely because forecasting is an activity fraught with pitfalls, especially when forecasting with factors external to the market.

Apex Trading builds positions incrementally over time as US Bond futures move. There is safety in this “gradual” technique because it produces performance curves having manageable slope.

In addition, Apex Trading facilitates generating income separate and apart from time decay. How? Short option premium builds the account’s cash balance and a large portion of this cash can be used to purchase T-bills for interest income.

The Concept – What Apex Trading is about

Apex Trading is NOT:

    • Technical or fundamental analysis of any kind
    • A directional forecasting technique
    • A cyclical model
    • A seasonal timing method
    • A “black box” system

Apex Trading IS:

    • A program for managing money by trading US Bond options
    • A program for systematically buying and selling US Bond options in accordance with specific entry and adjustment guidelines
    • A way to earn money from positive time decay regardless of short term market direction
    • A method that doesn’t care which way the US Bond futures contract moves as long as it doesn’t move “too much” in a short period of time
    • A procedure for “staying balanced” in relation to the price of the underlying US Bond futures contract
    • Procedures guided by risk management
    • A measured approach to trading that incrementally builds positions over time (as opposed to initiating large positions all at once)
    • A trading technique for keeping the apex of your position’s performance curve centered over the current price of the US Bond futures contract
    • A trading program that stays in sync with the market because it doesn’t try to guess the market’s next move

Personal Observations

While waiting for profits, every trader must avoid large drawdowns. Of course, most traders find this is difficult when they speculate in highly leveraged instruments like options on futures. Avoiding significant drawdowns takes specialized knowledge about how to use options and how to manage risk by reacting to changes in the market.

I’ve learned that no one can consistently anticipate what a market’s going to do. Guessing market direction and risking money on “timing a market” is a road to frustration (and losses) for most traders. So it’s important to let your market opinion “take a back seat” to an approach that targets profits from factors besides market direction and that adjusts positions when net deltas become unbalanced. The Apex Trading approach does exactly that.