Long Futures Collar Trade

I put on my first collared futures trade. The idea was to sell a call 5 points above my long futures entry point and buy a put 5 points below. But my futures entry was at 2676.25 instead of 2675 and and the call was 1.5 points less than the put. So my potential upside is only $112.50 not counting fees and my potential downside is $387.50. As the model has a 71% win rate, the expected value is -$32.50 :( It's probably worse than that because the futures gapped up over the weekend reducing the potential upside. Oh well, the expected "tuition fee" is not so big. The screenshot shows the current state of play. Down.

P.S. 17 April
I "managed" the trade a bit and the futures were just below 2680 when the options expired. So I had a naked futures position, which I then sold at 2680.25. Overall, I made about USD 200 on the trade. I have now put another trade on. Long futures at 2681.5, sold a 2690 call for 7.25 and bought a 2675 put for 9.25. Maximum upside is USD 325 and maximum downside is USD 425 not counting commissions, which are small. Expected value is about USD 100. The spread between the two options today is 15 points, up from 10 points yesterday. The idea is to gradually widen the points spread as I am comfortable with it, eventually buying the put 25 points below the futures entry price, which is equivalent to a 1% stop. Yeah, the model is still long, the market is "overbought" and trending up according to the model.

ASX 200 and MSCI All World Total Returns

The Australia share price index - the ASX 200 - has not performed well since 2007. The current level is below its peak. However, when you add in both dividends and franking credits, it has almost doubled since the peak. Since 1996 it has returned twice as much as the MSCI in Australian Dollar terms, though since the crisis the two have had about the same gain, tripling from the low.

The Gold Model

I have now managed to reconstruct something similar to the old model I tried to trade a decade ago. It is a mixture of trend following when the markets are trending and predicting the direction to trade in when markets are more choppy. It follows a clear set of rules with no real discretion. Using those rules since January 1st this year would have returned 51% with a Sharpe ratio of 0.58. The model wins 71% of the time with an average daily win of 1.15%. The maximum loss is 1% as set by the stop. When I optimize a portfolio of the various methods I have come up with to maximize the Sharpe ratio of the portfolio the solution says to put 90% in this strategy and to actually short one of the other strategies! At the moment the model is long, which is good, as I have a long calls position still on from Friday. I think I will rename the new version of the old model the "gold model" :)

By the way, if you can borrow, maximizing the Sharpe ratio makes much more sense than maximizing return. You then get the smoothest time path of returns, which you can lever up if you want taking into account the size of likely drawdowns.