Kelly Formula In Trading

Kelly % = W – [(1 – W) / R]

Where:
W = Winning probability
R = Win/loss ratio

The output is the Kelly percentage, which we examine below.

Putting It to Use
Kelly's system can be put to use by following these simple steps:
Access your last 50-60 trades. You can do this by simply asking your broker, or by checking your recent tax returns (if you claimed all your trades). If you are a more advanced trader with a developed trading system, then you can simply back test the system and take those results. The Kelly Criterion assumes, however, that you trade the same way you traded in the past.
Calculate "W", the winning probability. To do this, divide the number of trades that returned a positive amount by your total number of trades (positive and negative). This number is better as it gets closer to one. Any number above 0.50 is good.
Calculate "R," the win/loss ratio. Do this by dividing the average gain of the positive trades by the average loss of the negative trades. You should have a number greater than 1 if your average gains are greater than your average losses. A result less than one is managable as long as the number of losing trades remains small.
Input these numbers into Kelly's equation: K% = W – [(1 – W) / R].
Record the Kelly % that the equation returns.
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Covered Call Strategies

• Sell 4 weeks/5 weeks covered call for stock when VIX is under 20 , SPX is up trend and no earning report for the stock in contract month.
  
• During first two weeks ( weeks 3 in 5 weeks contract ), buy back the options whn its value drop to 20% of the original premium or less.
• During week 3 ( week 4 of 5 weeks cycle ) of contract period, buy back the options when the ask is 10% or less of the original premium.
• During week 4 ( last week ) of the contract , buy back the option at any price if we feel necessity to sell the underlying equity immediately.
• If at any time during the contract period you have reasons to believe that a stock will drop dramatically in price, buy back the option at any price, sell the stock , and immediately move the cash into another period.
• Rolling down when buy XYZ@38, sell $40 call at $2. One week later price drop to $35 nad option value drop to $.40 ( drop to 20% of value). At the same time the $35 strike is selling at $2.0. Rolling down generate additional $160. If the stock above $35 after expired, income =$200+$160,loss from stock $38-$35 = $300.Profit $60.
• Hit the double strategy :Buy back the options when t meet our 20%/10% requirements, sell the same option strike and month again if stock and option price up.
• Convert dead money to cash profits, consider when there is dark cloud hanging over the stock.There is nothing wrong with selling a stock that is not performing.Closed all the position.
• Exit strategies near expiration Friday, if price at or in the money, you can either rolling out(Rule price In the money ), rolling out and up( Rule price ITM ) or no action.

Trading VIX Options

Steven Smith of TheStreet.com has a video interview up in which he asks Brian Overby for his thoughts on how to trade VIX options.

Overby, who is Director of Education at TradeKing and authors an informative options blog, Options Guy, tackles some of the idiosyncrasies of the VIX and has some excellent suggestions for those who insist on trading the volatility index. Frankly, there is close to 100% overlap between what he says and what I believe about the VIX.

I recommend clicking through to the video, but in a nutshell, Overby’s thinking boils down to the following:

1. VIX options do not follow the (cash) VIX index
   
   
2. To understand the price action in VIX options, look at VIX futures
   
   
3. When trading VIX options, trade the front month (closest contracts to expiration)
   
   
4. Trade VIX options when the VIX is at the extremes of its trading range
   
   
5. Utilize a mean reversion trading strategy
   
   
6. Look to sell vertical spreads (sell puts when the VIX is low; sell calls when the VIX is high)