The Bittman Algorithm

The Bittman Algorithm

A CBOE plaque is seen near the front entrance to the Chicago Board Options Exchange in Chicago, Illinois, U.S., on Thursday, May 20, 2010. CBOE Holdings Inc. set a price range for its planned initial public offering that values the owner of the Chicago Board Options Exchange at about $2.87 billion. Photographer: Tim Boyle/Bloomberg via Getty Images

In 2012 Jim Bittman, Director of Program Development and a Senior Instructor for The Options Institute at CBOE, gave a presentation that outlined a 2-step strategy for trading the S&P 500 Index (SPX) using weekly options. The strategy is particularly attractive because Mr Bittman supplied very specific entry and exit points, back testing data, probabilities and a detailed comparison vs trading once a month using standard monthly SPX options. This weekly strategy was one of the primary strategies that inspired the creation of Alta5. And thus, the Bittman Algorithm became famous.

In this article, we will discuss the results and challenges faced while manually trading the strategy Mr Bittman outlined, how he has solved those challenges while increasing returns by 1.5% per week and how to set up and use the Bittman algorithm for yourself.

In order to utilize this strategy to the fullest, you may first want to pick a brokerage that allows for API development. This will enable you to create a playground to test algorithms.

The Bittman Algorithm Strategy

For those experienced with options trading, below is a high level overview of how the strategy works. It is non-directional and involves selling either a Bull Put or Bear Call credit spread each week after the SPX moves a calculated amount in either direction.

Entry

  1. Calculate a 1/4 and 1/2 standard deviation (SD) move for the SPX using Wednesday’s closing VIX.
  2. Use SPX open price on Thursday  and the values from step 1 to calculate 1/4 and 1/2 SD moves up and down.
  3. When SPX touches either 1/4 SD, sell “opposite” credit spread with a strike price 1/2 SD on the other side. This can happen Thur or Fri of the same week or Mon, Tue or Wed of the following week. The closer to it is to expiration the smaller the credit collected but with a higher probability of being profitable.

Exit

  1. If the market retraces to the opposite 1/4 SD price then immediately exit the position regardless of profit or loss.
  2. Otherwise, let the options expire worthless on the following friday and keep the full credit received when selling the spread as profit.

Expected Results

66% +1.20 +1.20 x 2 = +2.40
34% -1.40 (avg) -1.40 x 1 = -1.40
Profit per share after 3 trades: = +1.00

If you would like to watch the presentation of the Bittman Algorithm, the slides and full video are available for download on Hamzei Analytics’ website. Livevol also has a great explanation with example.

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