TITLE:
Designing Equity Option Strategies Using Memetic Algorithms
AUTHORS:
Richard Tymerski, Garrison Greenwood
KEYWORDS:
Memetic Algorithms, Equity Options, Trading Strategies, Financial Options, Larmarckian Local Search
JOURNAL NAME:
Technology and Investment,
Vol.9 No.4,
October
26,
2018
ABSTRACT: Equity options strategies
consist of a combination of options which are simultaneously entered into the
market which enable one to achieve a financial return. A range of standard
well-known strategies exist from which one can choose. The present paper looks
beyond standard strategies and uses a memetic algorithm to choose from a myriad
of option combinations in arriving at strategies which optimize specific
fitness functions. The fitness function is formulated to find strategies that
maximize return while, at the same time, limiting equity drawdown and achieving
a desired rate of trade success. Over a decade of historical option data of the
SPY, the S & P 500 Exchange Traded Fund, is used to choose strategies
ranging from two to six option legs. Specific four- and six-leg option
strategies were found to achieve optimum performance.