Introduction

In my first year being an options trader, it was a pretty rough ride up and down and up again and ultimately down again. I survived for a year but not much longer after that. I realised that even though I could be profitable, there were still many things I didn’t know yet and experience that I needed to gain. Looking back, it seems almost like a stroke of luck that I was profitable when I was.

Since then I have ‘gone back to school’ and learnt more about the art and science of options trading and have a better grasp of the practice.

I have to give a give shout out and thanks to my family. They were so supportive as to learn options trading themselves so that they can understand what I do and experience. I have the best family ever. They too motivated me to get my head back into the game, and now trading is a family activity.

The last time I did trading, I had a pretty weak system of forecasting, double checking the trade conditions and recording my trades and tracking my progress. Now that I want to do it again, I decided that I will need improvements to all of the above. Thus, you see before you the oil option forecasting game, setup and rules. Below will be the rules I will adhere to while forecasting what trades to make. These forecasting rules were also inspired by the book Superforecasting, which stressed the specificity in forecasting.

Rules of Forecasting

1. Every week (likely Wednesday) I will make a forecast on the price of oil.
   1. The type of oil referred to is known as West Texas Intermediate crude oil. The ticker symbol is /CL.
   2. Each forecast is be accompanied by evidence for or against the forecast.
2. The forecast will be that of where the price of oil is not going to go. This is based on my options trading strategy, which is mainly being a net seller of options.
   1. Alternatively, the price is known as Out of The Money (OTM).
   2. Based on the appropriate strategy, the forecast might be instead a price range where the price of oil is predicted to stay in.
3. Each forecast will be for an option expiry date that is at least 2 monthly options away.
   1. For example, if today is Jan, I will make a prediction on the monthly option that will expire in Mar.
   2. The specific end date for each of the oil price predictions is the 3rd Friday of each month, as per the usual option expiry date.
4. I will use the probability of OTM calculation as the baseline for the forecast confidence.
   1. I will choose from the option OTM probability of 70% to 90% as the baseline.
   2. I will adjust my confidence from the baseline by a few percentage points based on external market factors that might affect the price.
5. The forecast must have a precise numerical value of the prediction confidence, price, direction(above or below) or range(between price to price), and date.
   1. The final forecast statement will be written as, for example: I am 81.5% confident that the price of WTI oil will not be below $65.50 on the 21/09/2018.
6. The forecasts from week to week may change drastically. This will be decided by my desire to ‘win’ and also because market conditions might have gone in a totally different and unexpected direction.
   1. These changes will be done regardless of the forecast the week before. Each forecast will be standalone with no way to ‘change’ the forecast once it has been made. Each forecast will not be considered as a ‘correction’ of the previous week’s forecast.
7. A ‘win’ is when the forecast turns out to be true and the price remained OTM on the stated date. Alternatively, a ‘lose’ is when the forecast turns out to be false, even if it price crossed In The Money (ITM) by a hair of a cent on the stated date.
   1. The date of the forecast is important, for example, if the price crossed into ITM territory but crossed back to OTM territory later on and stayed OTM on the stated date, it counts as a win.
8. All forecasts will be tabulated as with a Brier Score. These scores will be released after each option expiry period when the forecast ends and the win conditions can be calculated.
   1. Generally speaking, the lower the Brier Score the better. A score 0 is perfect, while a score of 1 means I am either the worse trader imaginable or the unluckiest person on earth.
9. The purpose of the game is to also make options trades on my forecast. I will make a trade with each forecast. However, I may choose to not make a trade based on my confidence in my own prediction, other extraordinary market factors, and times of extreme market uncertainty.
10. The options traded, their profits and their success will differ from the forecasts I make. This is due to the following scenarios:
    1. Part way during the forecast for each trade, if it makes sense to exit a trade early, then the profit or loss will be taken before the forecast ends.
    2. Part way during the forecast for each trade, if it seems like a ‘lose’ outcome is inevitable, then trade adjustments will be made to reduce the loss or turn it into a profit.
    3. In essence, the forecast and the options trade start at the same place but might divert as time goes on.

Starting the forecasting game

As mentioned, I will start to forecast and put my forecasts up here every week. How I envision it is that I will review the general scenario of the market, news reports, and points that support and go against my thinking, then finally I will make the forecast.

Monthly, I will also review the success and failure of my forecasts and look at the Brier Score.

Note that the status of the options that I trade will not be reported or made known. Other than privacy, the main reason is it will be too tedious to report this. It will get even more confusing and tedious to report when I do adjustment strategies on the trades. I will instead track these myself.

I have put much thought into these forecast game rules. When moving forward with the forecasts, I will refer back to these rules. They may change in the future.

Please check back in the following weeks for the first forecast.

May the games begin!