Additional Filters for Enhanced Trade Selectivity
This document outlines additional filters designed to further enhance the selectivity of our options trading strategy. These filters work in conjunction with our high-confidence setups, refined entry criteria, and confidence scoring system to ensure we only take trades with the highest probability of success (80%+ win rate).
Market Regime Filter
Purpose: Identify the current market regime and only trade setups that perform well in that regime.
Implementation:
- Trending Market Filter: Calculate 20-day vs 50-day moving average relationship for SPY and ADX (Average Directional Index). Only take long trades when 20-day > 50-day MA AND ADX > 20. Only take short trades when 20-day < 50-day MA AND ADX > 20.
- Volatility Regime Filter: Calculate 10-day historical volatility for SPY and compare to 3-month average. Only take VolatilityExpansion setups in Low Volatility Regime (Current < 0.8 × 3-month average).
- Correlation Regime Filter: Calculate average correlation among S&P 500 stocks. Only take META and GOOGL trades in Low or Medium Correlation environments. Only take QQQ trades in High Correlation environments.
Market Breadth Filter
Purpose: Ensure the broader market internals support the trade direction.
Implementation:
- Advance-Decline Filter: Calculate 5-day moving average of NYSE Advance-Decline Line. For long trades: A-D Line must be rising for at least 3 days. For short trades: A-D Line must be falling for at least 3 days.
- Percentage of Stocks Above Moving Averages: For long trades: At least 55% of S&P 500 stocks must be above their 50-day MA. For short trades: No more than 45% of stocks must be above their 50-day MA.
- New Highs vs. New Lows: For long trades: New Highs must exceed New Lows by at least 2:1. For short trades: New Lows must exceed New Highs by at least 2:1.
Sector Rotation Filter
Purpose: Align trades with current sector rotation dynamics.
Implementation:
- Sector Relative Strength: Calculate 10-day relative performance of each sector vs. S&P 500. For META, GOOGL, AMZN: Only take long trades when Technology/Communication Services/Consumer Discretionary sectors are in top 3 performing sectors.
- Sector Breadth: Calculate percentage of stocks above 20-day MA within relevant sector. For long trades: At least 60% of sector stocks must be above their 20-day MA. For short trades: No more than 40% of sector stocks must be above their 20-day MA.
Multi-Timeframe Confirmation Filter
Purpose: Ensure trade signals are confirmed across multiple timeframes.
Implementation:
- Timeframe Alignment Check: Primary timeframe: Daily chart. Secondary timeframe: 4-hour chart. Tertiary timeframe: Weekly chart. For long trades: All three timeframes must show bullish signals. For short trades: All three timeframes must show bearish signals.
- Specific Indicator Requirements: Daily chart: Primary setup conditions as defined in refined entry criteria. 4-hour chart: RSI and MACD must confirm trade direction. Weekly chart: Price must be on correct side of 10-week moving average for trade direction.
Volume Profile Filter
Purpose: Ensure price is at a significant level according to volume profile analysis.
Implementation:
- Volume by Price Analysis: Calculate 3-month Volume Profile for the symbol. For VolatilityExpansion setups: Current price must be in a low-volume node. For SupportBounce setups: Current price must be at a high-volume node.
- Volume Spread Analysis: Analyze the relationship between volume and price spread (range). For long trades: Recent volume pattern must show accumulation characteristics. For short trades: Recent volume pattern must show distribution characteristics.
Volatility Structure Filter
Purpose: Ensure volatility conditions are optimal for the specific setup.
Implementation:
- Implied Volatility Term Structure: Compare IV across different option expirations. For VolatilityExpansion setups: IV term structure must be flat or in contango (rising with duration). Avoid trades when IV term structure is in steep backwardation.
- Implied vs. Historical Volatility: Calculate ratio of current IV to 20-day historical volatility. For long options: Only trade when IV/HV ratio is below 1.1 (IV not significantly overpriced). For short options: Only trade when IV/HV ratio is above 0.9 (IV not significantly underpriced).
- Volatility of Volatility: Calculate 5-day standard deviation of daily VIX changes. Avoid all trades when volatility of volatility is in the top 20% of its 3-month range.
Earnings and News Filter
Purpose: Avoid trading around high-impact events.
Implementation:
- Extended Earnings Exclusion: No trades within 20 calendar days before earnings (extended from 15). No trades within 10 calendar days after earnings. For sector ETFs (QQQ): No trades during peak weeks of earnings season.
- News Sentiment Analysis: Monitor news sentiment scores for target symbols. Only take trades when news sentiment is neutral (avoid extremely positive or negative news cycles). Exclude symbols with recent (7-day) significant news events.
Options Market Sentiment Filter
Purpose: Use options market data to gauge sentiment and confirm trade direction.
Implementation:
- Put/Call Ratio Filter: Calculate 5-day average equity put/call ratio. For long trades: P/C ratio must be above its 20-day average (indicating pessimism). For short trades: P/C ratio must be below its 20-day average (indicating optimism).
- Options Volume Surge Filter: Monitor for unusual options volume in target symbols. Avoid trades when options volume exceeds 200% of 20-day average. Exception: Take trades when volume surge aligns with trade direction and other criteria are strongly met.
- Open Interest Configuration: Analyze open interest across strike prices. For long trades: Higher open interest should be below current price (support). For short trades: Higher open interest should be above current price (resistance).
Institutional Activity Filter
Purpose: Align trades with institutional money flow.
Implementation:
- Dark Pool Activity: Monitor dark pool volume for target symbols. For long trades: Dark pool volume should show accumulation pattern. For short trades: Dark pool volume should show distribution pattern.
- Options Block Trades: Monitor for large block trades in options. Consider trade direction of blocks exceeding $1 million in premium. Align our trades with direction of significant institutional options activity.
Intraday Timing Filter
Purpose: Only enter trades during optimal times of the trading day.
Implementation:
- Refined Trading Windows: Morning window: 10:30 AM - 11:15 AM ET only. Afternoon window: 1:45 PM - 2:30 PM ET only. Avoid first 60 minutes and last 60 minutes of trading day. Avoid 12:00 PM - 1:30 PM ET (lunch hour volatility decline).
- Day of Week Filter: Analyze win rates by day of week from historical data. Prioritize trades on Tuesday, Wednesday, Thursday. Avoid or reduce position size for Monday and Friday trades.
Seasonal Filter
Purpose: Account for seasonal patterns in market and specific symbols.
Implementation:
- Monthly Seasonality: Analyze historical performance by month for each symbol. Only take trades in months with above-average historical win rates. Reduce position size in historically weak months.
- Options Expiration Week Filter: Identify historical performance patterns during options expiration weeks. Adjust trade criteria during expiration weeks based on historical patterns. Avoid certain setups that historically underperform during expiration weeks.
Integration with Confidence Scoring System
These additional filters should be integrated with the confidence scoring system as follows:
- Pre-Screening Filters: Market Regime Filter, Earnings and News Filter, Seasonal Filter. These filters are applied first as initial screening criteria.
- Scoring Component Filters: Market Breadth Filter, Sector Rotation Filter, Multi-Timeframe Confirmation Filter, Volume Profile Filter, Volatility Structure Filter, Options Market Sentiment Filter, Institutional Activity Filter. These filters contribute to the confidence score calculation.
- Execution Filters: Intraday Timing Filter. This filter is applied at the time of execution, even if all other criteria are met.
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