This document summarizes research into using trailing stops, option hedges, and covered calls for risk control. It describes experiments comparing the performance of a baseline long/flat MACD strategy against that same strategy enhanced with: 1) A trailing stop, 2) Put option hedging, and 3) Covered call selling. Key statistics like Sharpe ratio, drawdown, and alpha are presented for each strategy when backtested against IBM and SPY, showing that in most cases, the risk control techniques improved the strategy's risk-adjusted returns.

1. Risk Control with Trailing Stops and Options
Systematic Evaluation of Popular Risk Control Techniques
www.quantconnect.com
Jared Broad
Founder & CEO

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Outline
▪ Introduction to QuantConnect
▪ Algorithm Development Process
▪ Creating Our Investigation Thesis
▪ Developing a Control
▪ Testing and Researching
▪ Experiment 1: Adding Trailing Stop
▪ Experiment 2: Adding Option Hedge
▪ Experiment 3: Covered Calls
▪ Summary

3. What is QuantConnect?
We empower investors with powerful
investment tools and connect the brightest
minds from around the world with capital they need.
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4. What is QuantConnect?
QuantConnect is a community of 44,000 Engineers, Data Scientists, Programmers
From 6,100 Cities and 173 Countries
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5. Building Thousands of Algorithms Every Day
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6. We’ve built a web algorithm lab where thousands of
people test their ideas on financial data we provide; for free.
LEAN ALGO
TECHNOLOGY
FINANCIAL
DATA
POWER
COMPUTING
How do we do it?
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EQUITIES
OPTIONS
FUTURES
FOREX
CRYPTO

7. Development Process
Live Trade
Deploy the strategy live in
a real money account.
Research
Ideas
Backtest
Algorithms
Paper
Trade
Live
Trading
Research
Quickly test ideas in a
command line environment.
Backtest
Codify and run full simulation
in the Algorithm Lab.
Paper Trade
Run idea on live market data.
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8. Creating Our Investment Hypothesis
First we define our null hypothesis,
something we setout to disprove:
The market is completely efficient and
attempts at risk control are futile.
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We are testing this theory by evaluating popular risk control methods;
(e.g. Trailing Stops and Option Hedging), and comparing the performance.

9. Setting the Benchmark, Control
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• Define a baseline performance for judging algorithm studies.
• Baseline should ideally be as close as possible to study. This reduces
other variables and makes it easier to identify potential causes.
Control: Long Only MACD
Long-Flat MACD; nothing else.
Exp 1: Long Only MACD
+ Trailing Stop.
Exp 2: Long Only MACD
+ Put Option Hedge.

10. Exploratory Research
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Quantbook Research

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Control Implementation
SPY Backtest
IBM Backtest

12. Trailing Stop Hypothesis
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Place Stop
Move Up

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Experiment 1: Adding Trailing Stop
SPY Backtest
IBM Backtest

14. Option Hedge Hypothesis
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Buy Put
Insure Dip

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Experiment 2: Buying Put Hedge
SPY Backtest
IBM Backtest

16. Covered Call, Selling Options Hypothesis
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Buy Stock
Sell Call
Covered call works best on
sideways or downward markets.

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Experiment 3: Selling Covered Call
Not strictly “risk control”
SPY Backtest
IBM Backtest

18. Key Statistics
IBM Experiment Sharpe Ratio Drawdown Alpha
Control Study 0.844 2.7% 0.015
Trailing Stop 0.615 7% 0.005
Option Hedging 1.194 3.8% 0.032
Covered Calls 1.891 3.3% 0.057
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Key statistics from testing our experimental strategy against a
downward/sideways trending asset; IBM.

19. Key Statistics
SPY Experiment Sharpe Ratio Drawdown Alpha
Control Study 0.944 3.6% 0.007
Trailing Stop 1.396 4.1% 0.015
Option Hedging 1.038 3.6% 0.004
Covered Calls 2.13 3.0% 0.042
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Key statistics summary from re-testing the control and experimental strategies
against a trending asset; the SPY ETF.

20. www.quantconnect.com
Thank you.

21. Appendix

22. Our Research Environment
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23. Coding the Idea, The Algorithm Lab
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24. Going Live, Deploying to Live Trading
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