FAQ – Directional Alpha (DAC) Strategy

How long is the typical trade held open for the DAC strategy?

The objective of the DAC strategy is to extract maximum gain from a strong directional move in a short period of time. Each trade is either bullish or bearish, is an in-the-money (ITM) long call or put, and is typically open for 4 to 21 days.

What % of the DAC portfolio is typically allocated to short trades?

The portfolio is dynamically allocated via a proprietary quantitative model. The market may be going up significantly but the portfolio will still be dynamically allocated to bulls and bears to protect from shocks or to follow trends not captured by the broad market.

What methodology is used to pick trades for the DAC strategy?

The Directional Alpha Collection strategy (DAC) identifies high probability, long and short directional trades on highly liquid stocks using a proprietary 4 level scanner comprising technical, fundamental and quantitative analysis. The objective of the service is to extract maximum gain from a strong directional move in a short period of time. Each trade is either bullish or bearish, is an in-the-money (ITM) long call or put, and is typically open for 4 to 21 days. The bullish trades are on fundamentally strong companies that have high probability bullish technical setups. The bearish trades are on fundamentally weak companies that have high probability bearish technical setups. Four percent of capital is allocated to each trade where each trade represents an individual statistical event.

The methodology is focused on maximizing the effectiveness of specific technical set-ups. While these technical set-ups are consistent and predictable, periodically exogenous factors will cause a trade to fail. By augmenting the technical set-ups with a fundamental screen and a proprietary quantitative model, we increase the probabilities that the set-ups will follow-through and complete as expected.

What is the potential max loss for a DAC trade, and how is the risk managed?

Each trade is either bullish or bearish, is an in-the-money (ITM) long call or put, and is typically open for 4 to 21 days. Each trade is a debit trade where the max loss is the premium that we paid to open the trade.  The loss cannot exceed the debit that we paid to buy the call or put. That said, our losing trades average 35% loss per trade. We manage this by allocating a maximum of 4% of capital to each trade, so the portfolio is diversified across 20 to 25 trades.  This allows any single trade to have a minimized effect on overall P/L. Historically, 40% of trades for the DAC service are losing trades.

For the winners, historically, 60% are winners, and the gain for the winners range between +15% to more than +150%.

How much money do I need to get started with the DAC strategy?

The DAC strategy requires a minimum of $10,000.  It then moves up in $10,000 increments, where the next step up would be $20,000.

What is factor-based quantitative analysis?

Factor-based, quantitative predictive analysis (QA) is a technique that seeks to understand and predict behavior by using mathematical and statistical modeling.  In the financial services industry, QA is used to analyze investment opportunities to provide predictions of when to purchase or sell securities, and the potential magnitude of a move.  The input factors, or independent variables, that are fed into a quantitative model include financial ratios such as price-earnings ratio (P/E), earnings growth, revenue growth, cash flow, among others.

 

How do I set up the autotrade rule for the DAC strategy?

Autotrade is a system that allows MCTO to send trade alerts to your broker to automatically make trades in your brokerage account. The minimum required capital for the DAC autotrade service is $10,000. We currently offer autotrading for the DAC service through TD Ameritrade, eOption, OptionsRoute and Autoshares. If your broker is not listed please contact us and we can contact the broker to possibly enable autotrading.

Please refer to the following steps to set up an autotrade rule in your brokerage account.

Step 1: Sign-up as a paying subscriber to the DAC service from within this website. We offer a special rate for first-time subscribers of $5 for the first month.
Step 2: Log into your brokerage account and navigate to the autotrade page.
Step 3: Select MCTO DAC service, and in the pull-down parameter window select “Specified Quantity” or “Specified Number of Contracts”.
Step 4: Input number of contracts. To calculate the number of contracts divide the total amount of capital you wish to allocate to the DAC strategy by $10,000. For example, if you wish to allocate $30,000 to the strategy the number you would enter is “3” because $30,000 divided by $10,000 is 3. For this example of setting the “specified quantity” to 3, each time we send a trade alert to the broker, quantity 3 of the trade will be opened in your account.

If you have any questions about setting up your autotrade rule please contact us. If you wish to self-manage this strategy you can use either the DAC self-managed, or the TOTD service.

To talk to someone directly please call 877-248-7455, or email us at support@monthlycashthruoptions.com.

Who is the chief publisher of this strategy?

Pranav Singh is Chief Publisher for Directional Alpha Collection (DAC) and Trade of the Day Long/Short Options Newsletter (TOTD). His primary area of interest is quantitative trading strategies that blend technical and fundamental analysis. Pranav is a graduate of Bentley University with degrees in Economics-Finance and Mathematics. He resides in the New York Area.

Who is this strategy for?

The DAC strategy is designed to augment and diversify any existing portfolio.  By allocating 10% of your portfolio to the DAC strategy, you can increase your overall yearly ROI by an additional 2% to 3% annually.  Because this strategy is directional and uses option debits, it combines well with a credit collecting strategy such as the Iron Condor service.

When a strategy is Long/Short what does this mean?

A long/short strategy, such as Directional Alpha, actively opens bullish and bearish trades, usually at the same time.  Sometimes this type of strategy is called a market neutral strategy since it can make money in both directions.