As promised, in this thread I'll be testing a new use of my bot with a different approach. The goal is a methodology that may be used by "smaller" funds as well. General approach The fundamental idea is to profit from both option time decay and the drift of the underlying at the same time while using long scalps to protect against negative moves. This "scalping" engine will essentially work like this: We will consider very "far" OTM equity options (for instance, SPX PUTs, say at least 40-50% OTM or more, depending on the instrument and the desired risk). The bot is required to ensure that the instrument always has a permanent short position while also possibly doing long-only scalps to maximize profits and/or reduce possible drawdowns (when the indicators show a temporary change in the direction of the VIX and/or SPX). Without automation, it would be difficult to catch the unfavorable moves with long scalps, and we should employ more money or margins to try to manage the same profit. In any case, when an option (on a layer) is near expiry, we roll over to a new option (possibly with a different strike and expiry) but always at a higher price. Strategy So, in practice, the bot will maintain a short position on far-away OTM PUTs while doing long-only scalps. This will ensure that 2 great unstoppable "forces" will be working in our favor: time decay and the drift of the underlying, while at the same time protecting it with long entries (in case we find suitable leveraged instruments, we can also exploit the effect of daily rebalancing). Do not expect much "fun", as we have seen with bilateral scalping of commodities. I expect this is going to be pretty "slow", boring trading. But the idea is to minimize the risk while getting an automatic, steady, profit flow. The procedure can be scaled up to any account size. From a psychological point of view, the drawdown should be much more bearable because, in the worst of cases (a flash-crash of the market with the SPX dropping more than 50% in a few days, which historically has been only temporary), we end up with long exposure to the market. For this test, I will start with SPX and a few others (suggestions welcome in regard to other instruments), and if it works fine, we will see if we can apply the idea to other instruments (and whenever there is higher volatility or leverage, we can use a "game expansion factor"). I will start with a smaller "packet size" and a maximum of 3 "packets" for each layer. And we will increase it after looking at the available margins and general behavior. While the general idea seems attractive, it needs to be tested and refined well because trading algorithmically options is not so straightforward. The purpose of this test is also to better understand and tune the strategy parameters (take profit, packet size, max number of contracts, option expiry, option strikes, instruments, etc.) based on the behavior of the option price curve (delta, etc.).
Nope newwurldmn, the buys are done on the option itself. There are no stocks involved. (This means that if you are 2 short, then 1 can be used to scalp long. And so on.)
Sorry, is that a typo? You will be collecting premium on options that are 50% away!? Is it one of those “buy one, sell a ton” kind of strategies?
I am not sure what you mean by "buy one, sell a ton". I guess you are referring to some backspread approach. In any case, no, we are not buying one nor selling a ton. The general idea is that we continuously collect premium from an OTM (put) option [having as its underlying an instrument correlated with the general market]. However, we use long scalps to protect against the possible adverse moves (the price of the option rising) and reduce the impact of DD. Even when doing the long scalps, we maintain, in any case, the overall short position of the option. There is a continuous rollover of this option. Like an infinite price curve that we ride forever. In essence, we give up some of the premium for some protection (and to recover some margins) in case of an adverse move. For each option, all the work is carried out locally on that option. There are no other instruments involved. Clearly, we will work with many different option instruments for more fun, but each one can be seen as independent (in principle, one could just work with one instrument alone, preferably one SPX put, I would say).
your post is confusing. You should rewrite it: So, in practice, the bot will maintain a short position on far-away OTM PUTs while doing long-only scalps
Sure. I think I wrote it in the first post: "The bot is required to ensure that the instrument always has a permanent short position while also possibly doing long-only scalps" So you are right now. Please excuse and do correct me when I sound strange or unclear. Obviously English is not my native language
Right, what ratio will you have? I assume your longs will be ATM or at least not as far out as your shorts. I assume you have back-tested this, so my question is: if you just run the long portion of this strategy, is it profitable? If so, what percentage of profits does it contribute to the overall PnL.
The essence here is the continuous neverending premium collection and the confidence that the possible (hopefully rare) unfavorable move will put you at around -50% or more of the S&P, which is not a bad spot to be in, and makes the possible DD much more bearable (considering market the drift). The psychological part is in fact important with automated trading because a scared investor will shut down the bot The long scalp part is just a device to reduce the impact of a strong adverse move. The long part can be positive or negative at random. It all depends if a top buy remains "stranded" (not closed). The purpose is just to mitigate the DD and recover margins. So it's not really a combination of two separate strategies, but a unique strategy where essentially we are continuously getting the premium, but we "give up" some of it to protect, if necessary.
Ok, it’s your show and you can run it any way you please. But I remember your previous journal where I asked specific questions but received very vague answers, after which I stopped following. It’s very hard to envision how a system that is selling 50% OTM strangles can make meaningful risk-adjusted returns. Good luck anyway, I will put myself on mute