Another “what’s your edge” thread

[destriero]

@destriero any sane person in your timezone would be sleeping right now.

Bear set off alarm by brushing against the patio door on the deck. I forgot to bring in the suet, and I've got a neck ache from tummy sleeping. Popped an aspirin and will head to the office for some headphone time.

I am working on my degen algorithmic short put "layers" which when described in those terms is clearly an edge in the 'foilo. Attempting to perfect the capture of "time decay" and market drift, you see? These fine ES contracts are only down 2.00 basis March and March is a wonderful month.

 

[taowave]

Fook,Ild hate to see him go hard..

AmI the only one who looks at edge as some quality or method that leads to above benchmark returns on a risk adjusted basis???

Does one have EDGE if they are consistently profitable but consistently underperform??

lol he took it easy on us. I've known "KS" for a long time.

 

[taowave]

1) where in the world do you live??

2) who sleeps on their tummy after the age of 14??

Now that's impressive

Bear set off alarm by brushing against the patio door on the deck. I forgot to bring in the suet, and I've got a neck ache from tummy sleeping. Popped an aspirin and will head to the office for some headphone time.

I am working on my degen algorithmic short put "layers" which when described in those terms is clearly an edge in the 'foilo. Attempting to perfect the capture of "time decay" and market drift, you see? These fine ES contracts are only down 2.00 basis March and March is a wonderful month.

 

[destriero]

1) where in the world do you live??

2) who sleeps on their tummy after the age of 14??

Now that's impressive

Lake Tahoe.

How do you determine how you sleep? You're sleeping? My body pillow was ejected from the bed.

 

[newwurldmn]

If I follow what you are saying: your edge is the asset you are looking at vs a replicating portfolio. And you can quantify that edge using the math you describe which is beyond my understanding. Though professor protter was my statistics teacher in undergrad and I TA’d for him during my masters program.

If my interpretation is right, then how do you define an edge in a cash product like stocks where there is no replicating portfolio?

I would define it as any trade that, under the assumption of a complete market, could be recast as an arb via trades in Arrow-Debreau securities.

A complete market is one for which Arrow-Debreau securities can be traded transaction-cost free (at mid) on all possible future states. Actual complete markets may not exist, but the SPX complex comes reasonably close.

Jarrow and Protter proved the equivalence of edge and arb in 2010 (but had been circulating in preprint for years prior, proof might also require a representative agent). To quote from the paper: "a non-zero ... alpha represents an arbitrage."

Arrow-Debreau rearrangement can be approximated (with trans cost frictions) with listed options. You've seen screen-grabs of this kind of structure here on ET multiple times. E.g. a ****-edge large enough (exceeds a certain metric level) can be recast as a ****-arb. You also see this type of rearrangment in the inverse strike squared weighting that's used in hedging/replicating var swaps. Note that the gamma curve is the RND shifted slightly right (not exactly, but more or less). The weighting turns it close to a uniform density (divide by the integral so that it integrates to unity) -- it looks like a kernel density estimate of a uniform, using a gamma or some other right-skewed positive support kernel.

Under this arrangement, there will be edges available as long as the Q-measure implied density differs from the rationally-expected P-measure density. This will happen as long as traders/investors remain risk-averse. These edges will not be traded away as they are compensation for perceived risk.

 

[Overnight]

Lake Tahoe.

How do you determine how you sleep? You're sleeping? My body pillow was ejected from the bed.

It is incredible how much one moves in their sleep, when sleeping. During the colder months like now, I have multiple layers of blankets on the bed. They are all even when I snuggle under them. When I wake up in the morning? One is on the floor on one side of bed, another is on floor on other side of bed, and the rest are a jumbled mess! How the heck does that happen, lol!

 

[oraclewizard77]

Elon just fired me from Twitter, so I need to spend more time trading now and working on my edge.

 

[proftradingjourney]

I find statistical option premium selling as a pretty good edge in the markets that one could implement, provided they manage losers well. The trades are high probability, though the risk/reward isn't that great. Best to take profits once your reach 50 percent of your max profit (50 percent of total premium received). Manage losers by either closing at a loss of 2x credit received, or rolling the trade into the future, though this depends on account size, risk tolerance, undefined risk vs defined risk strategies etc..

The thing with this kind of option trading is that its more in tune with human nature, which wants to take profits fast and doesn't mind holding onto losers because they think things can go right again (is the case when your trading a narrow spread or one of your short legs on a spread is just barely ITM and you want to roll it into the future).

Traditional kind of trading is more counter to human nature i.e. cutting losses quick, holding winners long. It takes some work to be successful with this kind of trading since it plays with your emotions and attachment to money, requires a system that works and the skill to trade it profitably, and probably more in-depth analysis is involved. Though I think the risk/reward is better for this kind of trading when you get it right, provided the risk management is on point.

But what do I know, I'm just a newb who never traded.

 

[taowave]

Selling premium is not an edge...

Better risk management is the edge,and as you said,easier said than done...

 

[panzerman]

I find statistical option premium selling as a pretty good edge in the markets that one could implement, provided they manage losers well. The trades are high probability, though the risk/reward isn't that great. Best to take profits once your reach 50 percent of your max profit (50 percent of total premium received). Manage losers by either closing at a loss of 2x credit received, or rolling the trade into the future, though this depends on account size, risk tolerance, undefined risk vs defined risk strategies etc..

The thing with this kind of option trading is that its more in tune with human nature, which wants to take profits fast and doesn't mind holding onto losers because they think things can go right again (is the case when your trading a narrow spread or one of your short legs on a spread is just barely ITM and you want to roll it into the future).

Traditional kind of trading is more counter to human nature i.e. cutting losses quick, holding winners long. It takes some work to be successful with this kind of trading since it plays with your emotions and attachment to money, requires a system that works and the skill to trade it profitably, and probably more in-depth analysis is involved. Though I think the risk/reward is better for this kind of trading when you get it right, provided the risk management is on point.

But what do I know, I'm just a newb who never traded.

If you insist on selling options, look at selling the ones where you maximize probability of profit x (reward/risk). In theory, that should work out better than just having a high probability of profit. I say better, but I'm of the opinion that selling option premium only will ultimately result in disaster.