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Notes:
My account seemed to be around $498K on Friday, but TDA recalculated option values overnight. This happens almost every night, so the value does fluctuate a bit from day to day. Some of my option contracts are illiquid, but not horrible in terms of getting in & out.
I’m 90% sure I have some (multiple) of the most efficient methods of extracting alpha out of options skew, including protection from jump risk. This can be confirmed mathematically, logically, and intuitively, meaning that the methodology can be understood and traded with a degree of confidence, even though it was found with the help of machine learning. I’m also 100% sure that I’m inefficient at utilizing it.
It’s easy to become cocky in a bull market when everyone makes money. I just regularly post my P&L online (on Twitter/X) due to confidence in the long-term sustainability of my approach. I definitely wouldn’t make so much profit without the bull market, but the goal was to get bullish at minimum cost, and it worked, just better than expected. In a whipsaw market I may be just trying to balance the account. I’ve also had decent wins on bearish trades and could focus on building bearish positions at minimum cost, which would then require a bearish market to make excessive profit. I still do mix in some bearish trades, while even some bullish trades may turn out bearish (I’ve lost money on those, then learned how to use them for hedging).
Most of my trades are at a debit and with limited risk, which is much more difficult to balance and continually grow than collecting credit & theta as many options traders do. Though, I also try to collect theta on those debit trades. And I enter some trades at credit, some with unlimited risk, sometimes offset with other trades with unlimited profit potential. Alpha often comes from combining somewhat different, even opposite strategies, sometimes at once, other times layered across time.
I face the risk of large drawdowns, but most of it is from large profits that build up. Meaning that I don’t expect to lose more than I put in (which can be 10% - 20% of capital), but if I make $100K, then theoretically I can lose that $100K if I don’t close trades on time. Also, as stocks get more overpriced, my new trades have an increased chance of failure as it gets more difficult to find alpha in a bull market, including the skew no longer expected to reverse from bearish to bullish. Thus, my % profitability is expected to decrease.
I started the account with $200K in Sept 2021 but didn’t trade as much until May 2023, as previously I was still researching and backtesting a variety of option strategies, often unable to get fills on my favorite trades. One of my strategies was making a decent profit, which was later offset by a different one that didn’t work as well as in backtests. Later I figured out the problem, as well as experimented with and finalized new strategies.
Machine learning/AI has very limited value in options trading unless accompanied by thousands of hours of back-and-forth interactions, continually analyzing problems and feeding new ideas and solutions to the ML that it can then re-test and optimize. AI can do a lot of things in terms of analyzing and summarizing data, but it won’t come up with hundreds of original ideas and solutions. It’s all about problem-solving, with ML being just one of the tools to use.
My original goal was to finalize research and find the optimal methodology of trading options, then proving that it works. Possibly I’m nearly there, except now trading and managing trades consumes all my time. It also became boring and mechanical, just reviewing millions of possible trades and placing orders for whatever I may pick. It can be fun when making money, stressful when losing, but also lacking purpose. I was going to publish some research, but then found more alpha than I expected, and many furus reselling everyone else's stuff. I want to code some new stuff, maybe an options trading platform, maybe release some alpha in chunks.
To be continued…
