So it may all come down to continuous casino-style betting on stocks and options, using Kelly-sized bets. There really isn't anything else that math gurus at Rentech could or should be doing.
You’d make specific bets using options, usually without strong direction but not necessarily directionless, then keep continually re-betting, which may be done by scalping shares against held options and odds, vs hedging to zero delta. Although I guess delta-hedging, in theory, is also based on odds and since it makes money then someone could say they’re already doing it. The difference may be in being able to increase the odds by making specific bets and with proper size, vs MMs simply taking all bets and having tiny advantage.
This approach can also be used with stocks, though it may simply mean holding Kelly-sized shares/positions, occasionally readjusting. This should work somewhat differently from modern portfolio, and can even work on a single stock.
Now it’s just the matter of estimating correct odds, and I think I’ve got this, which also gives me the end goal and vision. I’m starting from beginning and redoing everything I’ve done in the past few years. First I’m building a new stock strategy extraction/analysis/testing system for stocks because it’s simpler than options and I can test and fine-tune it before using it for options. For now it's basic statistical analysis that allows calculating Kelly bet size for holding a stock, but it also allows me to extract certain natural behavior of stocks (Markov?) and produce theories that later can be tested and validated. This also results in zero overfitting, to the point that now none of my newly extracted stock strategies can beat the basic strategy of simply holding shares...
So in the end stock picking and holding shares seems to be a much better approach than trading, though not necessarily.
In one way I now see clearly that holding shares means that you’re always on the train and don’t miss getting back on it if you exited earlier. While trading means getting out of Amazon or Tesla, missing a move up, then never catching them again at the previous/lower price. This is why trading doesn’t work for retail traders, especially as they just want to get their favorite stocks "cheaper" and keep missing upward moves. In the end successful trading means always looking for a greener grass, and that’s what makes it so difficult.
So now I’m ending up not finding too many stock trade ideas and strategies with my new system, except for just picking stocks that naturally perform well, such as SPY. But this is a great starting point and a "clean slate" because now I can finally see true problems and focus on solving them, vs previously most problems could be solved by "fitting" a system to any data.
On another hand, I'm also starting to see some potential trading/betting opportunities, sometimes in surprising places like trading UVXY long. It may not be worth trading due to low RoMad and low median gain lower than avg gain, but at least I'm getting new ideas for hedging, which potentially can be enhanced later using options.
I'm also now seeing and learning why and how high leverage can be useful, especially when able to get high RoMad but low avg gain, though I don't think I'd want to trade that way.
Anyway, now I see there aren't too many sources of alpha (without external information) in the general universe of stocks, except for general odds of holding some, or even holding small slices of majority of stocks. However, now I have a base system that naturally prevents overfitting and makes it very difficult to make money trading, which is a great starting point providing actual problems to solve, vs my previous stock trading system where anything could work with a bit of fitting. And when applied to options, the new system actually gives me a ton of stuff to work with.
Now my strategy development consists of extracting natural behavior out of certain stocks and options, as well as potential trading methods & signals that naturally fit the behavior of those stocks (hidden Markov?), which then become theories that can then be tested and confirmed. And I even started using RealTest to validate a potential strategy, and see it as quite a nice, useful tool.
Though even without overfitting, the behavior of stocks and markets may always change, so having temporary advantage isn’t the holy grail, at least for stocks.
Trading-wise, I’m slowly making money trading options but not reporting much recently because I realized I’ve had a false start earlier, and still a lot of work to do. Basically I initially started by testing my new options strategies and making some money and being able to defend my positions when the market wasn’t moving much, then suddenly the market started going up and I was quickly making money and putting new trades on every day, without realizing how much it’s due to the market vs my strategies. Now I’m back to slowly grinding forward and let the market work as slowly or as quickly as it naturally does. I’m up minimum 5% in the last 30 days, seeing 10% at one point, but it fluctuates a lot due to still being sensitive to market moves, and due to holding many OTM and LEAP combos that show different value each day, for example LEAP OTM butterflies showing value between $1.50 and $8 depending on the day, while I can’t buy them cheaper or sell for more than around $5/ea.
The only problem is that I’m spending too much time... trading, which means staring at various option ideas, analyzing them, picking some to trade, then analyzing stats for them, defending losers, deciding when to close positions, etc. This all would be great if I had interest in trading, but I'm having more fun figuring out solutions to problems, and just exploring new territory. At least after trading options based on probabilities for a while, it’s become obvious that the only way to trade on large scale should be mathematical (though not necessarily using the same math that others use), and the best way to do that with options may be by continuous betting. Once anyone knows the odds on their various setups and trades, then it all comes down to using Kelly’s criterion for proper position sizing. Though right now I have too many setups to choose from, so that I don’t need to bet big on any of them, just taking small option positions in various companies, ETFs and indexes.
At the same time I’m starting to pick a few simple short-term option strategies that I like for their liquidity, repeatability, scalability, and great potential overall for trading.
