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.).
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.).
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