Long-scalping equity options against time decay and market drift

[fullautotrading]

If you say you have a maxDD of 3%. What does this mean? In your world you don't have DDs. Every player end their world in profit

Every player will have its own DD (as large as it gets). Actually, most of the time a player exists in DD only. Because as soon as it makes its profit, he "dies" and is even forgotten by the scalping/hedging engine.

Sad destiny. Almost metaphor for our human lives

 

[dorietrading]

Haha.
I reverse also risk bij converting written puts to written calls. Also lowers the margin.
Happy trading!

 

[fullautotrading]

This evening I have been working on another little visual improvement.

I have added a small indicator of the "riskiness" of an option. A riskiness gauge for each option. This is pretty useful to see the situation just with one simple glance when one is rushing to supervise the folio or many folios (see top right gadget):

Clearly, this is just a custom indicator that, in this case, is trying to mimic my perception of the "riskiness" of the instrument (based on: distance from strike and days to expiry, DTE).

This is just a preliminary implementation and I believe that with usage one can surely come up with refinements.

The little margin gauge is also in place and pretty useful to have an immediate perception of the global margin situation

I am also curious about how you would implement your own indicator ("option riskiness"). To see if coincides with my idea.

Anyone?

 

[fullautotrading]

A straightforward way to make an intuitive assessment of the "riskiness" of an option could be based on the distance between the strike price and the price of the underlying. But, of course, it must also depend on the remaining days until expiry.

For instance, say that we have 30 days to expiration. We could, for instance, consider (statistically) "safe" a certain % distance. Let's say, for instance, a 40% move of the underlying. Clearly, if, instead, only it's only 1 day to expiry, then 40% would be way too exaggerated. We could consider it safe a smaller distance. Say, for instance, 10%.

A simple index that reflects this sort of assessment could be based on the distance from the "safe" % distance, obtained by simple interpolation (for instance, linear) between these two different "assessment points".

This would be quite straightforward and of immediate intuitive interpretation. This is essentially what I have implemented so far in my custom gauge.

In particular, I have coded it in such a way that the middle of the gauge represents a "safe" distance. While going forward, the underlying price is "too close" to the strike.

Clearly, this can be easily tuned to reflect personal preferences by changing the reference distances at the 2 key "assessment points".

Some practical examples (from the options in our folio):

 

[fullautotrading]

Starting our 100th day of trading. The mkt has been going down during the last few weeks:

Folio situation:

With 63,6% of current funds usage (PNL 61K currently).

All our options are pretty "far" and essentially on the "green zone" of our new risk gauge.

Except for this one which is in the yellow zone (see top right gauge):

ES FOP 20220520 3460 P GLOBEX 50 E-mini S&P 500 [EW3K2 P3460, 529587863, mult: 50]

and which is taking about 220K maint margins.

Now. since the situation might potentially (even if with low probability) get uncomfortable and, after all, the option, is in profit, to be extra prudent, I am going to close this layer. No need to be too greedy.

Ok closed now:

Margin's situation now looks much more comfortable and, in case, we are ready to thrive even in further moves downward of the market:

 

[fullautotrading]

It turns out it wasn't a too bad decision to free margins as the market has been going further down:

The fact that we keep "distant" allows us to enjoy relatively smaller volatility and still grab decay which protects us from large dd:

and actually, our PNL even increased with respect to the last time we checked, even if Es decreased, and we have plenty of funds to hold on even further moves down and wait for the options to bring home their profits.

Two options are expiring in a few days (8 and 11) so tomorrow (today actually, given the hour) we could actually start another couple of layers.

 

[fullautotrading]

Quite busy doing some more enhancements (I will explain below) and monitoring all my "investors" (everybody in profit). Anyway, let's take a look at what is doing our ET "illustration".

Es has been recovering a bit since the last time we looked at it on Friday:

Global situation of the layers:

106 solar days so far. Current PNL $70.9K. Commissions: $9.2K. 70% funds in margins.

I have now added a few icons to make it quick to identify the layers which are now definitely closed in profit ("green lock") and those still running (red or green "gear") ["gray lock" means still to be activated for auto trading, so just getting data feed].

Clearly, by strategy design, every red gear will eventually become a green lock , because we will roll a layer until this is verified.

A few layers are expiring in a very few days. For example, this one expires in 6 days:

ES FOP 20220523 2900 P GLOBEX 50 E-mini S&P 500 [E4AK2 P2900, 558704178, mult: 50]

Those currently running will expire in:

6.43 days distance: 28.79%
8.43 days distance: 28.80%
14.43 days distance: 41.07%
14.43 days distance: 36.15%
17.43 days distance: 28.80%
31.43 days distance: 41.07%
44.43 days distance: 41.12%

Margin usage is at the moment above 50%, but it does not make us uncomfortable at all as we have many expiring layers, all far away.

 

[fullautotrading]

Week ending with an even more marked decline of the S&P, with exception of the very few last minutes on Friday closing, where there was a (relatively) remarkable bounce:

Last prices arrived: 3902/3902.5

Not the easiest market to trade, but we are still holding on fine in the bear market with a current PNL of 68K (commissions about 9.5K):

https://www.reuters.com/markets/europe/bear-market-beckons-us-stock-slide-deepens-2022-05-20/

3 layers expired on May 20 (Friday). These were all positive.

Most of the (3) layers which are going to expire did not make it and are ending up with scarce or negative PNL, Therefore we will need to roll them. I will wait for the expiration to perform the "transfer", in order to grab the spread.

This is an example of that, expiring in 3 days (26% away):

ES FOP 20220525 2900 P GLOBEX 50 E-mini S&P 500 [E4CK2 P2900, 559318544, mult: 50]

On Friday I did transfer another option which was getting close to a unitary price and still negative due to 3 stop orders which had eroded practically all profit.

So I transferred:
ES FOP 20220603 2900 P GLOBEX 50 → ES FOP 20220630 2700 P GLOBEX 50

That ended up to be a good move because just after the transfer the price first spiked up, thus recovering all the stop-loss order, and then reversed ending up with a profit. At that point I just closed the layer, looking now like this:

What one can notice is that some volatility is beneficial to the scalping action. However, when there is not enough fluctuation one can end up with too much hedging action and "stranded" buy orders, which can reduce the PNL. So some practical experience is useful to determine the right kind of volatility.

I am going to make some slight changes to the "scalping/hedging rules" decreasing the maximum number of open "stranded" buys to 2 instead of 3. This could increase a bit the DD but also reduce the necessity of rollovers of layers ending with a too low profit or slight loss.

After all, 2 overlaid buy players are usually enough to provide a decent amount of protection and scalping action, considering that the sell "players" are constrained to 4 and we keep the strike quite far away from the current price.

 

[fullautotrading]

Today we broke our last high-water mark, by touching 75.7K PNL.

Currently, our net PNL is 74.2K (115 days so far), and we have also spent almost 10K in commissions.

ES has been slowly moving upward, which clearly help to crash our options prices:

Today I have rolled a couple of layers which were ending in a slight loss.

One is the following, where you can clearly see the "information transfer" (or rollover), on the right:

Transfer: ES FOP 20220624 2800 P GLOBEX 50 → ES FOP 20220819 2750 P GLOBEX 50

This quickly became slightly positive just after the transfer.

The second one instead has still several stop-loss orders to recover:

ES FOP 20220617 2400 P GLOBEX 50 → ES FOP 20220729 2800 P GLOBEX 50

This was a pretty "unlucky" layer, but we will "roll" it until fully positive

In the meantime, I have been doing more improvements to the interface (as you can probably notice from the screenshots) and to the scalping/hedging game and added some amazing functionalities (which is better not to advertise too much publically

From now on, I will use around 60 dte (or more) options, as one month does not seem good (price too low, too little time to recover stranded buy orders and to the scalp the corrections). Also before getting to a low price (1-2$) it's better to "transfer" anyway, as the rest is mostly a waste of time (all spread).

Pretty good so far in general, as everybody is in profit and we are going strong forward.
This approach does require patience but the DD level is generally quite comfortable.
One just needs to watch carefully margins and don't be greedy, and we have our gauges now to help us with that

Options are certainly extremely challenging to automate, but on the other hand, they provide the kind of flexibility in "modulating" DD that you cannot achieve with any other instrument.

Especially coming from the roller coaster of scalping futures in the past, this feels more like a walk in the park... Not too bad for the broker too, enjoying fat comms...

 

[fullautotrading]

Today we reached another PNL peak, with ES rising above 4000. PNL touched actually $ 85.4K, while at the moment is $ 77.6K (about 116 days elapsed).

The options that we "transferred" (rolled) yesterday:

ES FOP 20220624 2800 P GLOBEX 50 → ES FOP 20220819 2750 P GLOBEX 50
ES FOP 20220617 2400 P GLOBEX 50 → ES FOP 20220729 2800 P GLOBEX 50

are now respectively:

ES FOP 20220819 2750 P GLOBEX 50 E-mini S&P 500 [EW3Q2 P2750, 509909131, mult: 50]

ES FOP 20220729 2800 P GLOBEX 50 E-mini S&P 500 [EWN2 P2800, 542609194, mult: 50]

From the PNL, still negative, the second one would not seem to have done much "progress", but it's just an illusion created by the huge spread at this hour. (The spread alone, in this case, is worth 2.5K)

Also, the layer that we have seen on Sunday, expiring negative, now has turned positive after transfer:

ES FOP 20220525 2900 P GLOBEX 50 → ES FOP 20220831 2750 P GLOBEX 50


Margin usage is a bit too high at the moment (considering we want to keep funds usage most of the time around 50%) but I am momentarily allowing it, as we have 2 layers expiring in 5 days.

(In the future, I will avoid bringing the layers to expiry because it appears to be just a total waste of time and resources in the last few days of options life. Better to close and roll when the price is not too low.)