Long-scalping equity options against time decay and market drift

[fullautotrading]

Ok, it’s your show and you can run it any way you please. But I remember your previous journal where I asked specific questions but received very vague answers, after which I stopped following. It’s very hard to envision how a system that is selling 50% OTM strangles can make meaningful risk-adjusted returns. Good luck anyway, I will put myself on mute

qlai I am sorry if I sounded vague. If I did, it was unintentional. As I said, English is not my native language.

Please do continue intervening and hammering with questions, as the purpose of these tests is to improve. I do not have any "truth" to distribute: it's just a quest and continuos refinement

I will also post pictures of the actual trades so we can discuss the details of the approach. We can also introduce variations to the algorithm if they seem appropriate.

Unfortunately, this approach is a bit "slow" and not much fun (as with bilateral scalping), but I will try to show the most salient events. I think this can be (made) viable to many smaller funds.

 

[newwurldmn]

Sure. I think I wrote it in the first post: "The bot is required to ensure that the instrument always has a permanent short position while also possibly doing long-only scalps"

So you are right now.

Please excuse and do correct me when I sound strange or unclear. Obviously English is not my native language

I took permanent short position means short a put and then buying stock. I would rewrite the post to be 1/3 as long and clearer

 

[fullautotrading]

As anticipated, we need to be patient because this is a slow game, and the main purpose is to create a steady profit with a possible drawdown that almost anyone can easily bear, without too much fear.

Now I will show some pictures from today. I just started the bot about 9 hours ago and activated a few instruments (options).

First of all, observe that these instruments are all independent of each other, and to follow the approach, you could look at just 1 instrument (1 "layer," as I call it).

The reason why I am using multiple layers, in this case, is just for testing purposes, to catch as many problems as possible in diversified situations. [Actually, today I already caught some unexpected technical issues (due to the monster spread of some instruments, and also already fixed) that I will explain in another post.]

So for now, let's just look at 1 layer. For instance, the following:

What is this?

This is an ES put strike 2650, currently about -41% OTM. Expiring in about 137 days. Specifically,

ES FOP 20220617 2650 P GLOBEX 50 E-mini S & P 500 [ESM2 P2650, 497966096, mult: 50]

You see, I have started the bot and, following the rules encoded, it has made 2 entries (the red circles). The red and blue lines are bid/ask prices. The distance between these entries, their size (which I call a "packet"), and their total number are algorithm's parameters.

In this case, the size ("packet") of each order is 10, and so far I have fixed a maximum of 3 of those packets.

If the price rises, the bot may make long entries but will always keep the global position 1 packet short.

I hope that, so far, this is clear. Let me know if not.

 

[fullautotrading]

I took permanent short position means short a put and then buying stock. I would rewrite the post to be 1/3 as long and clearer

Thank you newwurldmn. The posts here can be edited only for a little while. But, for sure, during this discussion, I try to do my best to make it all clear.

The permanent negative position is referred to the option itself (see if the previous post clarifies). (There are no stocks involved.) [Just look at 1 instrument].

 

[traider]

How much to license G-Bot?

 

[fullautotrading]

How much to license G-Bot?

Hello, traider. Thanks for asking.

I am not actually "licensing" the bot: it's more like a partnership.
What I do is just let suitable investors/funds (=enough capital in the account to justify my time, and to minimize the possibility of default) use it. Clearly, one understands that (voluntary) gifts are welcome when there is a profit

The instrument would be too complex to just give it to the general public, most of whom would have a hard time understanding all the functionalities (this is now about 20 years of work).
One by one, I need to take care of a few users. [Also, because custom adjustments may be needed. I also take care of the installation and initial guidance.]

So, as I see it, it's more like a very customized service for close friends

 

[cesfx]

So the bot would always be short naked puts and scalp by buying back those puts and re-enter short at the same or higher strike if you sold for a rally?

If I understood correctly, don't you need deep pockets/margin and plenty of patience and hope to deal with a serious market correction?

 

[fullautotrading]

update about the same layer as before

ES FOP 20220617 2650 P GLOBEX 50 E-mini S&P 500 [ESM2 P2650, 497966096, mult: 50]

it looks like that ES is better and smoother, for the bot, than SPX. NQ is terrible (huge spread, nasty price microstructure)

 

[fullautotrading]

So the bot would always be short naked puts and scalp by buying back those puts and re-enter short at the same or higher strike if you sold for a rally?

If I understood correctly, don't you need deep pockets/margin and plenty of patience and hope to deal with a serious market correction?

Hello cesfx.

that seems to be a correct description. Also, note that the sell orders themselves are allowed to close (their "take profit" size is a parameter, which, in case, I could set to let them open until the option price vanishes), provided the instrument remains short. [For this reason, currently, I have also set the bot, not to make any buy order under any of the currently open sells].

In addition, we do a perennial "rollover" in the sense that, when close to expiry, we "switch" (rollover and transfer all the previous trading information of the current layer) to a new option with a higher price (in principle, it could be any strike, any expiry and even any different instrument). This would also often allow to "close " the possible "stranded" buy orders.

About "deep pockets", it's all relative, clearly. But certainly, the prospective of ending up, in the worst case, on one (low) side of the market may help to bear the possible drawdown and improve the overall probability of survival.

 

[fullautotrading]

update about the layer shown before:
ES FOP 20220617 2650 P GLOBEX 50 E-mini S&P 500 [ESM2 P2650, 497966096, mult: 50]

For now, I am focusing only on 1 instrument to avoid confusion and to make it more clear that each instrument is a story in itself. (The reason I use multiple instruments is just for testing.)

As mentioned in the reply to cesfx, you can see from the picture, that the bot closed the first open sell order (I call these open positions "players"). The closing order (BUY 10 @ 14 LMT DAY) is the blue circle visible on the right. (This was issued because the bot "sensed" some possible change of direction). As said before, this kind of "take profit" is a strategy parameter that can be possibly changed and adds another source of scalping.
The second sell player (SELL 10 @ 13.5, the second red circle), cannot close, unless another sell player is open, because of the short constraint enforced (1 packet short).

The story of the other layers is not much different. [Apart NQ where I had a technical mishap or, more precisely something unexpected (caused by the very large spread and wild quotes), which was anyway useful to improve the robustness of the trading engine.]