Long-scalping equity options against time decay and market drift

[fullautotrading]

We are still doing fine and according to plans, even in the middle of the storm.
https://edition.cnn.com/business/live-news/stock-market-news-russia-ukraine-030722/index.html
Actually, it's good to perform this test under relatively tough conditions.

ES situation:

I am noticing that, at least visually, among the various ES options I am looking at, those belonging to the class "EW" seem noticeably more sensitive to underlying moves, with quite "schizophrenic" spikes, that are not present in similar or even closer options.

For instance, look at these 2 layers:

The first one is:
ES FOP 20220323 3600 P GLOBEX 50 E-mini S&P 500 [E4CH2 P3600, 546996532, mult: 50]
expiring in 15 days and 14% away:

this second one is:
ES FOP 20220414 3400 P GLOBEX 50 E-mini S&P 500 [EW3J2 P3400, 495664410, mult: 50]
expiring in 37 days and almost 20% away:

(It looks like that, unless we like steep spikes, it's better to avoid this class. )
I need to dig more into the reasons for that. Let me know if you have more info.

After the quote filter, I have also been adding a few quotes and spread checks, to make absolutely certain to get the "locally best" prices for our orders.

 

[fullautotrading]

S&P has recovered a little bit, and we have less "pressure" on our instruments.

The recent market decline has allowed us to do a lot of long scalping action, which has various advantages:

- reduce margin usage
- reduce drawdown
- add additional profit

This kind of approach, since it is merely based on scalping against time decay and market drift (that is, we get both the theta and delta), is quite sound conceptually because it is not based on some arbitrary hypothesis (=delusion) that one can use statistic tools to predict the market. Unfortunately, Statistics is good for modelling and simulating, but not for prediction in this specific context, where the price does not carry useful information for predictions.

Clearly, there is still "risk" and we can still fail to get the desired profit, and the only reason why this can happen is margin shortage. (This can be the result of a capital shortage and/or options being "too close".)

Clearly, the higher % of the account funds we use for margins, the higher the risk that we get stuck in our positions and are forced to take losses, or we get liquidated.
In real applications, therefore, one should maintain a reserve to be safe (say 1/2 or more of the account funds) and consider suitable strikes and maturities, or be ready to commit additional funds.
In this illustration, I have been taking more risk than that. For this reason, I am now closing in profit some layers, just to be more prudent. I have for now "suspended" this layer (in profit):

and am letting run all the other ones:

Let's take a look at the layer that has taken the most "heat" (an EW option):

Anyways it has also scalped a lot of extra profits.

Here is the other one momentarily in profit:

ES FOP 20220323 3600 P GLOBEX 50 E-mini S&P 500 [E4CH2 P3600, 546996532, mult: 50]

The other 3 ES layers are similar. In particular, if we consider further maturities and strikes, the situation remains quite comfortable even in bad mkt scenarios: eg:

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

NQ is the most "problematic" due to its very wild quotes and spread. Not worth trading. I will shut it down for good and switch when I see some profit.

In practice, the whole approach can be pursued with ES alone. And possibly SPX (or SPY), if we need strikes not available with ES options.

 

[fullautotrading]

Yesterday I have carried out another "information transfer" from the
ES FOP 20220323 3600 P GLOBEX 50 E-mini S&P 500 [E4CH2 P3600, 546996532, mult: 50]

which was expiring in just 13 days to a slightly far away maturity (20 days):
ES FOP 20220331 3600 P GLOBEX 50 E-mini S&P 500 [EWH2 P3600, 518635917, mult: 50]

Just enough to allow a "stranded" buy order ("buy player") to close its "scalp".

This is the resulting layer:

(The buy order that was closed is the BUY 20 @ 5.75, the rightmost blue dot in the picture.)

ES has recovered a little bit, which allows recovering margins and allocation on new positions. So far, all is going according to plan and as expected.

ES FUT 20220617 GLOBEX 50 E-mini S&P 500 [ESM2, 477836957, mult: 50]

 

[fullautotrading]

The current situation with ES:

taking advantage of the momentary small rise, I am going to close in profit one layer (locking 8.9K):

ES FOP 20220331 3600 P GLOBEX 50 E-mini S&P 500 [EWH2 P3600, 518635917, mult: 50]

I know. I could have waited for it to crash since there are only 16 days remaining. Point is that am using relatively too much margin, and I wish to have some room to trade in case ES drops a bit in the next few days. It's just a precaution. Never mind, if ES goes down we will have plenty of occasions to load up on other layers. (Or even to reopen this one.)

The SPX options are "too far away" and "insensitive" and I am getting tired of them. I am waiting for an occasion to close them. In the meantime, if ES goes down I will transfer at least some of them to a closer maturity.

 

[fullautotrading]

I have also let another layer close in profit, in order to have margins to trade the other layers which still need to come to a profit.
To close it, I just set up a take profit at 6.5K as you can see on the take profit dialog box on the top left of the picture.

ES FOP 20220323 3800 P GLOBEX 50 E-mini S&P 500 [E4CH2 P3800, 546996676, mult: 50]

The bot sent gradually various (4) partial orders at suitable current ask prices, in order to fill at the given target PnL (orders are: 10/43 @ 3, 7/33 @ 2.95, 3/26 @ 2.95, 23/23 @ 3.05).

 

[fullautotrading]

Today the market is moving up another 2%, which allows us to recover all the drawdown (mostly caused by ES FOP 20220414 3400 P GLOBEX 50) and get into a positive area (about 14K profit currently).

Before the end of the day, I am planning to close all the SPX layers that are positive, so that in the next few days we can finally activate new ES layers. (NQ is still bleeding, and I hope to be able to remove it soon.)

 

[fullautotrading]

This morning (here in Rome), the situation looks finally better.

I closed all the SPX options with a tiny profit so that I am now free to allocate on the more suitable ES.

But I am still unable to close NQ, because of wild quotes and spread (never mind, it was served anyway as an experience and to make a more robust quote and spread filter):

The overall situation is now as follows:

with about 18.5K profit (about 45 days).

This first round has been useful to understand the behaviour of these instruments.

So far, it looks convenient to work with maturities not "too far" away, in order to have sufficient "action" in the price curve and in order to make the long scalps. But we also need to use strikes as far as possible, in order to have less impact possible on margins.

The type of scalping action that we like is something like this:

while, with too little volatility, one may get something like this:

which obviously is less ideal and defies the purpose of the scalper (we waste time while tying otherwise useful resources.).

I am going to operate on ES alone wherever possible (that is unless a "rollover" to extreme strikes is needed and ES does not offer them), and, if volatility remains relatively high like now, work with expiries about 2 months away (with strikes at least 40% away, hopefully). (Remember that the mkt has several circuit breakers in place anyway.)

 

[fullautotrading]

Today, the situation is not much different from yesterday. ES is another 1% up:

PNL is currently about 17.8K. Sure we have missed a lot of profits by closing early many layers, but better safe than sorry, and we can't see in the future

NQ still impossible to close due to "monster" spread and unfavourable entries. We sure have wasted a lot of resources in this rough start, but on the other hand, acquired some good experience and information for the future.

At this point, I would wait for some retracement of the market index before starting hammering again with new layers.

btw, thanks a lot for the many views!

 

[fullautotrading]

End of the week. ES still up:

ES FUT 20220617 GLOBEX 50 E-mini S&P 500 [ESM2, 477836957, mult: 50]

We have been getting the due profits from all layers, except NQ (huge spread). Currently, the total PNL is about 24.7K (total of commissions about 4.4K) after 45 days:

Today. I have been adding a little but useful feature, which is grouping/ordering the instruments also by maturity in the treeview (left side of the picture). This makes it more comfortable to keep track of the expiry dates:

Enjoy your weekend.

 

[fullautotrading]

This morning, Mar 22, we are up 28.8K:

I am still unable to close NQ because of the "monster" spread (lesson learned!). But I am close anyway.

Some layers are very close to expiry but still deep OTM. In such a case it might be convenient to let the bot overload a bit the position, to grab the last few cents:

I have already prepared the next layer that I want to activate, but I am actually waiting for some retracement of ES, while the other layers are expiring:

ES FOP 20220520 2600 P GLOBEX 50 E-mini S&P 500 [EW3K2 P2600, 495662700, mult: 50]

this is about 42% and 60 days away ($3.2)

ES:
ES FUT 20220617 GLOBEX 50 E-mini S&P 500 [ESM2, 477836957, mult: 50]