Guru's pursuit of the Holy Grail

Discussion in 'Journals' started by guru, Aug 26, 2020.

  1. guru

    guru

    I've been delaying creating a journal here because I wasn't sure I'd have anything substantial to say or offer. I also hate writing essays, while English is (or was) my 2nd language, and I'm much better at just briefly answering questions. I was also concerned that I won’t be able to disclose my trades or strategies, so my journal may only contain my performance, which until recently was mainly experimental.
    But I never provided much intro on ET either, just slipping bits of info into my various responses to other posts. Thus maybe it's time to start a small journal, more in style of a blog, which I may use at least as a spot for occasional thoughts and updates. Will try to keep my posts brief.

    I'm coming from tech industry where I've created several small and bootstrapped startups, each based on coming up with original solutions to various problems, mostly being tools for software developers and web designers. At least of them had 250K users and generated 8-figure profits. But nothing lasts forever, especially with fierce competition and everyone copying everyone else in tech. After a while you just constantly defend your turf. At some point I've had to decide whether to work on another startup that would be my end-game, or park some money in the stock market and write a program that would grow it over time. In the end I choose the stock market because it would allow me to generate funding for anything I may want to do later. Obviously I was arrogant, thinking "if some traders can make money trading manually or even by writing some trading scripts, then imagine how much I can make when I automate all their little strategies and load up my own bank account". It took me couple years of working on software that was supposed to find and extract trading strategies/edges/alpha out of historical data, but it found very little of usable and scalable edges. It manage to find potential edges in trading premarket, possible ETF mispricings, pair trading, trading the open, trading penny stocks, etc - but nothing that I'd consider predictive, scalable and powerful. There were always more things I could've worked on, but I can't stay focused on boring stuff or stuff that everyone else is doing. I was looking for the Holy Grail and either had it or had to move on.
    After testing hundreds of millions of strategies, and making improvements, and tweaks, and adjustments, I finally realized that none of them could become what I was looking for, there are no strong & predictive strategies or indicators, while any strategy that supposedly worked in the past isn't going to be very useful in the future. But some could be somewhat useful to day traders, so I started streaming trades/notifications on Twitter and Discord (for free) as "Deus Ex Trader".

    In the meantime, since 2017, I've been learning and studying options, sometimes staring 16 hours a day at the options chains and writing down notes, pasting screenshots into PowerPoint and ending up with hundreds of pages of option trade ideas, their performance, hedging methods, etc. Initially, in 2017 I managed to make $80K from pure option arbitrage (that I quickly automated ), and another $300K from trading options manually, often selling UVXY calls and buying UVXY put spreads. My goal was to learn enough to work on options trading software, but I got carried away with doing "too well" by trading manually and following other traders online, and lost all my previous profit in 2018 volmageddon. At that point I realized that I must stop following people on Facebook and Twitter and trading manually with them, instead needing to get my act together and get back to what I do best, which is technology, as well as always stay hedged. Later I became so obsessed with hedging that I wasn't able to make much more money anymore during the bull market (at least with manual options trading). But I've learned how to buy nearly-free hedges, so finally made some money during this year's 2020 short bear market. But I also knew that if trading options can be consistently profitable then I'd be able to write software for trading them. Therefore during last three years, I've also been thinking, analyzing, writing notes and formulas, calculating, and preparing to write software for trading options. As well as wanting to combine my previous stock trading software/experience with automated options trading.
    I also started to become a bit obsessed with Rentech's Medallion, at least in terms of knowing that if they consistently can make shitloads of money over the years, then at least this is possible and "Holy Grail" may exist. I also much enjoyed the posts of one of the top options traders I found online, right here on ET (@destriero) from whom I've also learned a bit about limiting risk and aiming for small but consistent profits. Not sure I can beat him, but finding something powerful in trading probably became my ultimate challenge and goal, and I knew that if/since it's rather not in trading stocks directly then it might be in options, or combination of both.
    I now believe I have found it.



    (taking a break)
     
  2. guru

    guru

    "I now believe I have found the Holy Grail." - so now the question is whether this is the arrogant me, hopeful me, or dumb me. I'm only starting to gather the evidence and what makes it difficult is the current super-bullish market where everyone makes money and thinks they have the Holy Grail too. So I was going to wait a bit longer with this journal but another friendly trader/poster here @ValeryN messaged me asking when I'll have my journal up, which helped me decide to start (with the above post).

    So where I am now, is a prototype software that analyzes the options volatility surface, extracts some information from it, then tells me exactly what options and option/stock combos I should trade. This is independent of my own opinion of the market and not requiring predicting future prices, thus it should work regardless of market conditions or bullish or bearish markets. Though of course it generates different trade ideas at different times, based on current volatility. In a way it may be described as volatility trading system, but not by selling VIX-type volatility, more along the lines of projecting volatility expansion and contraction levels, on any stock or index.
    A few things that it does or aims to do:
    - Perfect balancing of Delta, Gamma, Vega, 2nd order Greeks, etc - without understanding or calculating any of them. I utilize my own math but B&S can always be used later to measure the Greeks.
    - Arbitraging volatility smiles, skews, inefficiencies and market microstructure mispricings.
    - Trading index and equity options without knowing or caring which way the market will turn.
    - "solving" VIX, UVXY and VXX.
    - Profiting off of hedges (VIX options) even when they aren't used.
    - "Betting" on and between earnings with an edge of 75% win rate and average win higher than average loss.
    - Empirical, statistical and mathematical option price projections all matching each other.
    - Creating complex option orders with legs across multiple strikes and expirys, with the highest reward-to-risk possible.
    - Trading options efficiently and across underlyings.
    - $Billions in high-performance trading capacity.
    - Extensive hedging like Universa.
    - Reasonable margin utilization, within the limits imposed by Interactive Brokers.

    I now have most of the above implemented and it seems to work beyond my wildest expectations, but we're in such a strong bull market that I have to wait to see what happens during pullbacks, flash crashes, and bear market(s). It's not fully automated because some trades can be a bit complex involving 4-6 option legs with different strikes, quantities and expiration dates. Rarely they are basic spreads or butterflies. I'll need to either find or write order execution software to fill those trades, but for now trading some simpler ones manually, while also manually splitting more complex ones into multiple smaller trades.
    I currently have about 670 different option combos in my account, and 300+ individual options. Mostly on SPX, SPY, RUT, UVXY, VXX, VIX. Here is a sample, filtered by "SP":
    upload_2020-8-26_21-33-2.png

    upload_2020-8-26_21-34-1.png


    The performance for this account is up 50% during the last 2 months since I started trading these options. This is my options-only account, meaning I have other accounts for trading stocks and penny stocks, so this one doesn't show much activity until the last 2 months.
    Previously I only traded it a bit in March/April where I made some money from (nearly free) hedges, but later lost it betting on crude oil (selling $1-strike CL puts) that went negative, so I went back to working on my options trading program, which I then started utilizing less than couple months ago in July. Now I finally don't have to guess anything, just rely on my program.

    [​IMG]


    Here is IB's summary of my performance vs SPY since July 1st:
    [​IMG]

    [​IMG]

    [​IMG]


    A lot of my performance has to do with the current bull market as I mostly trade SPX/SPY & UVXY options, with just a bit of TSLA and earnings, rarely losing.
    SPY is up about 8% in the past 2 months, so I'm mainly multiplying its returns and I'm correlated to SPY/SPX. But at the same time I have strong hedges that should kick in when SPX quickly drops by 5%, so in theory I should be less correlated. That's what needs to be seen, and I may still need years of trading to see what happens during various market conditions.

    I also trade options on oil, gas, and gold ETFs, with some options needing several months to profit, and I may fine tune those in the future.
    Also planning to trade options on futures, as well as option combos with legs across different underlyings (that will be fun).

    I'm utilizing margin quite heavily and may need to move some money from another account to have more margin in case the market drops and before my hedges kick in. I do expect up to 20% loss before the hedges start working, but not sure, aiming for less. I'm scanning for pockets of risks that sometimes get worse and other times better.

    And I do see people on Facebook and Twitter making 100%, 200%, even 2000% in the last few months, usually with small accounts and trading TSLA and tech options, so my 50% may not look impressive to others, in this market. I only know that my approach is the most unique I've ever seen or heard of.
     
    Last edited: Aug 27, 2020
  3. Atikon

    Atikon

    Rooting for you :)
     
  4. Well, the first question is - why options instead of delta-1?
     
    .sigma likes this.
  5. guru

    guru


    Because my current delta and target delta is not -1 ?
    And because I don’t know anything about what other people do with delta, and my alpha is in solving the intelligence bias - outperforming those who are so intelligent that they know exactly what to do with delta but in the end aren’t profitable. ?
    :)
     
    Last edited: Aug 27, 2020
  6. toshiaki

    toshiaki

    I don't think people that are directionally correct yet unprofitable are the intelligent traders. Probably closer to redditors like me a few months ago before I started learning about options - aka dumb retail.
     
  7. Turveyd

    Turveyd

    Above my pay grade hugely, lets see how this pans out!!
     
  8. guru

    guru


    It’s really both to a degree, or at different times. I’ve seen some most intelligent people give up on finance and moving to tech industry instead, while others may work for firms like Bridgewater that are doing ok but not as great as people imagine hedge funds should be doing. I’m sure there are plenty of exceptions and very successful firms and traders.
    Though my point was a bit tied to Robert Mercer (of Rentech/Medallion) who likely was very intelligent but attacked by other people who felt they were even more intelligent because they’ve studied speech recognition for years and developed related science and formulas, and knew exactly what to do. While he came in and didn’t use any of “their science”, just ran some statistics or machine learning. Yet he beat them all and showed them that “their science” is pretty much worthless (then he was poached to work for finance). To me that’s the intelligence bias, because knowing too much clouds your view of how to do something differently. You simply do things the way you’re taught.
    Btw, I don’t feel “too intelligent” and wouldn’t be able to solve any cute puzzles given at finance firm interviews. So my only tool is persistence and trying to do things 20 different ways, looking for clues of potential solutions to problems.
     
    Last edited: Aug 27, 2020
    beginner66 and ValeryN like this.
  9. ValeryN

    ValeryN

    Glad you started!

    Hard and smart work does pay off.
    No one ever knows if their stuff will keep working in the future.
    Enjoy the ride.

    Val
     
  10. thecoder

    thecoder

    @guru FYI: the last 4 images in your 2nd posting do not show up.
    And of course: congrats to your recent successes in the market. Just keep it up. cu.
     
    #10     Aug 27, 2020
    guru likes this.