Hi TskTsk, Thank you. > you do not take losses... That's right. > but rather hedge them with correlated instruments There are several sources for hedging I am currently using. These are, in order of "importance": - "Player superposition" (on the same layer) - "Layer overlay" (same instrument, corr = 1) - Possible use of options ("protective structures", "protection units") - "Layer overlay" (different instruments, high corr, | corr | > c) My current belief is that the first "source" can be so "strong", as to "obliterate" all the others, and possibly to make them even unnecessary in most situations. (But that is an open area of research: it's essentially the "strategic dominance hypothesis", I talked in a previous post, on p.15)
Thanks, I've read the G-BOT page with interest. Two questions however, you mention using options for a "memory full" stoploss, but here there is a time decay and often negative volatility risk premium which means you would be losing on theta. Does the program account for this? Also, in the talk about order clouds, I'm still not sure what type of orders are submitted. I assume to make this work, one would potentially need to have limit orders open on both sides of the same instrument, and then one would need MM status... Also what if you use instruments with correlation <1 and the correlation breaks down?
> there is a time decay and often negative volatility risk premium which means you would be losing on theta. Does the program account for this? Yes, the "protection unit" placer selects pairs of options in such a way to be theta positive. This is explained on posts on p. 7. See also the relevant post on pp.13 (manual option selector) and 15 (option dynamics). Anyway options are just 1 possible mean to hedge some situations, if one likes them. It's not mandatory. I made these examples of use to provide possible hints and suggestions and inviting people to stay open minded. > I'm still not sure what type of orders are submitted By default it's always LMT orders (the default can be overridden by the manager, if he wishes so). > I assume to make this work, one would potentially need to have limit orders open on both sides of the same instrument I do not understand this. Remember that the "players" are "virtual" entities. They are just conceptual devices to easily operate on the buy/sell averages, while retaining in memory the past trading information. > Also what if you use instruments with correlation <1 and the correlation breaks down? Correlations (which I call in this case "<b>codirections</b>", to remark the fact that I am <b>not limited to the linear component</b>, cf., http://www.datatime.eu/public/gbot/MetricsForAlgorithmicTrading.htm) are computed <b>realtime</b>. Of course, if the <b>absolute values</b> goes under a threshold fixed by the manager, they are automatically ignored.
Thanks I see now that options are only used to hedge deltas (thetas neutralized). I was confused by the idea of an "option hedge" because usually that means worst-case scenario / tail risk hedging. Still not sure I understand the order cloud concept. I was under the impression that an order cloud is a "cloud" of several active limit orders arranged a spesific way. How exactly does the order transmitting system work? Does it transmit one and one order out as price approaches the trigger point, or?
> I see now that options are only used to hedge deltas (thetas neutralized) That's right. Since, by assumption, we don't want to allow ("memory-less") losses, we are not allowing paying time decay. In case of assignment of some option, the corresponding position will be transformed ("fill projection" facility) into an ordinary player and will only close in profit (as, by definition, all players). > Does it transmit one and one order That's right. The app never leaves "presubmitted" orders (in automatic mode): all automated orders are either executed "immediately" (say, within a given reasonably short timeout) or they are discarded (ie., there will never be "several active limit orders ", but only one). [There is actually the possibility to "presubmit" orders too, but that is a discretionary feature. Or, there is the possibility to "enqueue" orders which will be followed automatically by the app in the future, but this is also another discretionary feature, which we can ignore, for simplicity, for the moment.] All the colorful squares or circles you see in the "order cloud" (in "order-view mode") are only (already) executed orders (blue=Buy, red=Sell). Each order placed is actually the result of the activity of the logic layer created by the superposition of the "virtual players". In practice each player will have its own requests like for instance, "open" some positions, or "close" some positions, and so on. All these multiple requests are "pooled" (algebraically) and channeled into a unique physical order each time (say at each tick, or in between ticks). Then, on execution, or partial execution, the possible fill is "redistributed" to the multiple players accordingly to their requests, thus changing their virtual states. If it can be more expressive, you can think of this like (mathematically) equivalent to having multiple independent "real" individual traders (they will be "partners") working on different and distinct accounts (possibly using the same financial instrument), but talking continuously to each other, and coordinating their actions for reciprocal "protection", while nevertheless also pursuing an "individual" profit, whenever possible, but assuming they are sharing a financial interest in maximizing the overall profit (say, they will share the sum of individual PNLs) and minimizing the overall risk.
A quick folio update (21 Jan) after the holiday. Today we had a pretty large drawdown (DD), with almost everything "loading up" and hedging (indexes, metals, energy). The top picture is the usual PNL view (this time I am not showing the other PNL components around, to make more appreciable the PNL DD.) The "net gain component" has raised to 70K, and that is good to sustain the "investment". A sign that we are hedging ok (in general, we always want scalping/hedging games that, to each plunge of the unrealized, make correspond an increase of the "net gain component"). <img src="http://www.elitetrader.com/vb/attachment.php?attachmentid=142366&stc=1&d=1390346015" />
Here is quick folio update. Definitely the worst day ever, with a monster DD. Had various mishaps with hitting the initial margin figure (too many layers loading up) and with orders being rejected on several layers and the gas instruments (ugaz, gasx) have rapidly escalated to a very large DD. I had to close manually (going manual) many layers to recover the margins. This is not something that should be done in principle, but I had not much choice. I closed many of the positive layers, letting open those in DD (so losing a big deal of the "net gain" component). I am now revising the order sizing rules, to impose a stricter and stronger hedging. I am also refining the automatic order resizing for the case of insufficient margins. It looks like the rule I have been using, that is hedging with 1/2 of the current position imbalance may be too weak for wild runners like ugaz and gasx. Ugaz, in particular, looks pretty hard to manage (also because there are no options.). I will change the rule from 1/2 to 3/2 (practically a position inversion) to block early the bleeding. Now the problem is to deal with those layers which have already run wildly out of control. We will see if I can recover them algorithmically, or it's better to restart a clean session with more attention to sizing and folio composition. <img src="http://www.elitetrader.com/vb/attachment.php?attachmentid=142403&stc=1&d=1390433069" />
Tom, Hedging a instrument with its options on a 1:1 basis is not efficient in the realm of your portfolio scheme. The exception is if trading from a JBO with cross margin relief than hedge using cross exchange options. ie. ES Future Options against SPY position. This will also focus and limit your world to the OCC cross margin eligible instrument list. Consider Using an index as your gauge and hedge risk and measure performance against this benchmark. Indices are typically updated every second and reflect all trades if their constituents in real time and will give you a more accurate picture of your results against the market. Every fund measures performance against indices and managers are compensated based on these figures. Consider adapting your correlation module to measure against indices may provide insight of what instrument plays can offset risk. Finally: I appreciate your transparency and honesty in reporting the ups and the downs in this journal. The Drawdown was a bitter pill and having to go manual at least allows you to trade another day. Be careful making too many changes dynamically.
Thank you Sam. Well if it were not sincere, there would be not much point making a journal. The purpose is also to grow from mishaps and errors and thus stay on top of them Many aspects of this test are still purely experimental (well, we never stop improving anyway), and I think it is above all the investor to be complimented for his courage and support. Yes, one aspect which can be challenging is to continually stay on top of dynamic corrections, changes and at the same time take care of a real folio with all its complexity. It's very challenging on one side, on the other side it forces you to grow fast and continuously regain composure when any mishap occurs. I will keep your suggestion in considerations. These wild instruments without options are a bit of a challenge, but they can be useful to better tune the hedging actions and sizing logic. Keep giving your suggestions and advice