[HN Gopher] Offline Algorithms in Low-Frequency Trading
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Offline Algorithms in Low-Frequency Trading
Author : hypomnemata
Score : 264 points
Date : 2021-01-30 11:51 UTC (11 hours ago)
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| lowfreqtrader wrote:
| If low frequency trading interests you, here's a project some
| people might want to check out:
| https://github.com/brndnmtthws/thetagang
|
| It's designed to sell option premium on major indices (like the
| S&P500 or NASDAQ-100) to generate mostly passive income, with a
| fairly reasonable risk-adjusted return. It uses a combination of
| strategies that involve selling naked puts and covered calls,
| which both have the same risk profile, but naked puts tend to
| have higher premiums.
| jkhdigital wrote:
| I've observed the opposite in cryptocurrency option markets;
| covered calls tend to net a higher yield than the equivalent
| puts.
| lionyo wrote:
| Where are you writing your options? Only the stablecoin pairs
| seem to be liquid
| nullc wrote:
| That is the normal behaviour for commodities. It's arguably
| reasonable that Bitcoin behaves more like a commodity than a
| stock, at least so far as anything is arguably reasonable in
| the realm of cryptocurrency.
|
| But maybe strategies involving puts will become more
| successful if we can convince more of the HN Bitcoin
| naysayers to sign up for LedgerX and put their money where
| their mouth is. :)
| lordnacho wrote:
| Ex pro options trader here. Looks interesting, and I've starred
| it, but it does sound like it's just collecting premium?
|
| If you're selling options, you probably need to risk adjust
| your returns a bit more than what's common:
|
| https://papers.ssrn.com/sol3/papers.cfm?abstract_id=377260
|
| That's by Andrew Lo, big name in the area.
|
| I'm sure you've also come across Taleb, who knows a thing or
| two about selling options.
| Goosee wrote:
| SSRN only let me view the abstract. Here's a link to the pdf
| that worked for me.
|
| https://alo.mit.edu/wp-content/uploads/2017/06/The-
| Statistic...
| JimBlackwood wrote:
| Do you maybe have some books you could recommend? I have a
| strong math background, so that's not a problem.
|
| I have a hard time finding courses or books that cover how
| these instruments work in some depth.
| lordnacho wrote:
| The problem is the books don't really tell you. They're
| written in this mathematical way that kinda obscures how to
| actually think about them practically. If you're more into
| math maybe stochastic calc will be just fine for you.
|
| Here we go anyway:
|
| Hull: Futures, Options, and Other Derivatives
|
| Natenberg. Don't recall the name, but this is maybe the
| closest to practical.
|
| Paul Wilmott, Quantitative finance.
|
| Taleb, Dynamic Hedging. Got a signed copy :)
|
| Also I think it's smart to read about instruments that
| aren't options, ie don't just cut to the chase. Time value
| of money, futures, forwards, bonds, swaps, equities. Then
| vanilla options on all those things, then exotics.
| pvitz wrote:
| Someone with a strong math background should cut Wilmott
| and go directly to Shreve: Stochastic Calculus for
| Finance II (or Bjork: Arbitrage Theory in Continuous
| Time).
| hackton wrote:
| "Natenberg: Option volatility and Pricing" I guess. Very
| instructive, but I have a slight preference for the Hull.
| They are both rather old but well explained. They give a
| very good starting point.
| icedchai wrote:
| Seems like it would be less trouble to buy QYLD (nasdaq-100
| covered call ETF), or one of the equivalent funds.
| kgwgk wrote:
| https://www.daytrading.com/selling-volatility
| WJW wrote:
| There's a fantastic quote in the book about the LTCM fiasco
| ("When genius failed") about how academics always want to
| short volatility because they have view of how society
| "should be" and it is not very volatile. IIRC, the quote was
| by some old grizzled options trader who used to have the same
| view but had been bitten often enough to internalize that
| volatility is much more common than beginners think.
| varyherb wrote:
| Genuine question, does this strike others as immensely off-
| topic? I'm curious if the parent commenter even opened the
| link. I'm sure there are applications of generalized knapsack
| problems (or dynamic programming generally) in options trading,
| but this isn't it.
| svmt wrote:
| I briefly looked at the README and code. The strategy is an
| implementation of The Wheel. Did you backtest the strategy
| including commissions?
|
| I doubt there is much left after commissions. See [0] for a
| backtest including commissions and [1] for a blog post from
| ORATS on how to backtest the strategy using the ORATS
| backtester.
|
| [0]
| https://www.reddit.com/r/options/comments/j3ofna/the_wheel_b...
|
| [1] https://blog.orats.com/backtest-basics-how-to-set-up-the-
| whe...
| opportune wrote:
| What many people don't understand about the relatively low-
| risk options strategies like the wheel or basic covered call
| selling is that, because they are low risk, they are less
| lucrative than many simpler strategies.
|
| The financial industry would not just leave that much risk-
| adjusted return on the table, after all. Just because a
| strategy is complex does not mean it is lucrative.
| RyanShook wrote:
| Have you been successful running this script/strategy?
| beezle wrote:
| Generally speaking, a seller of naked puts is looking to
| supplement income via a stock they are willing to own at a
| lower level. If you are not willing to take delivery, it is
| probably better to sell a vertical spread so that there is a
| built in stop out. Here I'm speaking of transactions of a
| reasonable premium amount, not 5 or 10 cents.
|
| While it is true that the upside is unlimited against a naked
| call (and the downside is 0 on a naked put), naked puts suffer
| from systemic risk that calls for all intents do not. Both are
| subject to news/events specific to the company in question, but
| the risk of the short call running away from you because the
| market had a +20% day are well, fleeting. On the other hand,
| unexpected economic news, politcal/military events, liquidity
| issues, etc can tank the entire market 10, 20, 30% and have
| numerous times. A rise of similar magnitude, to my knowledge,
| has only happened after market crashes (so you would then be
| alert to the upside risk).
| qeternity wrote:
| This is why skew exists, and should not deter anyone. The
| vast majority of people should buy a 20-30% dip, and so the
| fact that 99% of the time you're not going to be assigned
| means that it's a good idea in most scenarios.
|
| I suggest most retail to be short straddles against a core
| underlying position for yield enhancement. Yes, over a number
| of decades you will have something go against you, but under
| the current monetary and fiscal regimes, you should be hoping
| for the day that you can buy the dip or sell the rip via a
| systemic short vol overlay.
| [deleted]
| hntrader wrote:
| What does the tail risk look like on this strategy and what
| kind of annual return do you expect?
| omarhaneef wrote:
| You're taking the tail risk on the down side but you've sold
| it on the upside for extra yield.
| artemonster wrote:
| I undestand words but I have absolutely no clue what you're
| talking about. Can you recommend some books on the topic?
| wbl wrote:
| The only book you should read is John Bogel's. Do what he
| says like Goldman partners, Bank of America senior
| executives, almost every economist does with their money
| and stick it in low cost diversified mutual funds.
|
| Or you can learn stochastic calculus and end up in the
| same place once you realize half of all active traders do
| worse than the market, before fees.
| smabie wrote:
| None of the kinds of people you listed are good at
| trading (esp economists). From experience, professional
| traders do tend to use passive indices for part of their
| PA, but also actively trade a portion.
|
| But you're right in that if you don't have a passion for
| it, you'll never be able to truly outperform spy on a
| risk adjusted basis. However, if you do have the
| knowledge and the passion, I definitely think you can.
|
| Investing is personal, and just holding spy doesn't
| fulfill everyone's objectives.
|
| Here's an example of a strategy that outperforms spy in
| most cases: 1/3 of your portfolio goes to upro (3x
| leveraged spy) and 2/3s goes to a bond fund/etf. As long
| as the bond etf returns above the upro expense ratio
| (~1%), you will outperform. From my backtests, this
| strategy will earn you an extra 1-2% return a year, while
| also having a slightly higher risk adjusted returns.
|
| I list the above as a great example because it's the kind
| of strategy that is great for a PA: easy to manage,
| doesn't require babysitting, and backed by solid academic
| research. When people think active vs passive, they think
| actively trading single stocks vs just holding an index.
| My point is that you can use some quant-lite strategies
| that tilt your portfolio to eek out a little return. You
| don't have to be trading everyday or even holding
| anything except ETFs.
| victor106 wrote:
| While I always preached just buying the S&P one risk i've
| been seeing with it is if, a majority of investors just
| buy the S&P index, since the index is market cap
| weighted, it would just make the largest stocks in the
| index more expensive.
|
| This would make the stocks that have less weight in the
| index or stocks outside the index relatively cheap and
| obviously offer better returns.
|
| Anyone disagree?
| eloff wrote:
| This strategy seems to make a lot of sense to me, so I
| just checked out the performance of UPRO over the last 5
| years versus SPY (^GSPC).
|
| UPRO is up 426% (wow) $17.37-$74.01
|
| and
|
| ^GSPC is up 192% (talk about a bull run) $1932-$3714
|
| So with UPRO you would have had an average profit of
| 65.2% per year, and with SPY 18.4% per year. That's even
| better than x3 returns.
|
| Plus you'd have the bond returns. Interesting idea.
| StrangeDoctor wrote:
| You absolutely do not want to own upro for 5 years. High
| fees and more importantly beta-slippage will eat you
| alive.
| smabie wrote:
| by beta slippage you mean volatility drag? On a risk
| adjusted basis, upro is definitely a loser due to
| volatility drag and high expense ratio. However, you can
| easily calculate optimal leverage ratio in order to
| maximize the geometric growth of your portfolio. The
| equation is:
|
| lev = E(r) / Var(r)
|
| So if the expected return is 10% and the expected
| volatility is 10%, optimal leverage to maximize geometric
| growth is 10x.
|
| This of course is much too high and the risk of losing
| everything due to excessive kurtosis and downside skew is
| very high. Like the everything else in finance,
| fundamental sin of that formula is assumption of the log
| normality of returns.
|
| However, is 3x too high for the long term? I dunno, but
| over long time periods, a pure 3x leveraged spy portfolio
| is going to outperform significantly. The problem is most
| people will be unable to weather the storm as you can
| easily lose half of your money in a week.
|
| I wouldn't hold pure spy 3x and wouldn't exactly
| recommend it, but from a mathematical perspective it is a
| defensible (as in, you can make cogent arguments for it)
| long term investment.
|
| On the other hand, I would probably recommend 1.5x lev or
| possibly even 2x lev to certain people.
|
| As a quant, I approach these things like leverage from a
| mathematical perspective. It's important not to have an
| emotional reaction. There are very smart people running
| books that have 10x leverage but you would never be able
| to guess by looking at their volatility. It's all about
| the factor exposures, net delta, etc.
|
| For example I've seen 15x leveraged delta neutral books
| that have absolutely insane Sharpe ratios (>15) and
| annualized volatility of less than 5%.
| eloff wrote:
| Well you would have done just amazing (as I pointed out)
| over the last 5 years. Better than 3x the S&P 500.
|
| I'm not saying you don't have a point, but one would need
| to look at how it performs over longer periods with more
| varied market conditions to answer your question.
| hntrader wrote:
| Isn't UPRO just a leveraged SPY. Seems different to the
| above option selling strategy
| eloff wrote:
| You must have skipped over and didn't read the parent
| post at all. We're not talking about the wheel strategy
| here.
| smabie wrote:
| UPRO is only 1/3 of your portfolio, so you have the same
| exposure as SPY i.e: you are not going to make those
| crazy returns.
|
| The idea is to get cheap borrowing by using a leverage
| ETF and then buying bonds such that the bond yield > cost
| of leverage.
| eloff wrote:
| You're arguing against a strawman argument that you
| invented.
|
| I didn't say you would get those crazy returns - merely
| pointed out that you would have beat the S&P 500 over the
| last 5 years with the strategy outlined by the parent
| post.
|
| How well it holds up over a time period that also
| includes bear markets is another question - you can't
| just look at a bull market and assume it's representative
| of all time.
| joshribakoff wrote:
| Buffet sells 5b in options premium a year
| atomicnumber3 wrote:
| I think a big distinction that retail traders need to
| come to terms with is that, while yes, technically you
| can make reasonably good sums of money with various
| trading strategies of various risk profiles, as one
| person, so many of them are just not worth the trouble.
|
| If your passion is this sort of thing, by all means, go
| ahead.
|
| But it's like running a homelab. Yes, you can get pretty
| decent "savings" (vs running in AWS/DO) but I can
| guarantee you, you will end up in the basement replugging
| ethernet cables trying to figure out which one is the bad
| one while your family and relatives are waiting upstairs,
| fairly bemused, for you to fix "the internet".
|
| It's possible, but as a person with a life, unless it's
| your passion, I'd recommend just not. Do the financial
| equivalent of paying DigitalOcean 5 dollars a month: buy
| sp500 etfs and sit on them.
| hntrader wrote:
| I wonder if we can invest in a fund manager who does this
| strategy. And if it's so good then why do pension funds
| and endowments not allocate to it typically.
| rusticpenn wrote:
| Yes, me too. I just read about someone calle 1ronyman on
| Reddit, and I am interested too.
| im3w1l wrote:
| The "tail" in tail risk referes to the tails of a
| probability distribution. A normal distribution has
| "thin" tails. The probability of huge outliers is pretty
| low.
|
| If you have tail risk, then it means you have a decent
| chance of losing a lot more money than the typical
| variation. Your returns might look like +1.1, +0.9, +1.2
| +1.05, -3. So your profit is pretty predictable with
| little variation, until suddenly you lose a lot of money.
| omarhaneef wrote:
| I would look up two terms:
|
| Covered calls
|
| Naked puts
|
| If you want to go heavy duty into it I recommend the Hull
| book (options, futures and other derivatives) but for
| your purposes the investopedia articles are enough.
|
| Basically naked puts means you're selling downside
| insurance so if the stock crashes you eat the loss.
| Covered calls mean you sell upside risk but have the
| stock so if it goes up you make a little.
| beezle wrote:
| Hull is a great book and is not too heavy on the math.
| However, for someone just getting their feet wet, Options
| as a Strategic Investment by MacMillan is a classic.
| im3w1l wrote:
| Selling a _deep in the money_ put behaves like owning the
| stock (probably with margin, but it depends on how many puts
| you are selling compared to your reserves of cash and short
| term "safe" bonds) except that you are capping your gains.
|
| The further towards out of the money you go the more it
| behaves like _picking up pennies in front of a steamroller_.
| But an interesting quirk of selling puts compared to calls is
| that the downside _is_ limited. The stock can 't go below 0.
| hntrader wrote:
| That gives me a good intuitive picture. I'd really love a
| basic online simulator where I can plug in portfolio
| characteristics (eg percent of calls Vs puts, ATM Vs OTM)
| and simulate an equity curve over the last ten years. I
| could build my own of course but I think a tool like this
| would be generally useful for investors.
| Schweigi wrote:
| I did make my own option trading algo which is similar to the
| one in the Git Hub repo (but I used Scala, which gave me
| additional returns, jk :) ). Return totally depends on the
| delta of the options you write and the option symbols in your
| basket. Mine could be configured to be between 10-100+%. The
| higher the return the more volatile.
|
| The idea of using multiple symbols like SPY and TLT is to
| reduce the tail risk. But in the end there is still tail risk
| like for example in the crash of 2015. Making the strategy
| delta neutral with hedging could improve it but I never
| completed that part.
|
| There is an interesting book with all the math by Euan
| Sinclair about option writing and how to minimize the risk if
| you are interested.
| hannofcart wrote:
| Another way to reduce tail risk when selling options is to
| simply hedge with a protective call/put at a higher or
| lower strike respectively. Sufficiently far off strikes
| will have minimal impacts on returns while reducing tail
| risk.
| dgb23 wrote:
| Interesting, we're in one of the largest crisis since decades and
| all these stock trading stories are popping up.
| mhh__ wrote:
| Crisis for whom?
| omarhaneef wrote:
| This is worth a read if only because of the clear introductory
| explanation of the market clearing mechanism.
|
| However, it's not a profit maximizing algo that will make you
| rich (not that there's anything wrong with that).
| kwhitefoot wrote:
| Will it make me better off?
| WJW wrote:
| Reading more about things you haven't read about before will
| increase your total knowledge and therefore make you better
| off in a holistic sense, yes. In a purely monetary sense, no
| it will probably not have any effect on your life.
| philosopher1234 wrote:
| Knowledge is not infinitely accretive
| WJW wrote:
| I was making the gamble that people who compulsively ask
| "Will it make me better off?" without having read the
| article are not yet at the point where they've hit the
| diminishing returns on additional knowledge.
|
| Your statement is correct though, username checks out as
| well.
| secondcoming wrote:
| The Vickery Auction was pretty much the de-facto auction type in
| adtech realtime bidding.
|
| It's since been replaced with standard first-price auctions for
| reasons I don't fully understand, but I assume it was because
| websites misunderstood bid prices and though they were being
| ripped off.
| 29athrowaway wrote:
| Whatever you do, do not film yourself and emit a "guh" sound.
|
| https://www.youtube.com/watch?v=d80ahvRSV8E
| breck wrote:
| Unzipped the code and put it here for easy viewing:
| https://github.com/breck7/drillBits
|
| (Note: if author wants to create a GitHub I'll edit this link and
| point to theirs!)
| boxfire wrote:
| Given the clear copyright statement,
|
| > Copyright (C) 2020-2021 Terence Kelly. All rights reserved.
|
| did you happen to get the author's permission to put that up? I
| don't even like IP law that much, but its funny to me how much
| no one gives a shit. This was a crime, albeit a silly and small
| one.
| breck wrote:
| https://giphy.com/gifs/reactiongifs-DsFhEEGzo9LVu
| Jommi wrote:
| There is a mistake in the article, the 2nd graph is repeated.
| There is no figure 3.
| msilb wrote:
| I was also wondering about the missing figure 3. In the linked
| pdf version everything seems to be in place.
| bobbydreamer wrote:
| Just asking anybody figured out, how to find high low for a
| period of time. Say in a period of 6months, starting from a
| initial point, next point could be a high or low, if high,
| program needs to find next lowest point and afterward, it needs
| to find highest amd continues to do so in zigzag. For low it's
| vice versa.
| IIAOPSW wrote:
| I think what you are asking is given a time series (x_0, x_1...
| x_n), what is the 6 month high (or low) on day i? In other
| words you want the max (or min) of the sub series
| (x_{i-180},x_{i-179}... x_i).
|
| x_0 is obviously the 6 month high at day 0 (since there is no
| previous data). If x_1 > x_0 then x_1 is the new 6 month high
| so we can discard x_0 on day 1. If x_1 < x_0 then x_0 is still
| the 6 month high on day 1, but we cannot discard x_1 because it
| might become the 6 month high when x_0 expires on day 181. So
| we need to maintain some sort of data structure of potential 6
| month highs such that we can lookup the current high and remove
| these highs as they expire or get replaced. The easiest way to
| do this is with a list of pairs [(x_i1, i1), (x_i2, i2)...]
| sorted by increasing x_i. Because it is sorted, the current
| high is always found on the element closest to the end of the
| list. Furthermore when a new element (x_k, k) is added, it
| replaces all the elements which come before it (thus they can
| be removed). As a corollary, because the newest element is
| always added to the back (after removing what's in front of
| it), the list is also sorted by order of expiry (with the
| oldest (x_i,i) at the end). Start with an empty list and i = 0
|
| Find the sorted insertion point in the list for (x_i,i).
|
| Remove everything prior to the insertion point.
|
| Insert (x_i, i) at the start of the list.
|
| If the element at the end of the list (x_n, n) is expired (n <
| i+180) then remove it.
|
| The 6 month high on day i is found in the element at the end of
| the list. Store this in a new series h_i.
|
| Increment i by 1 and repeat.
|
| This method trivially works for finding the 6 month low as
| well.
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