Offline Algorithms in Low-Frequency Trading

https://queue.acm.org/detail.cfm?id=3448307

by hypomnemata • 5 years ago

349 100 5 years ago

queue.acm.org

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.

hntrader5• 5 years ago

What does the tail risk look like on this strategy and what kind of annual return do you expect?

omarhaneef3• 5 years ago

You’re taking the tail risk on the down side but you’ve sold it on the upside for extra yield.

im3w1l2• 5 years ago

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.

Schweigi• 5 years ago

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.

kgwgk10• 5 years ago

https://www.daytrading.com/selling-volatility

WJW3• 5 years ago

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.

RyanShook• 5 years ago

Have you been successful running this script/strategy?

jkhdigital• 5 years ago

I’ve observed the opposite in cryptocurrency option markets; covered calls tend to net a higher yield than the equivalent puts.

lionyo• 5 years ago

Where are you writing your options? Only the stablecoin pairs seem to be liquid

nullc• 5 years ago

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. :)

lordnacho2• 5 years ago

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• 5 years ago

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...

JimBlackwood3• 5 years ago

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.

beezle4• 5 years ago

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• 5 years ago

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.

kgwgk10• 5 years ago

Generally speaking, a seller of naked puts is looking to supplement income via a stock they are willing to own at a lower level.

The problem is that they may be willing to own at a lower level today. But it may happen that when they have to own it the price is lower for a good reason.

dheera2• 5 years ago

downside is 0 on a naked put

What? If the stock goes lower than the strike price, the downside on a naked put is the difference between strike price and market price. You will be forced to take delivery of the stock at the strike price when you could have bought it for market price if you hadn't written the option.

It is not 0.

svmt• 5 years ago

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...

opportune2• 5 years ago

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.

icedchai• 5 years ago

Seems like it would be less trouble to buy QYLD (nasdaq-100 covered call ETF), or one of the equivalent funds.

varyherb• 5 years ago

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.

mrfox321• 5 years ago

This always happens. Post about X. Somebody replies with, "look at my Y". Usually off topic and trying to take advantage of the posts visibility.

neximo64• 5 years ago

Are you a tourist on hacker news? This is almost the defining trait of a HN post.

omarhaneef3• 5 years ago

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• 5 years ago

Will it make me better off?

WJW3• 5 years ago

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.

breck2• 5 years ago

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• 5 years ago

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.

breck2• 5 years ago

https://giphy.com/gifs/reactiongifs-DsFhEEGzo9LVu

Kranar2• 5 years ago

Copyright infringement is not a crime in and of itself. It's only criminal when it's done for commercial purpose with financial gain which is clearly not the case here.

bobbydreamer• 5 years ago

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• 5 years ago

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.

hntrader5• 5 years ago

You can do it in a single pass fairly easily. Loop over the rows of data. Store the current high to low, as well as the largest high to low since inception. If the current exceeds the largest since inception, simply replace it. Should be about 30 lines of code.

29athrowaway• 5 years ago

Whatever you do, do not film yourself and emit a "guh" sound.

https://www.youtube.com/watch?v=d80ahvRSV8E

Jommi• 5 years ago

There is a mistake in the article, the 2nd graph is repeated. There is no figure 3.

msilb• 5 years ago

I was also wondering about the missing figure 3. In the linked pdf version everything seems to be in place.

secondcoming• 5 years ago

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.

dgb232• 5 years ago

Interesting, we’re in one of the largest crisis since decades and all these stock trading stories are popping up.

mhh__• 5 years ago

Crisis for whom?

m3at• 5 years ago

This has little to do with trading, and a lot to do with algorithms. I recommend reading the articl, it is well written :)

dgb232• 5 years ago

Thank you for correcting me in a friendly way!

Offline Algorithms in Low-Frequency Trading

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