Developing Trust in 1 DTE SPX Options
First adjustment to the strategy was made with 0 DTE coming soon.
gm,
The first step to fine tuning the SPX trading strategies, is to trade them as accurately as possible. I executed two out of the three trades today the 1 DTE at 3pm. This is an old trading account and I still need to move adequate funds to it. I’ve been previously trading the 1 DTE prior to this overall strategy design.
Figure A below shows where our trade is sitting for tomorrow. There is no use of support or resistance. This is just based on delta. You can even notice a slight skew with a positive bias.
By recording these live results and cross-referencing them against the backtesting data, give us a hint about the potential divergence between simulation and reality. One thing that I have noticed so far is that slippage set at 0.15 seems to be adequate. In the backtests the iron condors were tested using 0.2. This was to play it safe. Moving forward I will try a 0.15 stop. I’ll also regenerate results and share them below. The difference between just $5 is pretty large on the backtest results in figure B. That said the stop only has to miss once to negate all the benefits of compounding later on.
There's always some room for adjustments when it comes to execution. For instance, backtesting uses the mid-price, whereas in live trading, we must account for slippage. It's always challenging to estimate how much adjustment is required, particularly given that it's usually more per leg in less liquid markets. That being said, the SPX 0 DTE market has demonstrated sufficient liquidity. However, as markets are ever-evolving, these parameters are by no means fixed. If I start missing stops I will need to go back to the previous 0.20. The need to set this is because I’m using Tastyworks which only allows for stop limits on spreads.
Employing a strategy like this requires a high level of trust. Trust in the approach, in the backtesting data, and in the testing process. Bias must take a backseat. An underlying goal here is the potential automation of the process completely. This is contingent on the strategies proving their effectiveness.
Backtesting captures a snapshot of the price at an exact moment, while live trading offers a degree of leeway when it comes to timing. Although I'm aiming to execute as close to the target time as possible to mirror backtest results, there is a degree of flexibility, perhaps a 2-minute window, which allows for some market prediction. However, at this stage, straying too far from the control could cause more harm than good.
Remember, strategies such as these are not without risks, especially when they require a significant portion of the buying power. A missed stop could lead to a sizable loss. Hence, backtesting and forward testing are both crucial components to validate the potential risks and rewards of the strategies.
Stay tuned for more updates as we continue to run these strategies, comparing backtest data with live trading results.
-GVB
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