G-BOT Algorithmic - Notes on Risk Management
G-BOT can trade any instrument. Mostly, one wants to focus on FUTs or FOPs, depending on capital.
From our experience, most relatively small investors will find trading S&P500 options more
comfortable for a variety of reasons that will become evident as they get more experience.
Trading these instruments poses several challenges, some of which are technical and others that require a good understanding of how the instruments behave.
For the technical issues, which are mostly related to taking care of spread and quotes by proper filtering, the application has plenty
of complex mechanisms to deal with those.
It is crucial for the investor to understand how the option price curve behaves because it is very different from the underlying.
Option movements are in fact influenced mainly by these factors in order of "importance":
1) Market volatility
2) Decay (for the OTM options)
3) Movements of the underlying
In fact, one important index to watch is obviously the VIX, which essentially tells you how much the price of the options is inflated.
It is important to understand that volatility can have very violent surges that are extremely steep and often have a relatively
short duration it is important to get used to this pattern and not to be scared, but instead to welcome it as an occasion to make extraordinary
profits.
While properly exploiting these surges, small and large, is essentially one of the reasons why you can beat the market, on the other hand,
it is important to have available powerful trading mechanisms to mitigate as much as possible the corresponding drawdown (DD).
Note that these DD's are usually short-lived, but they can be scary, especially for the novice investor, because the volatility curve
normally surges with unexpected violence and then eventually decays amid wild fluctuations.
Some trading mechanisms to reduce (or invert) the DD
We are equipped with a number of weapons, including:
1) Strict exposure control (automated short entry limiters based on the real-time margin requirements). Keep in mind that margin requirements
change continuously, which makes real-time monitoring crucial.
2) Permanent long legs: To lessen the volatility burst, it is helpful to keep some almost ATM long legs available. This is the most naive containment measure,
and even the most risk-averse investors can feel reassured by these. Although more active portfolio management is needed, this is a possible tool.
Recommended as a propedeutic approach for novice investors who are strongly risk-averse, before switching to the "long-bias" trading game.
3) Playing the "short-biased" game with long trades. This is one of the best tool for recovering margins and increasing profits significantly.
Because it makes buy orders the way up and locks profits in. This works great, and the buy orders made while the price rises can even arrive
to momentarily reverse the exposure and can only be hindered by outlier spread in very violent overnight moves.
4) "Long-biased" trading game. This shares some pros of the permanent long legs, with the advantage that it will cut the decay immediately
in case of volatility collapse, thus reducing the cost of the protection. A powerful method to recover margins when you seem to be stuck
only taking losses due to margin requirements. Be careful to choose a low theta and a low price, and to correctly balance with short legs.
It will often unlock difficult situations and allow trading in the most extreme conditions. Not our preferred method unless used for margin recovery.
5) Short put/calls balancing (short "Delta-neutral"). Used with highly volatile instruments. Very short timeframe (1 day). This is the most
advanced approach we have and can only be done algorithmically because the exposure on the opposite sides needs to be monitored in real-time
to keep balancing dynamically the put and call options' respective deltas while accumulating decay. The bot scalps very fast on both the
PUT and CALL sides, literally "destroying" the fast expiring options on both sides with very quick trades. This is the most effective way we have
and can generate enormous daily returns. For advanced investors only, as it needs active portfolio management and monitoring for rollovers.
A very fast and relatively safer track to profits.
All of these devices can be implemented simultaneously, which significantly reduces (or even reverses) the drawdown (DD) and allows for
a higher degree of riding the volatility surges than would otherwise be possible given the available funds.
Specifically, under the condition that sufficient funds are available, the account should normally be able to withstand moves larger than those
of the market through dynamic discharge (buy) orders that gradually remove exposure and accumulation of profits from the "long-bias" trading game,
while the mkt remains high volatile.
Remember, automated trading obviously requires uninterrupted operations; if not, you will be vulnerable in the absence
of the dynamic algorithmic defense.
Because of this, it is usually imperative to keep the trading machine connected at all times. This is especially crucial for the most
volatile periods, where significant profits can occur in a short period and where disconnecting while the market is running fast against the
current exposure could potentially have catastrophic consequences (including liquidation of positions at unfavorable prices).
It is also imperative, for hedging action, that the trading accounts are Portfolio Margin (that is, risk-based margin methodology,
not RegT margin). Check: https://www.ibkrguides.com/kb/article-2184.htm
According to our experience, we have succeeded in coming out alive and with a profit from the most impossible crashes and difficult markets.
The only exceptions to that are the cases when the investor gets scared on a peak drawdown (for instance, a sudden surge of volatility) and sees
the available funds in the red, especially at some overnight time, due to outlier spread (and increased margin requirements) and, taken by panic,
closes it all at the maximum possible loss. Never do that; we have plenty of means to come out of any situation. Do not be intimidated by
possible warning of position liquidations (in most cases liquidations will simply momentarily lower your average sell price) and calmly
re-evaluate the situation: there is almost always a way out. Anyway, trading can be difficult sometimes, and it is not for all.
Never ever trade with fear. In order to succeed in the long term, the ability to fight remaining cool to the very last penny available
must take the place of the inclination to close a drawdown at the maximum loss and give up. We are fully equipped to thrive and systematically
generate a profit.