Behind the Scenes: New 1DTE Options Trading Strategy [Part 4]

Key Concepts

• One DTE Strategy: A trading strategy focused on options expiring on the same day (Day '1' To Expiration).
• Backtesting: Simulating a trading strategy on historical data to evaluate its potential performance.
• Live Trading: Executing a trading strategy in real-time with actual capital.
• P&L (Profit and Loss): The financial gain or loss from a trade or series of trades.
• Win Rate: The percentage of trades that result in a profit.
• Loss Streak: A consecutive series of losing trades.
• Drawdown: A period where an investment's value falls from its peak.
• Iron Condor: An options strategy that involves selling an out-of-the-money (OTM) call spread and an OTM put spread, aiming to profit from low volatility.
• Automation: Using algorithms or bots to execute trades based on predefined rules.

Performance Review of One DTE Strategy (Part 4)

This video is the fourth installment in a series detailing the process of developing and implementing a One DTE (Day '1' To Expiration) options trading strategy. The focus of this update is to review the initial performance of the strategy during its live trading phase, comparing it against the results of extensive backtesting.

Initial Live Trading Performance (Approximately 30 Trades)

• Current Status: The bot has executed approximately 30 trades, with one position currently open.
• Overall P&L: The current P&L is down $422.
• Win Rate: The win rate is approximately 17% (5 wins, 24 losses). This is noted as being slightly underperforming the expected win rate from the backtest.
• Loss Streak: The bot has experienced a loss streak of six consecutive losses.
• Average Loss: Approximately $86.
• Average Win: Approximately $322.
• Emotional Context: The presenter emphasizes that 30 trades are insufficient to make definitive decisions about a strategy's success or failure. This early stage is often characterized by emotional doubt and the temptation to second-guess the strategy, a common challenge for traders. The presenter aims to share their own feelings and thought process to help viewers navigate this period.

Comparison with Backtest Data

• Backtest Overview: The strategy was backtested extensively, and the presenter expresses confidence in its underlying mechanics. The backtest data is available for review.
• Live Trading vs. Backtest Trajectory: The presenter highlights that the current live trading performance, characterized by sideways to slightly downward action, appears "oddly similar" to the trajectory observed in the backtest during the corresponding period (July 29th-30th). This similarity provides significant confidence that the strategy is behaving as expected, even if immediate profitability is not evident.
• Backtest Statistics:
  • Total Trades in Backtest: 384 trades.
  • Backtest Win Rate: 29% or 27% (specific figure varies slightly between mentions).
  • Backtest Loss Streak: 13 trades.
  • Backtest Win Streak: 4 trades.
  • Backtest Average Win: Approximately $307.
  • Backtest Average Loss: Approximately $87.
• Current Performance vs. Backtest Averages: The live trading average loss ($86) and average win ($322) are noted as being "right in that range" of the backtest averages. While the current win rate and loss streak are outside the typical backtest parameters, the presenter reiterates that this is expected in the early stages and that the overall behavior aligns with projections.

Key Arguments and Perspectives

• Patience and Conservatism: The presenter advocates for patience, stating they are comfortable letting a strategy trade 50-100 trades before making significant adjustments.
• Automation as an Emotional Buffer: Automation is presented as a crucial tool for removing emotional baggage from day-to-day trading operations, allowing strategies to run their course.
• Acceptance of Drawdowns: The presenter acknowledges that trading strategies will experience periods of underperformance, including "drawdowns" or "dark nights," where performance is not optimal. These periods are a natural part of the process and can last for extended durations. An example is given of a strategy that took from March to June to recover from a drawdown.
• Confidence in Strategy Behavior: The primary takeaway from comparing live trading to backtesting is the confidence derived from the observed similarity in performance patterns. This similarity suggests the strategy is functioning as intended, despite short-term fluctuations.
• No Adjustments Needed (Yet): Based on the current data and its alignment with backtest expectations, no adjustments are being made to the strategy. The automations remain active, and the bot is allowed to continue trading as designed.

Technical Terms and Concepts Explained

• One DTE Strategy: A strategy focused on options that expire on the same day. This implies a high-frequency trading approach with short time horizons.
• Iron Condors: A neutral options strategy that profits from low volatility. It involves selling an out-of-the-money (OTM) call spread and an OTM put spread. The strategy aims to collect premium, and profit is maximized if the underlying asset's price stays within the short strikes of both spreads at expiration. The video mentions that these iron condors are "pretty narrow" and can sometimes behave like "iron butterflies" in terms of their profit potential within a tight range.
• Drawdown: A peak-to-trough decline in the value of an investment. The video illustrates a significant drawdown period where a strategy took several months to recover its previous peak value.

Logical Connections and Flow

The video logically progresses from an introduction to the current live trading status, then delves into the specific performance metrics. This is followed by a direct comparison with the backtest data, using charts and statistics to illustrate the similarities. The presenter then uses this comparison to support their arguments for patience and the effectiveness of automation, concluding with a statement of intent to continue monitoring the strategy without intervention.

Data and Research Findings

• Trade Count: Approximately 30 trades executed live.
• P&L: -$422.
• Win Rate (Live): ~17%.
• Loss Streak (Live): 6 trades.
• Backtest Win Rate: ~27-29%.
• Backtest Loss Streak: 13 trades.
• Backtest Total Trades: 384 trades.

Conclusion and Takeaways

The presenter's current assessment of the One DTE strategy is one of cautious optimism, primarily driven by the observed correlation between live trading performance and backtest results. Despite a current P&L deficit and a lower-than-expected win rate, the strategy is behaving in a manner consistent with its historical simulations. The key takeaway is the importance of patience and discipline in automated trading, allowing strategies to navigate inevitable drawdowns and periods of underperformance without premature intervention. The presenter plans to provide further updates as the strategy accumulates more trades, likely around the 100-150 trade mark.