Behind The Scenes: Opening Range Breakout (ORB) Strategy [Part 3] Starting LIVE Bot

Opening Range Breakout Bot – Live Deployment & Backtest Analysis

Key Concepts:

• Opening Range Breakout (ORB): A trading strategy based on identifying a trading range formed during the first 60 minutes of the trading day and capitalizing on breakouts above the high or below the low of that range.
• Zero DTE (ZDT): Options trading strategies expiring on the same day they are initiated.
• Backtesting: Analyzing a trading strategy using historical data to assess its performance.
• Profit Target: A predetermined price level at which to close a profitable trade.
• In-the-Money (ITM) Touch: A stop-loss or profit-taking mechanism triggered when the option moves a certain amount into the money.
• VIX: The CBOE Volatility Index, a measure of market expectations of near-term volatility.
• Slippage: The difference between the expected price of a trade and the actual price at which it is executed.
• Bid-Ask Spread: The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask).
• Position Sizing: Determining the appropriate amount of capital to allocate to a trade.
• Drawdown: The peak-to-trough decline during a specific period.
• Profit Factor: The ratio of gross profit to gross loss.

1. Backtest Performance Review & Recent Changes

Kirk revisits backtests conducted in early November on a short call spread and short put spread ORB strategy. He presents screenshots comparing the original backtest results with a rerun incorporating the subsequent two months of trading data (up to the video’s recording date). While both strategies experienced a drawdown during the intervening period, they have since recovered. The original backtest showed a higher overall P&L, profit factor, and lower max drawdown than the updated backtest. Specifically, the numbers were slightly lower in the recent rerun, indicating a potential decrease in performance due to recent market conditions. This prompted further investigation into optimizing the strategy.

2. Backtesting Process & Variations Tested

Kirk details his iterative backtesting process, emphasizing the importance of systematically testing variations. He used the Option Alpha backtesting platform, demonstrating how to create variations of existing backtests using the "compare" and "add variation" functions. He tested numerous combinations, including:

• Different Profit Targets: Tested profit targets of 25%, 30%, 45%, 50%, 75% of the premium received. Results showed that adjusting profit targets decreased overall performance for the short call spread.
• In-the-Money (ITM) Touch: Explored using ITM touch as a stop-loss mechanism to limit losses if the breakout reversed. This also proved ineffective, with the original strategy consistently outperforming. Variations included testing immediate touch, $5 ITM, $10 ITM, and $10 before being ITM.
• VIX Correlation: Investigated whether incorporating VIX changes (5%, 10%, 15%) as a filter could improve results. This also yielded negative results.

3. Identifying the Root Cause of Drawdowns

Through manual analysis of days where the strategy experienced losses, Kirk identified a common factor: unexpected market reversals driven by unforeseen news events, specifically the resolution of the government shutdown threat around November 7th. He concluded that these “black swan” events are difficult to predict or backtest against and emphasized the importance of position sizing and diversification to mitigate their impact. He notes that these events create rapid price swings that are difficult to anticipate.

4. Short Put Spread Backtest Variations

Similar to the short call spread, Kirk tested variations on the short put spread strategy:

• Breakout Time Window: Tested different time windows for identifying the breakout, including 11:00 AM, 1:00 PM, 1:30 PM, and 2:30 PM, compared to the original 12:00 PM latest entry. Narrowing the window to 11:00 AM proved detrimental.
• Profit Targets: Tested various profit targets (e.g., $40, 50% of premium) but found the original strategy (letting the position run to expiration) consistently performed best.
• ITM Touch: Similar to the short call spread, ITM touch variations did not improve performance.

5. Key Findings & Strategy Selection

The extensive backtesting revealed that the original short call spread and short put spread strategies, as initially defined in Part 2 of the series, consistently outperformed all tested variations. Kirk acknowledges the possibility that a superior combination exists but prioritizes deploying a proven strategy over endlessly pursuing marginal improvements. He emphasizes the value of starting with a solid baseline and iterating from there.

6. Bot Deployment & Configuration

Kirk demonstrates the process of creating a live trading bot on the Option Alpha platform:

• Combining Strategies: He combines the short call spread and short put spread strategies into a single bot, ensuring that only one position is opened at a time (if the other isn’t already open).
• Capital Allocation: He allocates $3,000 to the bot.
• Trade Pricing: He sets the trade pricing to 100% of the bid-ask spread with up to 5 cents of slippage, mirroring the settings used during backtesting.
• Automation & Tagging: He activates the automations and adds tags ("orb") to the open position actions for tracking purposes.

7. Notable Quotes

• “You just can't get away from some of those types of days where it just you have a big reversal for an unknown news item that you just can't predict, black swan type of event.”
• “This is where position sizing and keeping lots of different strategies in place actually helps out.”
• “I'm not going to, you know, just continue fighting that forever and trying to curve fit something that's going to beat it.”

8. Technical Terms Explained

• Curve Fitting: Optimizing a trading strategy to perform exceptionally well on historical data, often leading to poor performance in live trading.
• Zero-Day to Expiration (0DTE): Options contracts that expire on the same day they are traded.
• SPX: The S&P 500 Index.

9. Logical Connections

The video follows a clear logical progression: initial backtest review, detailed explanation of the testing process, analysis of results, identification of the root cause of drawdowns, and finally, live bot deployment. Each section builds upon the previous one, culminating in a practical application of the research. The emphasis on the iterative nature of backtesting and the importance of understanding why a strategy performs a certain way is consistently reinforced.

10. Synthesis & Conclusion

Kirk successfully deployed a live trading bot based on an opening range breakout strategy, informed by rigorous backtesting and analysis. The key takeaway is that while continuous optimization is valuable, a solid baseline strategy, combined with robust risk management (position sizing, diversification), is often more effective than endlessly chasing marginal improvements. The video highlights the importance of understanding the limitations of backtesting and acknowledging the impact of unpredictable market events. The bot is now live and will contribute to his existing zero DTE trading portfolio.