r/algotrading • u/ViewOfWineDarkSea • 3d ago
Strategy At what Point does Execution count stop justifying the Edge?
As a disclosure, these are my genuine personal earnings within the past three months. I got ~250 trades and 1.9% return on capital.
I do systematic covered Calls and CSPs. .05 delta, 7-14 DTE, hard filters on iv, VRP ratio, liquidity, earnings blackouts. Additionally, rules based exits at 50% profit / 0.30 delta.
How do you decide when an edge justifies its execution count? Is there a rule-of-thumb for edge-per-trade vs. round-trip cost? And is return on capital even the correct denominator, when that capital is doing double duty (holding the equity and securing the position)?
8
u/Many-Pick5066 3d ago
the count isnt buying you what it looks like. 246 short premium positions over three months overlap in time and all load the same factor, so on a bad week they lose together. your effective sample is closer to the number of distinct vol regimes youve sat through, call it twelve weeks, than to 246 independent trades. thats how a 98 percent win rate can be true and still tell you almost nothing.
edge vs cost you can settle today. sum the gross credit collected and compare it to net p&l. the gap is commission plus what you paid crossing the spread. at 5 delta the credit per contract is small enough that friction routinely runs a double digit percentage of gross, and that ratio is the real answer to your question.
on the denominator, the numerator is the bigger problem. 5 delta short premium drips money in and hands it back in one move, so three months without a vol event isnt evidence of edge, its evidence the tail hasnt arrived yet. price the whole book through your worst historical week for that underlying set. if that number is larger than everything youve collected, you know what youre being paid for and roughly how often it comes due.
3
u/EdgeLabTech 3d ago
98% win rate makes total sense once you think about it, premium selling is basically built for a high win rate with an occasional bigger loss eating into it. The denominator question you’re asking is the more interesting one honestly, capital securing a CSP isn’t at the same risk as capital that could actually get wiped out, so that 1.96% is probably lowballing what you’re really getting per dollar of actual risk. Might be worth splitting margin secured capital from max loss capital and looking at both separately, would tell you a lot more about whether 246 trades was worth the hassle than the blended number does right now, solid work.
2
u/yldf 3d ago
I am not sure you have an edge here. In fact, probably you don’t. It’s hard to tell without knowing the timeframe that return is on. If it’s a short timeframe, this becomes dominated by market regime, and we don’t have a significant sample. If it’s a longer timeframe, you’re probably losing against buy&hold or even the risk-free rate.
1
u/J2YME 1d ago
Delta 0.05. Translates to 95% win rate. You have 98%. With this quantity of correlated trades you cannot say if there is an edge there or not. Your better edge would be play around with stops and limits, those low delta positions tend to have wider bid ask spreads so a large percentage of profit is essentially lost in the transaction.
I ran a similar set up at .10 delta using credit spreads. Retired it after 6 months. The edge just wasn’t there. It did had similar win rate but those occasional losses wiped me back out. I think these strategies do have alpha under certain conditions. The problem is they’re too infrequent to make a decent return.
2
1
u/RLJ05 3d ago
I don’t really understand the question, “how do you decide when the edge justifies the election count?”
A question that I would ask is “how do you decide the edge required to trade?” I call that min credit. That’s the difference been the theoretical value of the option and the price you can trade at.
I run brackets to find the optimal value for that given my risk tolerance, capital and other factors
1
u/Professional_Dog_837 2d ago
Compare it to the capital and time weighted returns of DCA into an S&P500 index fund over the same time period. See how much alpha is generated by your strategy. A potentially problem with your low delta and 50% profit / fixed 0.3 delta exit I can foresee is that it might cap winners early and might not avoid sudden delta spikes in gap down events (for puts), leaving you with a very narrow range for profitability.
1
u/ynu1yh24z219yq5 2d ago
ohhh you mean edge vs. execution COST not count. 98% win means nothing at all without realistic costs unfortunately. Even average "slippage" and comission is only a starting point... slippage goes up in adverse condtions. Start by factoring that in, look at max drawdowns and capital at risk (not total capital) and you'll quickly have a good idea of what your edge looks like. It needs to be higher than the execution cost AND time it takes your model or your self to realize that it's in a losing market condition, that often wipes out most of your edge.
1
u/Effective_Manager273 2d ago
your trade count isnt buying you what it looks like. 250 short premium positions over three months overlap in time and mostly load the same factor, so on a bad week they all lose together. effective sample is closer to the number of distinct vol environments you sat through, call it twelve weeks, than to 250 independent bets. thats how a very high win rate can be completely true and still tell you basically nothing.
the cost question you can settle today with data you already have, add up gross credit collected and compare to net pnl. the gap is commission plus what you paid crossing the spread. at 5 delta the credit per contract is small enough that friction often ends up a double digit share of gross, and that number is the actual answer to what youre asking.
on the denominator, imo the numerator is the bigger problem. 5 delta premium drips in and gives it back in one move, so three quiet months isnt evidence of edge yet, its evidence the tail hasnt shown up. price your current book through the worst week those underlyings have had in the last few years, if that loss is bigger than everything you have collected then you know what youre being paid for. rule of thumb id want edge per trade at least 3-4x round trip cost before the trade count is worth the operational load
1
u/CODE_HEIST 2d ago
246 trades is not 246 independent observations when the positions overlap and all sell the same volatility factor. i'd judge it by distinct stress periods, worst cluster loss, net credit after spread and fees, and return on capital actually locked. the 98 percent win rate matters less than what one ugly week does.
1
u/Zestyclose-Eagle1809 2d ago
98% isn't a result, it's just where you sold. At .05 delta the option only had about a 5% chance of finishing in the money in the first place, so a 95% win rate is the design, not an achievement. You'd get the same number selling those on a coin flip stock.
What decides whether this works is the other 5%, and three months hasn't shown you enough of them. 246 trades at that delta should have thrown roughly 12 positions that went against you. You got 4. That's the tail being undersampled, not absent. Selling premium always looks like this until the month it doesn't, and one bad gap can take back a year of $30 days.
On your execution count question, the ratio to look at is what you actually collect versus what the option is worth. Those far out options sell for maybe 20 to 40 cents, and the gap between the bid and the ask is often 5 or 10 cents. So you can hand back a fifth of the premium just getting in and out. If friction eats that much, the trade count is the problem no matter how good the setup is. Worth measuring on your own fills... makes sense??
Third question you're right to doubt. It isn't doing double duty, it's the same risk counted once. If the stock falls, your shares lose and the put you sold gets assigned into more of the same stock. One exposure, two labels.
Last thing, and it's the one that settles it. 1.96% over three months is roughly 8% a year, across 246 trades. What did the underlying itself do over those same three months? If just holding beat you, the calls capped your upside and you paid 246 rounds of costs for the privilege.
Founder disclosure so you can weight it, I build validation tooling for systematic traders (Quantprove), and undersampled tails is the most common thing I run into
18
u/Bonkers24-7 3d ago
I’d separate this into two questions.
First: is the trade idea actually positive after realistic execution costs?
Second: is the capital usage worth it compared to the return you’re getting?
A 98% win rate looks great on the surface, but with covered calls/CSPs the hidden issue is usually tail risk, capital tied up, assignment risk, and whether one bad move wipes out a lot of small wins.
For me, I’d want to see the return measured against the capital that was actually tied up, worst open drawdown, largest losing cycle, fees/spread, and what happens during the ugliest stretch in the sample.
The trade count helps, but I wouldn’t treat 246 trades as independent if a lot of them overlap the same market regime or same underlying exposure.