gbarber Member  Posts: 28 Joined: 2/26/2018 Location: PEARLAND, TX  User Profile | I am not happy with the % equity allocation method. It gives unrealistic equity results as the portfolio equity grows large. That comes about because the purchase orders become very large to the point where they would move the market if executed in the real market. That becomes orders of magnitude worse when we are using options. The volume for options is far smaller than for stocks. Typically the open interest for a +1 or 2 level OTM call with short expiration will be in area of 2000 or 3000 contracts. The order size used by the ATM smart calls method just released gets up to the thousands. I saw many at 1000 and 2000 and some at 3000 and 4000. This happens when the equity is large toward the end of the simulation. So just one person using that method would be giving a market order to buy close to or more than the entire open interest of a given call contract. What if more people try to use the out of the box ATM smart call method. If they use it on the same day, who knows, it could be market orders for 10 times the open interest of a given contract. The market maker would have wide open eyes, drool at the mouth, and dream about the huge profit he was going to make that day. He would set the price as high as the regulations allow. After that initial volatility, the price would fall to normal and the call buyer would take an almost certain large loss. I think use of % equity to determine allocation would result in self-limiting equity growth in the real world. So I want to use something else that does not give crazy large orders as equity grows. I am now trying the fixed size option in port sim. However, if I give it a fixed size of 10 or 20, it will issue orders varying from 1 up to 60 or so contracts. I am not sure why that is happening. For values larger than 10 or 20 it could have something to do with using signals from multiple market states. I would like to understand better what the port sim allocation methods do. The ATM manual is extremely brief on that topic. I have not found a port sim specific manual. Does anyone know of a manual that explains the methods like fixed size, NN trade size, Kelley criteria, and so on? If so, please point me to it. | |
