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End-of-Day Versus Intraday Trading (Part 2)

As I mentioned last time, a big part of the debate between end-of-day (EOD) and intraday trading involves the difference between the probabilities of touching and expiring. The markets are often regarded as random (Brownian motion). When a particular price level is reached, the market then has a 50/50 chance of moving higher or moving lower. The probability of expiring beyond that level is therefore less than the probability of touching it.

For intraday trading, this may be both an advantage and disadvantage. More winners can be exited intraday, which is an advantage. More losers—some of which would otherwise go on to be winners—will also be exited intraday, which is a disadvantage. On trend days, exiting losers (winners) intraday will avoid (preclude) what could otherwise be larger EOD losses (profits), which is an advantage (disadvantage).

This debate is not getting any easier.

Price action aside, another disadvantage to intraday trading is the need to be available and/or take action more than once and possibly whenever the market is open. This takes a lot of flexibility out of the workday.

The biggest disadvantage to intraday trading is arguably a much more complex (or impossible) backtesting proposition. OptionVue (OV) provides data every half hour. If I am going to “trade like I backtest” (mentioned here and here) then I must monitor trades every 30 minutes. Such backtesting would more than quintuple my current 2-5 months per backtest. Continuous market monitoring represents another magnitude of complexity because significant volatility can occur even between 30-minute prints. Backtesting this trading time frame would therefore require a much more granular database.*

As a net seller of option premium, I find time decay to be more certain than typical [random] price action. Every 24 hours an option gets one day closer to expiration. Implied volatility increase can offset time decay in the short-term but this only happens in some instances of down markets, which is [significantly] less than 50% of the time.

Given this additional reasoning, my gut instinct is to give the nod to EOD over intraday trading. A trade is more likely to be exited at an intraday stop-loss for the additional reason that option decay into the close may improve the PnL. Being directionally long also favors EOD trading by giving more time to allow for positive drift. The observations that many trades have small MAEs and only a select few have huge MAEs is additional evidence in favor of longer trade duration (EOD).

For me, the exponential complexity or impossibility of backtesting is the proverbial nail in the coffin for intraday trading. These restrictions actually make me wonder whether the perceived benefit of enhanced intraday opportunity is more illusion than anything else.

* – Any discretionary strategy that uses alerts to signal entries, exits, or adjustments implies this sort of intraday, continuous-monitoring approach.

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