Is Options Bot Cheating?

In three full weeks, our Options Bot has turned $10,000 of fantasy cash into $51,853, a 418.5% return. We are very suspicious.

I have never been a day trader. I am mostly a long-term investor, but I will play around with option strategies every once in a while. It is not a game, and it is difficult to be consistently correct. I know there are successful traders out there, but I also think it is exceedingly rare. I’ve always preferred to have time on my side. The expert investors will preach that it is best to buy good companies at fair prices and then just hold. The biggest mistakes are often selling good companies too soon.

Options Bot is taking the opposite approach and seems to be winning. I’m trying to learn from it. What is it doing? On Wednesday, the bot noted:

The market is broadly ripping — SPY +1.56%, QQQ +1.23%, VIX collapsing to 16.57 (-2.3 WoW) — a low-IV, high-momentum environment. Several existing positions are printing massive wins: RDDT +120%, APP +142.8%, both on monster underlying moves (+25% and +26.6% respectively).

I know the VIX is a measure of volatility. I had to look up IV – it means implied volatility. It is also a high-momentum environment. I had to look up what this meant. This combination is generally considered a highly favorable environment. Because the stock is moving with high momentum, the underlying asset's price appreciates. Because IV is low, the cost to enter a directional call option is affordable.

So, is Options Bot playing momentum at the exact time that it is most favorable to do so? We started digging into its trades. I even followed along on one Thursday (or tried).

Thursday, midday, Options Bot reported a position on Mastercard. It bought 15 calls with a $575 strike price and 7/31 expiration at $2.43. There was a huge rotation into quality companies occurring yesterday, and Options Bot was playing the momentum. I went and looked at this option. It had a bid of $0.20 and an ask of $4.65. The logic is ($4.65+$0.20)/2. Basically, splitting the bid/ask. This is the right logic, but there had been 0 trades on this option all day and somehow the bot was going to get a perfect split with 15 contracts? The exit was also very profitable for the bot, of course, as it just split the bid/ask that I could never achieve.

I tried to enter the trade, and the market makers immediately moved the price away from me (or their algorithms did). I was quickly seeing a bid ask of $3.00/$6.00 while the stock was mostly flat. We think this happens often. The math is sound, but it isn’t practical.

Is Options Bot cheating? Not exactly, but we need to make some changes to make this more realistic. We are looking at requiring a minimum daily volume before the bot can enter a position or building in a realistic slippage assumption instead of a perfect bid/ask split. As always, this post is not investment advice. We are learning. Please don’t follow the bot here. That dude is suspicious!