Capturing the Fleeting Quotes - Option Pricing Inefficiencies Arbitrage

I've managed to exploit option pricing inefficiencies by constructing multileg trades in a way that magnifies the mispricing of each individual leg in reasonably liquid (but not too liquid) equity underlyings.

No advanced math, no pricing models.

I think the reason my method works is because

1. Different strikes' top of the book is quoted by different dealers using different pricing models
2. Dealers react to certain events by adjusting the quote differently, creating a very short window where the other dealers are kinda 'caught off guard' and couldn't re-adjust their quotes to other dealers' adjusted quotes in a way eliminates the arbitrage opportunity.

The short window is where I act.

Tested on live market for weeks and it worked good enough. There's almost no downside risk, if I got in, as long as there's exit liquidity, I'm guaranteed profit.

Fillability Probing

To retain my retail option trader status and execution priority, I cannot place more than 390 orders in a day, whether it's filled or not.

You can see that probing for fillability is costing me most of the order quota, and it's the most frustrating part of this strategy.

If only I could estimate fillability without placing an order!

Is there a heuristic to estimate this with without the history of quotes and trades on those legs? Sounds like a good problem for a blackbox ML model if I had more data points.

Scalability?

The liquidity for multileggers are not very good, the top of the book is thin. It's hard to get filled for slightly larger quantity.

Since the arb window is so small and any fill would cause the quotes to change, for each window I only have 1 change to get filled, and I need to use the optimal quantity for that.

Choosing the underlyings

I'm not sure what are the right criteria at the moment, but here's my guess:

• Not boring, no consumer staples or healthcare, and of course no biotech
• Good amount of speculative interest
• Just the right amount of liquidity, if too liquid there's no arb opportunity for me because it's too efficient and I'm just too slow
• Just the right range of price

Sortino / Sharpe?

Great if I can get out after getting in. Getting in is much harder though.

Potential Risks

• Getting squeezed out by faster traders who trade the same thing - the capacity of this arb is not great
• Pattern getting recognized by the market maker - since I'm not hitting their quotes and executes somewhere near mid price, they can choose not to fill my orders.
• Pin risk if no liquidity to exit and have to overnight, and news drop that the underlying has become GME, or Elon decided to buy the company with 1T cash, or the company got destroyed

How did I discover this?

It was inspired by a earnings play I did before.

Stats

From 4/16 to 4/23, I only traded this strategy (because I don't feel like taking on direction trades these days) for 5 days in a row and every day ended green with no losing trade.

I was about to take 100% loss on one of the trade that are filled within liquid strike range, but EOD vol spike saved me. :)

Zoomed-in version: https://gg.teddysc.me/?g=b4e75406bafb4b22ea5847bdff52e94f&a&c=2

The strategy is regime and direction agnostic, the only thing I need for it to work is:

• MMs quoting that chain don't create a perfect top of the book
• Change in volatility across the chain, any direction is fine.

It's like picking up pennies without the threat of being crushed by a steamroller :)