ORBs, day trading, and trying to make sense of it all

"The haters said I couldn't do it. And they were correct. Honestly great call from the haters." - Drew Janda

This post might be more long and meandering than it should be, but I want to get all my thoughts on this out. They’ve been in the back of my head for a while now, begging to be set free.

Is timeframe everything?

Let's talk about Day Trading a bit. The basic definition of a day trader is someone who buys and sells stocks/options/crypto/whatever all within a single market period. They don't keep positions overnight or longer. There's a general image of day traders as this 18-40 male demographic looking at charts, having like 5+ computer monitors, drawing lines that mean important things, crazy leverage, and then making huge profits in seconds.

Now, like most things that look cool on the internet, the image may be exaggerated. 85% of Day Traders quit within 3 years. A 2011 study of Taiwanese day traders found that only 3% of them were profitable at all, as did a study of Brazilian day traders. In fact, stocks that were determined to have significant retail RobinHood trader inflows had persistently negative 20-day returns afterwards. And I'm sure there's other depressing data out there about the reality of Day Trading riches.

But logically, this shouldn’t make sense. What's so difficult about doing a trade within an ~8 hour timeframe that makes it worse than 8 days, or weeks, or years? How can you do better holding a security from Monday to Tuesday, no matter what happens Monday afternoon? A stock doubling in 3 hours should be easier to make money on than one that doubles over 3 years, and commission costs and trading costs are the lowest they’ve ever been. Are we all just bad at making quick judgements during a single trading session?

I know there's evidence of elements like bid/ask spreads, excessive leverage, overtrading, and other factors messing people up… But there must be some advantage to day trading! I refuse to believe an entire timeframe is categorically unprofitable for trading stocks and options, even for retail investors.

How Do I Tiptoe Around My Point…

I'm something of a YouTube video addict. Two-hour infotainment about obscure topics? Sign me up. Silly videos? Fun. Historical documentary channels? God help me I'm trapped for hours. The YouTube pipeline is great for a variety of topics, but 'Financial' YouTube videos are a wasteland. I see videos like these constantly:

And those are just YouTube shorts. With 1-2 simple searches you’ll also find long-form videos, links for Discords, training videos, cool photoshopped ads of traders with stacks of cash and candlestick charts. Trading-related videos can have paid ads for other traders. And there are multiple YouTube accounts making videos trying to verify or debunk traders. The rabbit hole keeps getting deeper.

The first thought when I see these hype videos is always: "If it's a good strategy, why are you sharing it for free online or asking someone to pay for it? Wouldn't you just keep it secret and make money for yourself?"

…Yes, I'm sitting in my giant glass house throwing stones with no shame. But I think I have a point here.

I suspect that someone, somewhere has to be making money consistently within a single market session, but it’s not easy. It’s not even easy to tell who’s lying. I've seen interviews and profiles of a few people talking about their day trading success, and some have been audited and verified, but I'm not going to throw down a pile of money and time in the hopes their strategies work for me. The most I'll spring for is a book, but if I have to read pop-culture psychobabble one more time about 'trading mindsets' I'm going to put my head through a wall.

So pushing a little of the emotion out of the execution might be good for my mental health.

Automation Schmottomation

I've been holding off on using my broker's APIs to create trading bots from scratch, because I'm a little lazy and didn't want to spend time building an entire tech infrastructure just to trade stocks and options on strategies that are managed once a day at most. Also, seeing a bot I made glitch and lose money when the strategy would work if I’d just spent three seconds clicking buttons is a double gut punch. I'd prefer only a single gut punch, thank you. So I recently signed up for OptionAlpha and connected it to my brokerage account instead. Internalizing success and externalizing blame for issues is healthy, right?

OptionAlpha is an options backtesting and automation service that connects to brokers, and it's actually been pretty great to me so far. You can make strategy backtests for options based on some preset things like price levels, moving averages, days of the week, and whatnot, and then create bots that follow those strategies. I'm not paid to promote these guys, I just use the site. And I doubt OptionAlpha knows or cares that I exist. The parameters available for backtesting methods and strategies are a little light, which is to be expected for a no-code format, but it's doing the bot infrastructure heavy lifting for me.

So what does this site have to do with day trading and my willingness to pursue quick day trade-style profits at the low, low price of my sanity?

OptionAlpha's 0DTE backtests are determined by the minute of the day you open them. But recently OptionAlpha added 'Opening Range Breakouts' to their backtesting and bot options. Instead of a set time or time period to open a position, the backtest and bot triggers on a specific intraday price movement.

ORBs

The Opening Range Breakout (aka ORB) is a concept from the day-trading world that's been studied a bit by academics. It's not the lines, bars, and squiggles drawn on a candlestick chart at various time frames that confuse me and seem to make no sense, but an actual quantitative concept that can be tested and repeated.

For ORB, there are two important concepts. The 'Opening Range' (OR) is the high and low price points of a security in the first minutes of trading during regular trading hours, usually between 1-60 minutes. A 'Breakout' is when the price first moves above/below the high/low of the Opening Range during trading hours. At the start of the trading day, the trader will note the high and low of the opening range, and then wait for price to "break out", then they'd trade in the direction of the move.

A recently published paper showed a profitable strategy built around ORB with stocks that have high recent historical volatility and above-average volume, called ‘Stocks in Play‘. My understanding of the ‘why’ this strategy should work is the following:

• Institutional traders, ETFs, algorithms, options hedges, traders, and so on like to position in the early minutes of trading for the rest of the day. This is because the first few minutes often don't have a lot of news, and the volume and liquidity is high enough to put on large positions and set orders for future demand if price moves.

• When the underlying price exceeds this Opening Range either above or below, those groups will have to adjust their positions to keep with their trading plans, often by just going with the momentum. Options or futures may exacerbate this feedback loop.

• Once there's a "breakout", it's hard psychologically to bet in the opposite direction, or even close your position if you're in the right direction, as the price keeps moving.

It all sounds simple and profitable, but I have some concerns.

• First, the low win rate percentage scares me. Mean reversion boasts high win-rates with occasional big losses to keep you on your toes, and breakout trading looks like the opposite. I'm not certain I’ll see a string of say... ten losses in a row and tell myself, 'yeah, this strategy still works. Nothing changed.'

• Second, unless it's automated, the trade needs to be monitored the entire day. Each followed "In Play" stock needs to be checked, and could break out at any moment. And once the position is opened, it might need to be closed at a stop loss.

• Third, I have no guarantee that I can create a short book of stocks that are already dropping. The short interest might be too high for these stocks to get shares at the breakout moment I need, causing slippage from delays or even a completely missed position. Currently I'm a little sick of trying to get short sale fills at a moment's notice with just the EEM/TLT trader and don't want more stock shorting.

So my own intraday ORB strategy needs to be a little different.

Finally, The Actual Trading Strategies

Let's see if OptionAlpha can save the day with options. I’m looking at SPY/SPX IWM, or QQQ underlyings, because they're liquid and have daily 0DTE expirations, and I suspect that intraday liquidity for each will be better than a diverse portfolio of 'stocks in play' every trading day. So I used OptionAlpha to make a simple ORB trader that trades 1 contract at a time (link to OptionAlpha Backtests here for Calls and here for Puts).

The QQQ backtest chart looks something like this:

With the QQQ Long Call strategy having statistics:

And the QQQ Long Puts having statistics:

OptionAlpha allows 0DTE backtesting on SPY/SPX/XSP, QQQ, GLD, IWM, and TLT. So naturally I checked this strategy against each of them, and found QQQ to be the best and most consistent underlying, making roughly $19K in profits on single contract positions since 2022.

The results are similar, but lower for the profitability percentage and profit factor of SPY/SPX/XSP. IWM is barely profitable, but I suspect that's because IWM is unpopular and full of junk stocks. Surprisingly, TLT was nearly as profitable %-wise per trade as SPY/SPX/XSP, although not having 5 expirations per week hurt the returns. GLD's backtest is barely profitable, but it's a commodity ETF that recently had a bull run, and much like TLT it doesn't have daily 0DTE options.

If you're a better coder than me, and you want to code this up yourself with your own bot to avoid using OptionAlpha, here are the rules:

• Choose an underlying with frequent 0 Days to Expiration options like SPY/SPX, TLT, or QQQ.

• Get the Opening High and Low of underlying's price for the first 5 minutes of regular market hours.

• When the price first breaks above/below the Opening High/Low for the day, and the VIX Index is down from prior market close, open a long call/put, respectively.

• The long call or put opened is the one closest to a 0.7 Delta, with 0 Days to Expiration.

• The time period for when the long position can be opened is from 9:36AM-3:50PM EST.

• The option is closed at 3:55PM EST.

• The option has a 25% stop loss.

• The trade is entered and exited only once per day.

• The bot doesn’t trade on FOMC days.

Here's the reasoning for what I chose and why I think it should still work going forward:

• The ORB backtest has pretty consistent gains with both Call and Put options, and doesn't rely on large single day’s return to make money. There’s one big win in 2025, but the strategy is still profitable without it. I think this implies the strategy isn’t reliant on bull markets to be profitable, especially if you compare the strategy’s performance to QQQ’s long stock performance.

• I used the smallest ORB timeframe (5 minutes) to determine the Opening Range, because in the ORB trade study linked above, the shorter the ORB period, the better the returns. (Which I later confirmed by checking the multiple timeframes provided. The best results was indeed at the 5-minute ORB.)

• The bot opens a position on the first ORB breakout, and sticks to it. I don't think the market normally predicts or positions for multiple big runs in different directions within a day, so I’m cutting losses fast and letting winners ride.

• I'm closing out the position at 3:55PM EST to avoid assignment, and there should still be sufficient liquidity at that time. At five minutes to market close I’ll be checking the position while I'm checking others, like the Volatility Reversion trade. I found that holding to 4pm EST is more profitable, but I’m not certain a long option position can be closed fast enough at the last second.

• Deltas closest to 0.7 at the time of opening on a breakout should allow for a good balance of extrinsic and intrinsic value to capture SPY's momentum. You can use CBOE's option price calculator to see what the amount of intrinsic versus extrinsic premium for a 0.7 delta 0DTE option looks like depending on time of day, strike prices, and Implied Volatility. Furthermore, if the underlying suddenly makes a big move against me, the maximum amount of money I lose is the debit I paid for the option. I think that paying a little extrinsic premium here to hold the equivalent of 70 shares is worth not actually holding 70 shares.

• Opening the trade when the VIX is dropping from the prior close makes the options cheaper, for both Put and Call options. I hate to lean on the VIX like a crutch, but an increasing VIX makes going long options more difficult, even for long Puts due to the Put/Call price skew.

• I'm using a 25% stop loss to conserve capital. This is the most shaky aspect of the trading strategy, and a big reason why I'm allocating the smallest possible position sizing to it. A stop loss isn't guaranteed at the 25% loss point, and OptionAlpha only checks positions once per minute. Still, a 25-30% win rate feels less scary if the losses are capped to a fraction of the debit used in the trade.

• FOMCs are skipped. FOMC days have severe price swings around the announcement late in the day, and high implied volatility. I don't think they’ll work for the strategy.

• I'm using the last 3+ years for the timeframe because that's when 0DTE options became popular, and I don't think that the 0DTE market 5 or ten years ago is going to be reflective of how 0DTE options will behave going forward. A three+ year sample of daily trades should also be sufficient to suggest robustness for the strategy, since we're only using a single parameter (VIX), and a single stop-loss mechanic (25%).

• I'm risking on average $300 per day if the trade is opened (sub-1% of portfolio), so even 5-10 catastrophic losses of all the invested debit won't create a drawdown that’s impossible to escape.

Now we get to the scary part. All this backtesting is nice, but the real test is whether it makes money. So I'm going to trade it live starting this Monday and see what happens over the next 1-2 months. Much like with my EEM/TLT and DAX/EWG ideas I could spend a bunch of time agonizing over more metrics, more research, and attempt forward trading in a paper bot, but I’m biting the bullet with the smallest possible financial risk to save time. I should be able to compare my live results in 1-2 months to an updated backtest on OptionAlpha and see if the idea works and matches the results I've been modeling.

If the trade works well, I'll probably use both QQQ and TLT for this strategy and expand the daily total risk a little to maybe 1%-3% of my account size. At the end of the month, I'll have an update how the ORB, Volatility Reversion, and EEM/TLT trades are doing, along with a modification to an earlier strategy I posted about.

- Lay Quant