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Wednesday, March 20th 2019

Backtesting, AI, Machine Learning, and Fitness Functions in Options Explained

Michael Mescher, Founder of Gammon Capital, joins Matt Amberson of ORATS and Mark Longo of the Options Insider to discuss Artificial Intelligence, Machine Learning, Backtesting and the Fitness Function in options.

Summary

Michael Mescher, Founder of Gammon Capital, discusses backtesting, AI, machine learning, and fitness functions in options with Mark Longo of the Options Insider. Topics include the dangers of selling volatility, practical applications of machine learning in finance, and testing models on out-of-sample data. Mescher's background in derivatives trading and statistical analysis of backgammon games informs the approach at Gammon Capital.

I received a nice email from a client who had just listened to a podcast I co-hosted with Mark Longo at the Options Insider last year and my client loved it. I went back and gave it a listen, Michael Mescher from Gammon Capital does a great job as guest.

 

He discusses:

  • What is Gammon Capital?
  • You've talked a lot about the dangers of selling volatility and how short vol managers aren't worth their fees. What are your thoughts on the maelstrom of the past week? How have your funds fared over the past week?
  • Machine learning is a hot buzzword these days, but what are some of the practical applications that you're seeing in the financial markets right now? Is it ready for prime time or still in the nascent phase?
  • Unsupervised learning/ fundamental strategies?
  • Supervised learning / quantitative strategies?
  • Classification vs. Regression problems
  • Hiring machine learning specialists vs. Products specialists
  • 90% of the world's data was created in the past two years. Is that an opportunity or a terrifying statistic?
  • Testing models on out-of-sample data vs. carefully constructed back tests?
  • Should managers be concerned that the robots are coming to take their jobs and their clients?

Here's a link to the podcast and here's a video with sub-titles. Enjoy!

 

Michael's bio:

Michael Mescher heads the team at Gammon Capital which he founded in 2015. Mr. Mescher is the Chief Investment Officer of Gammon Capital’s program offerings. Over the past 15 years, he has established himself as a successful trader with extensive experience in listed derivatives.

Prior to founding Gammon Capital, he was a partner at Ronin Capital in charge of managing structured volatility strategies. His experience also includes 5 years on the sell side at Lehman/Barclays where he was the Head of Special Situations Volatility Trading.

Mr. Mescher began his derivatives trading career on the floor of the CBOE. It was there during his free time, that he began applying statistical analysis to backgammon money games with great success. It is these methods and processes that inspire the approach at Gammon Capital.

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The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors. For more information please see our disclaimer.
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