ADR-0033: Apex trader — maximize profit at the highest ACCEPTABLE risk (tail-capped 3× overnight composition)
- Status: Proposed (awaiting Alex's approval) — design only; nothing in this ADR arms or trades
- Date: 2026-07-24
- Deciders: Alex Place (pending); operator-requested design (kriskin)
- Loop stage: Reason (objective + risk framing) + Act (composition) + Verify (gates, breakers)
- Relates to: ADR-0028 (Sharpe-CI mandate for real capital), ADR-0032 (real-money onboarding), the 2026-07-24 measured-strategy ledger (
data/oracle/active-loop-runs.jsonlrowsbandits-trader-*,overnight-vol-conditioned), the options-shadow trader (measurement-gated), the ETF-universe retune.
Context
A session of walk-forward measurement established, with recorded evidence:
| Measured fact | Number | Sample |
|---|---|---|
| SPY overnight (Mon–Thu, trend-aligned + vol > trailing median) | Sharpe 3.18, 65% win, +0.103%/night, maxDD −3.1% | 10y, n=402 |
| Same edge levered (incl. ~5%/yr financing): 2× / 3× / 5× | Sharpe 2.88 / 2.77 / 2.69 · CAGR 7.8 / 11.3 / 18.4% · DD −6 / −10 / −16% | 10y |
| QQQ overnight is a calm-night edge (regime complements SPY's) | Sharpe 2.12 (flat-vol nights) | 10y, n=875 |
| 3× ETFs (TQQQ/SOXL) for this edge | Sharpe 1.5–1.7, DD −25…−28% — dominated by margined SPY | 10y |
| Intraday day-trader (best config: ETF universe + regime + 1R) | PF 1.17 in-sample, Sharpe ~0.19 OOS — weak | ~1mo |
| OTM overnight options | modeled negative (theta); now being measured by the shadow trader | gated |
| Single stocks | negative expectancy — excluded | 1mo + real book |
The operator asks for the profit-maximal trader at the highest acceptable risk. This ADR defines "acceptable" precisely and composes the measured edges under it.
Decision (proposed)
1. Define "acceptable risk" by the tail, not by variance
Gaussian/Kelly sizing on the measured per-night stats (μ≈0.10%, σ≈0.47%) suggests ~47× — absurd, because the binding risk is the un-stoppable overnight gap (a 2015/2020-class −5…−6% open), not night-to-night variance. So acceptability is a stress constraint:
S1 (hard): a −6% overnight SPY gap must cost ≤ ~20% of equity in one night and must not breach maintenance margin. S2 (hard): monthly loss ≥ −10% forces de-leverage to 1× for the rest of the month. S3 (hard): the existing kill-file / brake halts all entries instantly.
S1 ⇒ hard leverage cap 3.0× on the overnight book (3 × −6% = −18% worst night). 5× is explicitly rejected: +18.4% CAGR was measured, but a single bad gap ≈ −30% plus margin-call risk, and the backtest window contained no such gap — the DD figures understate exactly the risk that matters.
2. The Apex composition (one account, flat by day)
| Sleeve | What | Size | Measured basis |
|---|---|---|---|
| A — core | SPY overnight, Mon–Thu, trend-aligned + vol-not-flat regime | up to 3× (margin, not 3× ETFs) | Sharpe 2.77, CAGR 11.3%, DD −10% at 3× |
| B — complement | QQQ overnight, calm-vol regime (fires on different nights than A by construction) | up to 2×, and combined same-night gross ≤ 3× | Sharpe 2.12 regime |
| C — carry | Days + ineligible nights: cash/T-bill yield (equity is flat overnight-book by design) | 100% idle equity | ~4–5% carry |
| D — convex (the "highest-risk" slot) | The asymmetric OTM options sleeve | ≤ 1% equity premium/night, bounded loss = premium | OFF until the options-shadow ledger measures positive expectancy over ≥30 nights |
| Excluded | Single stocks; 3× ETFs (dominated); intraday day-trader (no proven edge — signals-only at most) | — | measured negative/weak |
3. Risk governance (what makes maximum aggression acceptable)
- Leverage scalar = base × brake: the existing
brake-monitorgross (0–2×, normalized) scales the 3× cap continuously tobrake-monitorin storms — the book de-levers itself before regimes break it. - Circuit breakers:consecutive losing nights → halve leverage forsessions; S2 monthly breaker; kill-file honored everywhere.
- Regime discipline: no trend-alignment → flat (inherent to the gates); one decision per night; weekend holds never.
- Vehicle upgrade (Phase 2): move sleeves A/B to MES/ES futures when available — the ~23h session makes overnight stops executable, converting most un-stoppable gap risk into stoppable path risk, with cleaner margin. This raises the acceptable cap; revisit S1 then.
4. Expected performance (composed from measured parts — honest bands)
CAGR ~15–20% (A ≈11% + B on its nights + carry), blended Sharpe ~2.3–2.8, max-DD budget 15–20%, worst-single-night −18% by construction. Confidence medium: 10-year bull-heavy sample, filtered-night Sharpe has wide CIs, tails understated by history, financing modeled at 5%/yr.
5. Sequencing and money
Phase 1: build Apex as a paper trader mode (sleeves A–C; D stays shadow). Phase 2: futures vehicle. Phase 3: arm D only on the shadow's measured positive_edge_candidate verdict + operator approval. Real money remains gated by ADR-0028 (Sharpe-CI mandate) and ADR-0032 (onboarding) — this ADR does not touch that.
Consequences
- The system gets one coherent max-aggression book with its risk defined by an explicit, testable stress bound instead of vibes — and a paper track record that ADR-0028 can eventually score.
- Profit is deliberately left on the table vs 5× (−7pp CAGR) to keep single-night ruin off the table; that is the point of "acceptable."
- The options sleeve stays an option (measurement-gated), so the highest-risk component can never silently turn on.
Rejected alternatives
- 5× leverage (measured +18.4% CAGR): one −6% gap ≈ −30% night + margin call; tail unpriced in-sample. Rejected on S1.
- Kelly/variance sizing (~47×): ignores gap tails entirely — the failure mode this design exists to prevent.
- 3× ETFs as the leverage vehicle: measured strictly worse (Sharpe 1.5–1.7, DD −25…−28%) than margined SPY at equal effective leverage; vol-drag + concentration.
- Including the intraday day-trader as a sleeve: OOS Sharpe ~0.19 — no proven edge to lever; keep signals-only until it earns in.
- Unconditional overnight holding (no vol/trend gates): measured Sharpe 1.59 vs 3.18 gated — the gates ARE the edge concentration.
Sources
- Measured runs (this repo):
data/oracle/active-loop-runs.jsonl— rowsbandits-trader-profitability,bandits-trader-universe,bandits-trader-sharpe-oos,overnight-vol-conditioned; scratch harnesses replayinglib/signal-engine+ Yahoo daily/15m bars (no lookahead). lib/brake-monitor.js(gross scalar),lib/options-shadow.js(measurement-gated convex sleeve), ADR-0028, ADR-0032.