When Is It Time To Change A Strategy?

Summary

Steven Brooks argues that a short losing stretch is not, by itself, a reason to change a trading strategy. The key question is whether the market structure that created the strategy’s edge still exists. If it does, the strategy may need to be adjusted to fit a changed market regime rather than abandoned.

Brooks uses zero-day-to-expiration (0DTE) options as an example. Since 0DTE options emerged in May 2022, participation and competition have increased, compressing the easy margins available early on. The underlying opportunity may remain even as its economics change.

In response to margin compression in 2024, 2025, and 2026, Brooks’s hedge-fund team spent about six weeks testing strategy variations. It selected a version that was more stable over the prior three years, which the team regarded as the more mature 0DTE market, rather than the version with the strongest historical backtest. The selected approach did not restore 2022–2023 margins; its appeal was that margins were more stable in 2024–2026.

Framework for Reviewing a Strategy

• Identify the market structure the strategy is designed to exploit, such as a market rule rather than a pattern discovered through backtesting.
• Check whether that structure still exists. Brooks notes, for example, that market circuit breakers can be activated only before 3:25 p.m. Eastern time.
• Assess whether the market regime has changed and whether the strategy’s expectancy, operating costs, or margins have deteriorated persistently enough to fall short of required returns.
• If the structural edge remains, test changes to how it is expressed, such as:
  • Entry or check-in time
  • Input filters, including adding or removing a filter
  • Option credit or price
  • Spread width
  • Profit target
  • Stop loss
• Avoid choosing a variation solely because it has the strongest retrospective backtest. Prefer one with plausible economics and stability in the current regime.
• If the structure behind the edge disappears—or there was no structural rationale in the first place—consider discarding the strategy. Brooks cautions that strategies based only on hindsight-fitting are especially difficult to evaluate after a bad week.

Assets and Instruments Mentioned

• 0DTE options, including selling options and adjusting option credit, price, and spread width
• Market circuit breakers
• No specific ticker symbols are mentioned.

Disclosures

No explicit “not financial advice” disclaimer appears in the subtitles.

Presenter and Source

Steven Brooks, speaking about the strategy-review process at his hedge fund.