Purged and Embargoed Cross-Validation for Options ML

Why plain k-fold silently overfits your trading model — and the 4-line fix that stops it. The Problem With k-Fold in Time Series Financial data is sequential. k-fold shuffles rows, so a training row from 2 PM Tuesday sits next to a test row from 10 AM Monday. Worse: triple-barrier labels overlap . A label at bar t looks 6 bars into the future; a training row at t+2 "knows" part of that future. The model leaks. V1's history is full of "HIGH overfit" verdicts — train AUC high, test AUC flat. Plain TimeSeriesSplit is only marginally better; it still lets adjacent windows bleed into each other. Purged + Embargoed CV For each test window [t0, t1] : Purge any train row whose label window overlaps the test window. Embargo max_training_horizon bars after the test window — drop those too. Overlapping labels are not i.i.d. Purging + embargoing makes the split honest. def purged_embargo_split ( n , n_splits = 5 , embargo_frac = 0.02 ): idx = np . arange ( n ) fold = np . array_split ( idx , n_splits ) splits = [] for i in range ( n_splits ): test = fold [ i ] emb = int ( len ( test ) * embargo_frac ) lo , hi = max ( 0 , test [ 0 ] - emb ), min ( n , test [ - 1 ] + emb + 1 ) train_mask = np . ones ( n , bool ); train_mask [ lo : hi ] = False splits . append (( idx [ train_mask ], test )) return splits Tune Only When You Have Enough Optuna once "won" a validation set with only 4 decisive rows — statistically meaningless. Rule: never tune when the decisive (non-abstained) validation rows are below ~30–50. Widen the date range or symbol basket first; don't trust the trial. Three-Way Split, Always train (fit) → validation (early stop + HP select) → disjoint calibration set (sigmoid/ isotonic) → test (untouched, final score only). V1 sometimes conflated validation and calibration. Keep them separate. The Promotion Gate Log every trial's train/val/test gap, not just the winner's test score. Promote only if replay AND shadow (≥1 live session) both beat baseline on buyer metrics : 1.5x