Evil.Rat

What Is Evil.Rat?

evil.rat is a micro trend black box trading system that has been developed internally at our notorious Lair Of Doom Headquarters. It has been scientifically engineered to satisfy the essential breeding requirements of the short tailed rattus domesticus speculatus - a.k.a. the casual index futures and ETF options traders. It’s primary qualities are:

• Low volatility
• Consistency
• Trades during core NYSE hours (9:30am EDT - 4:00pm EDT).
• No holding of overnight positions (especially important for futures trading in high volatility tape).
• Does not suffer from high implied volatility (e.g. VIX above 30) but actually thrives in it.
• It is highly profitable! $$

Obvious from the two graphs is that this strategy loves volatility and eats it for breakfast. However, it also does very well under low volatility (i.e. VIX below 30) but although we might see that in the coming months for a brief moment I’m confident that we’ll remain above the 30 line for a majority of the time for the next two years.

Performance Data S&P 500 E-Mini futures:

Testing period: 8/1/2008 - 7/31/2009:

Performance graph

Statistics

Weekly net profit

Stop Loss: 40 ticks (1 ES tick = $12.5 - thus 40 ticks = $500). The stop on the SPY (or SPY/ES options) is 10 points, which can be entered as a conditional stop order in your TOS desktop.

As proof that evil.rat is not a curve fitted system please go here to review the 2007 performance data.

Performance Data Nasdaq 100 E-Mini futures:

Testing period: 8/1/2008 - 7/31/2009:

Performance graph

Statistics

Weekly net profit

Stop Loss: 39 ticks (1 NQ tick = $5 - thus 39 ticks = $195). The stop on the QQQQ (or QQQQ/NDX options) is 9.75 points, which can be entered as a conditional stop order in your TOS desktop.

As proof that evil.rat is not a curve fitted system please go here to review the 2007 performance data.

How Do I Trade Evil.Rat?

• Subscribers will receive an email alert the second an order needs to be initiated. The email will contain:
  • Always: A time stamp - e.g. 10:15am EDT.
  • Always: A sequential number - making it easier to differentiate the execution sequence.
  • Always: The direction of the position, which will be either BUY or SELL - for options BUY means to either buy calls or sell puts, and SELL means to either buy puts or sell calls.
  • Always: The strike price of the respective futures contract at the time when the alert was triggered.
    Example: TRADE: Buy at 1292.25.
  • Only on entries: Your stop mark for this particular contract.
    Example: Set STOP ORDER to: Sell at 1283.25.
    Please note there will also be a reminder notification if a stop is being hit, so there is no need to actually place a stop order.
• A delay of a few minutes doesn’t matter as long as a position is taken within 10 minutes following the time stamp on the alert. So, if you receive an alert and the time stamp is 2:15pm EDT you should enter your trade by 2:25pm EDT.
• There is a stop on both versions of evil.rat (40 on the ES and 39 on the NQ) and you will be automatically notified when it triggers  - the system can be traded with a tighter stop but again over time the stop I selected produces maximum profits. Actually using no stop at all is even more profitable: On the ES it would have produced $42k in the past 12 months with only 7% max draw down. BTW, that’s not 7% of your capital - the way NinjaTrader calculates it is on the value of the contract - kind of weird.
• Once a position has been taken you will receive an alert to close that position by 3:58pm EDT (it will be emailed by 3:58pm EDT) or earlier. If the market goes our way then you will most likely receive your ‘close open positions alert’ a few minutes before the closing bell. If the market goes against your open position and breaches the contract’s stop loss provision (i.e. 40 on the ES, or 39 on the NQ) you will receive a ‘close open positions alert’ the moment that event occurs. Really, this sounds a lot more complicated than it really is - in more simpler terms: Winning positions close out at the EOD - losing positions close our earlier. No trade lasts more than 6.5 hours.
• As mentioned above, you will receive an email a few minutes before 4:00pm EDT but if you don’t get it for some reason please close out your positions before 3:59:59pm. The strategy performs best if you close out within 3:55:00pm - 3:59:59pm. If you are not in front of a computer during trading hours make sure you have access to a mobile device like an iPhone or a Blackberry so you can tend to your positions.

IMPORTANT: If you decide to trade both evil.rat and resident.evil concurrently you might at times find them trading in opposite directions - if only for a short amount of time. For that reason we recommend that you trade at least one (if not both) strategies with their respective ETF option counterpart (i.e. SPY options instead of the ES futures and QQQQ options instead of the NQ futures). For detailed information on how to trade options with either evil.rat or resident.evil please point your browser here.

Some traders just don’t feel comfortable trading the futures - others prefer the increased leverage offered by options - and some simply don’t have access to futures trading via their current brokerage or their particular account type (e.g. IRA accounts). What to do - what to do?

I have received several emails asking me about which type of option I would recommend in the context of trading evil.rat. Frankly, if I have a choice between trading the ES or SPY options I would have to go with the Spiders - some of those bid/ask spreads on the ES option chain look a bit strange at times. The same applies to NQ options vs. the Cubes (QQQQ) - stick with one of the most popular (and liquid) optionable contract available.

As mentioned above - since evil.rat is an intra-day trading system (i.e. you always exit before the closing bell) you want to buy as much delta as possible, thus ITM options are highly recommended. Remember that the 10-day ATR for the ES contract is about 53 points, or $2,650 - for the NQ it’s 71 points or about $1,420. That’s not a bad range but nothing you can capture well enough with a low delta option. I have highlighted some good examples in the option chain shown above.

Besides starting out with sufficient delta, you always want to make sure that there’s enough open interest in your particular option. This will reduce the chances to be taken advantage of by your friendly market maker due to a lack of bids when it’s time to sell your option. Of course the same applies to you intrepid option sellers - you want to make sure there’s a reasonable ask once you get the exit signal and it’s time to buy back your option.

Naturally your options will suffer from IV fluctuations, so you might not want to pick front month options and rather pay more for the next month. They will move the same in terms of price but suffer less from IV changes. You will obviously pay more for the added time value (theta), but you are selling them the same day, so it’s fair to say you’ll get 99% of that money back.

How many SPY options do I trade in place of one ES contract?

It’s actually pretty simple. You obviously know that the ES moves exactly $50 per point - the NQ moves $20 per point. If you buy options instead then you want to make sure that have sufficient delta to participate, something I have explained exhaustively above. But besides the delta - how many options do I need?

Let’s first not forget that the point value of the SPX is 2 times the point value of the e-minis. So, 20 e-minis hedge 10 combos in the SPX (i.e. long call/short put). Or in other words, one SPX combo (long call/short put) is equivalent to 2 e-mini S&P future contracts or 1000 shares of SPY. Or yet in simpler terms - one ES contract equals 500 shares of SPY.

So, the question now becomes - how do we control 500 shares of SPY? That’s right - with 5 SPY options! Of course they need to be in the money if you want to capture the full move. If your option’s delta is only 0.8 then you’ll need to get 6.25 x 0.8 delta SPY options (5 / 0.8) to match the point movement of one futures contract. I would probably get 7 to be safe - but don’t forget to pick a high volume option so that you don’t get cheated (too much) by the market maker.

As a side note - you’ll notice that the cost of 5 SPY ITM options (around 80 right now) is about the same as the overnight margin for one e-mini S&P contract.

How many QQQQ options do i trade in place of one NQ contract?

The Cubes have the same correlation to the Nasdaq e-Mini as the Spiders have to the S&P 500 e-Mini. Thus, one NQ contract equals 500 shares of QQQQ - and thus five QQQQ 1.0 delta options (as one option controls 100 shares). Now, if you want to match the NQ as close as possible you probably want to grab six options as you most likely won’t exceed a delta of 0.9. Of course using ITM options allow you the luxury of playing it smaller - for instance you could play just two or three options and thus have less exposure. However, $20 per NQ point is not exactly a huge move to begin with and you want to be sure that you return enough profits so that it at least pays for the subscription

More About ETF Trading Via Evil Rat

Some folks are only able to trade their company self-directed 401k account and thus no options, no futures or any shorting is allowed. But hey - you can buy ETFs, right?

Here is a link to a chart that shows the SPY vs. the inverse SH - the line in blue are the Spiders, and the black line is the SH. So, as you can see the SH runs exactly inverse to the Spiders, and instead of shorting the SPY you can always just buy SH. BTW, the inverse ETF for the QQQQ would be PSQ:

Now, the only question remaining is how many to buy. In the segment above I explained that you need 5 ITM Spiders to match one ES futures contract. So, it’s pretty easy - all you need to do is to buy 500 shares of SPY to match one long ES contract and 500 shares of SH to match one short ES contract. And the same equation applies to the NQ.

Of course you need enough capital to match one contract as you don’t have the leverage, but if it’s a 401k or Roth-IRA and you paid in for more than a year or two chances are you probably have enough. BTW, the one big advantage of trading the ETF directly is that you don’t have to worry about delta and picking options that offer sufficient open interest.
Alright I’m Sold - What Does It Cost?

There are three evil.rat subscriptions available - one for the S&P 500 E-Mini futures, one for the Nasdaq 100 E-Mini futures, and a package combo:

• evil.rat/ES: $99/month - can alternatively be traded via SPY or ES deep ITM options (delta > 0.8) but remember that any calls or puts need to be closed the same trading day, thus a trading account > $25,000 is necessary.
• evil.rat/NQ: $69/month - can alternatively be traded via QQQQ or NDX deep ITM options (delta > 0.8) options but remember that any calls or puts need to be closed the same trading day, thus a trading account > $25,000 is necessary.
• evil.rat/XX: $149/month - discounted combo of evil.rat/ES and evil.rat/NQ.

Patience: Trading alongside a black box takes discipline and patience. You might subscribe and find starting off during a losing week or two. If you follow a trend trading system then you need to give it time. Sometimes you might get lucky and bank profits right away but consistency is the key and you should be prepared to give evil.rat at least two to three months. I’m not saying that because I want to squeeze more subscriptions out of you guys - this is a very basic concept when it comes to automated trend trading and there is plenty of documentation on that subject available online. BTW, one of my favorite books on the subject is ‘Trend Following‘ by Michael Covel.

Consistency: There is another aspect to consistency worth remembering - let’s say you sign up and you run into a losing week or two. At the end of the month you skip for a month or two and then come back - there is a good chance that you just missed out on a great run as the best time to join a proven trading system is when it just had a drawdown.

Mechanical: That’s how you will have to be - even if it hurts. Don’t look at your charts - that’s what your discretionary trading is all about. Be aware that if you commit yourself to trading evil.rat there is only one way to do it and that’s the evil.rat way. There is no second guessing or waiting for a ‘better entry’. You execute the order when you get the signal. Over time you might see things that you believe will improve your odds - fine - if you can make it work that’s great but if you break the system and start losing money don’t complain to me.

Expectations: As you can see from the graph - evil.rat is a slow but consistent micro trend trading system. You won’t make tens of thousands per contract in one month but chances are that it will produce consistent results for you over time.

The Future: No one knows how high or low a market will go. No one knows when a market will move. You can’t undo the past and you can’t predict the future. Prices, not traders predict the future.

What You Know: Using ‘common sense’ is not a good way to judge or trade markets. If common sense would equal success in trading the markets we’d all be millionaires.

Losses: Face it - they are the cost of doing business. No one (not even a well tested system) can be right all the time. No one can make money all the time. System traders expect and handle losses with objectivity and detachment. If you don’t have losses, you are not taking risks. If you don’t take risks you won’t profit - simple as that.

Capital: Don’t get greedy. For every $25k you have in capital we strongly suggest that you trade one ES futures contract max - for every $10,000 you have in capital trade one NQ contract max. Do not stray from this rule. This is also the reason why your broker’s margin requirements do not matter. What does matter is that you won’t feel too much of a pinch when you lose - and you will lose occasionally. The key is sticking with the system and in order to assure that you need a comfortable ratio between your available capital and the risks you take.

Please do not sign up for evil.rat if you disagree with any of the tenets listed above - you won’t do us or yourself a favor.

If you would like to receive free SMS alerts, here’s how - all this of course assumes that you already have a Gmail account:

1. Sign into gmail
2. Go to settings top right
3. Click on filters
4. Create a new filter
5. Add from address ex. alerts@evilspeculator.com (where all alerts come from)
6. Click next step
7. Check forward to and add your SMS (e.g. 1234567890@txt.att.net for AT&T).
   You can find a mappings of most popular mobile providers here.
8. Click create filter and your done.

If you are switching from an existing email account to Gmail then you also need to do this:

1. Log into your EvilSpeculator membership profile.
2. Change your old email address to your new Gmail address.
3. Done - you should now receive all alerts at your Gmail address which will automatically be forwarded to your SMS number.

That’s it - from now on you should receive all your SMS messages for free and almost instantly.

Of course you can avoid having to do all the above by simply using your SMS email address (e.g. 1234567890@txt.att.net for AT&T) as your email address in your membership profile. However there are three strikes against that. First, I cannot guarantee delivery and also don’t know about delays. Second, you won’t receive alerts via email anymore. Third - I’m pretty sure those alerts are not free - but it might depend on your mobile provider’s offering.

For existing SMS recipients: I strongly recommend that you all use the period until May 21st to switch over. Because this way you can jump back to my existing SMS alert gateway if those alerts somehow don’t arrive properly. Most subscriptions are going to expire around the 20th anyway and this way you can just choose to not re-subscribe if SMS is essential to you and the Gmail solution is not an option for some reason. After May 21st all SMS numbers in the membership module will simply be ignored - if you want SMS after that you need to follow the instructions above.

A Few Pointers

Alright, before you jump the gun and sign up - here are a few pointers:

1. I strongly recommend that all evil.rat subscribers refrain from using the following webmail providers: Yahoo/Hotmail/AOL/Verizon/ATT/MSN. If you do use one of those then hop over to GMail and sign up for a free email account. GMail has the best spam filtering on the planet right now and thus far there have been no issues with folks receiving our alerts.
2. Please make sure you read the evil.rat page in its entirety - in particular I recommend you review the before-you-sign-up section. That should probably cut down on 90% of the emails I will receive
3. When you sign up you have an option to provide your SMS number. First up, make sure that you follow the input format as described in the form (i.e. no plus, no leading zeros, no spaces, your country code, etc.). Second - if you provide the SMS you will receive both email and SMS alerts. If you start seeing emails but no SMS arrives please let me know (admin at evilspeculator) and I’ll try to find a better route for your mobile provider.
4. I have kept the subscription format on a month-to-month basis for now - there is no auto-pay. Once your subscription has expired you’ll have to extend your subscription from your membership page. Nevertheless - I want to make it clear that trading a blackbox system takes a 3 month commitment minimum, which hopefully should not come to a big surprise to you. This is not a system which will make you tens of thousands with one contract in a matter of days. Look at the profit graph of the past year and you’ll get a good idea of what to expect.
5. You know the old mantra: Past performance is no indication of future success. I have tested the crap out of this thing and have great confidence that it will continue to perform but as you know - black swan events happen and when it comes to trading there are no guarantees.
6. There will be days when evil.rat does not get an entry trigger - please do not send me constant emails asking me why it’s not trading today. The system is the system and it’s possible to have a straight up or straight down day and there are not trades being taken. On average there is about one trade every two days on both evil.rat/NQ and evil.rat/ES.
7. Evil.rat subscribers will be eligible for a special partnership discounted futures rate at ThinkOrSwim. You will have to prove that you are an evil.rat subscriber, so after you sign up just email your username to support@thinkorswim.com and copy scott@thinkorswim.com - starting rate is $2.75 per contract per side inclusive of exchange fees. I know there are a few brokers who are a few dimes cheaper but this is an aggressive rate and in my not so humble opinion TOS is the best retail broker around - period. Also, if you continue to trade I’m sure they can probably match what some of those discount brokers are offering - just a matter of seeing some activity in your account.
8. If you like what you see - you can sign up here.

Frequently Asked Questions (more to come):

Q: If there is slippage between your alert and the current spot price should I go with the exact stop as indicated or set it 10 handles from my own entry? (please not that it’s 10 for the ES - and 9.75 for the NQ)

A: I would set recommend setting it as directed but there is little harm in adjusting it as you become more comfortable following the system. Of course there are times when the tape moves very fast in which case you will have to adjust accordingly.

Q: I have provided an SMS number when subscribing but I’m only receiving the email alerts - what do I need to do to make it work?

A: First, make sure that you entered your SMS # according to the instructions provided on the sign-up page (i.e. no plus, no double zeros, no spaces, and your correct country code). If you did it right and are still not receiving SMS alerts shoot me an email with your username and SMS# to admin at evilspeculator (and the dot com). I will forward your info to my gateway provider so that they can find a successful route for you.

Q: Will you be making an Excel spreadsheet with the recent trade history available to subscribers?

A: Yes, I plan to regularly export several months of trade history and post it for everyone to see - not just subscribers. I will also update the graphs and charts above on a weekly basis.

Q: Where can I access the data feed for evil.rat?

A: Just to make this clear - evil.rat is a black box trading system. There is nothing to watch - it’s not an indicator/oscillator like the Zero. All you will receive are email/SMS alerts indicating when evil.rat is executing a trade.

Q: Does evil.rat include the zero data feed or is that separate?

A: Nice try! No, that’s a separate subscription - one has nothing to do with the other and evil.rat is not based on the Zero.

Q: How do I claim my discounted $2.75 commission with ThinkOrSwim?

A: Easy! After you sign up just email your username to support@thinkorswim.com and copy scott@thinkorswim.com - they will take care of it right away. Starting rate is $2.75 per contract per side inclusive of exchange fees.