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Volar’s Quant Math’s Daily Edge
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Volar’s Quant Math’s Daily Edge

by MoleJune 22, 2011

Well “cuz” I (volar) promised a few of you a little treat this afternoon, you get one (in addition to a very lengthy/touted sentiment update tom.).

So why was the VIX down today and the SPX up? Bobby Low asked this, and it is a superb question.

Why? Not sure, but the better questions is whether or not there is an edge ūüėČ We rats dont give two kitten craps if the tape is up or down, we care about an edge!

First, when dealing with the VIX remember it is always seasonal around holidays. Also Mole and I have shown you that the VIX is least correlated to the SPX during the month of July (see many previous posts). Yes the 4th is coming up very soon, and that means a lower VIX.

Just look here:

This just shows that the narrowest range of the year is during the 4th of July (and one of the lowest values). Why? No volume! No volume, no volatility, no large traders, no reason to purchase vega! You all may think I am weird, but this is a game of buying and selling and market orders by weak hands, not FUNDAMENTAL VALUATION. The boyz figured this out in the 1800’s not 1999. Also (as a FYI and a response to a previous thread) I will add that 2008 does not SKEW this data; quartiles fix that issue.

Now on to the probabilities ūüėČ

You will need to read this chart closely. This is tomorrow’s probability and expected value of being higher.

Ok so we have good odds of being higher if you ask me. An edge means that we positive expectancy (no not % positive). For example I can win 90% but only make -2% on average.

Now an edge is not a good edge if one goes bankrupt. Or in other words how many times can I expect to lose in a row? So an edge simply means if I role the dice over and over do I win? That is how the game works and it is why backtesting is IMPERATIVE.

Well here you go:

This just goes to show that risk does not mean risk. Or for me to take this trade I must be able to risk loosing 10% (un-levered) for the gain of 27% (un-levered) since 94. So this system does not offer 1:1 risk to reward, and thus I would tend to not use it.

Just to prove to you that the edge has increased over time, here are the stats since 2005.

Obviously things have improved, but we also have had nice bull markets since then too. BUT, I dont like the return given the draw down.

So guess what? Leaches you get nothing! Rats here you go ūüėČ

[amprotect=nonmember]More of Volar’s charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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Ok on to another way of looking at the same data. This time as opposed to 1 day later, 1 week later. Or if we get this signal and I go long on close, what as the return 7 days later at close.

Clearly an edge here as well! 59% positive and an expected return 1 week later of 32-44 emini points!

BUT for due diligence, we need to know the draw down. Is the edge legit ? I admit I am likely short-cutting the drawdown here. Or I did not account for market swings while the trade was established (only consecutive outcomes). Or in other words, the market could fall 60 ES points and rally 90 into next week, and that would not show up in this data- however, that is really not my personal worry as I always have deep stops. So this is not perfect, but it is the best I can do in less than 45 minutes…

So here is the performance:

NOW THAT IS AN EDGE. Clearly this makes money with little draw down. So us rats are better off holding this a week and not one day.

Also, you guys are starting to get to know me… and I always run seasonality.

Here is the seasonality of that trade since 1986.

So not only is there an edge, there is a superb edge in the month of June (coincidence I think not).

Ok an one more random stat.

How many times in history has the SPX (since 1950) closed down 8 weeks in a row? Answer is 2x. Or we have extremely low odds of the market being down this week! Also notice that BOTH of the instances in which the market fell 8 consecutive weeks, we were below our 200day.

So we have high odds of closing higher this week.

Bottom line, this took me less than <45 minutes (including typing) to run this math. Edges may be hard to find, but they are much more hard to FOLLOW. I DO NOT CARE ABOUT THE OUTCOME TOMORROW OR NEXT WEEK. THE OUTCOME IS IRRELEVANT (unless I do not follow my system). Clearly, I have more than one edge to be long (in addition to my long sentiment update tomorrow). Panic and fear are still amok- Volar does not care on bit.

Finally, I leave you with a thought. How many of you will take this trade? Probably none correct? Why? Well as Mole stated,“That brings to mind a quote from Richard Dennis who said that he could have put the coveted turtle rules into the newspaper but nobody would have traded it. “

Just saying, emotion tends to get in the way of perfectly logical trades if you ask me.

Now I am not saying to take this trade- that is up to you, do you trust my math in 45 minutes? Do you trust my data? Also, holding a mini for a whole week makes many cringe, but it is what it is… I suggest a deep 20-30 point stop or so if you do decide to do this. This would give one about 1-2x risk to reward.

Best of luck trading,

And if you dont get stats or dont get this stuff, feel free to ask me.

-Volar

I did this way fast- so expect typos ūüėČ

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About The Author
Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • volar

    Ok got to go get something to eat…¬† see yo all tomorrow

  • volar

    Ok got to go get something to eat…¬† see yo all tomorrow

  • Anonymous

    Great post Volar. I am siding with a violent ABC. Being currently in B.

  • Anonymous

    Great post Volar. I am siding with a violent ABC. Being currently in B.

  • Anonymous

    Volar,
    If we do close down in June (since 1950) that will be very telling (even if we rally in July).  IMHO then this will indeed be an epic bear market.

    BTW I sort of took your long soy/ short corn trade but closed out early yesterday morning using ETFs. …. I should have legged out and held onto my¬† CORN July 45 puts a little longer.

  • Anonymous

    Volar,
    If we do close down in June (since 1950) that will be very telling (even if we rally in July).  IMHO then this will indeed be an epic bear market.

    BTW I sort of took your long soy/ short corn trade but closed out early yesterday morning using ETFs. …. I should have legged out and held onto my¬† CORN July 45 puts a little longer.

  • Anonymous

    /NKD with a nice pop.

  • Anonymous

    /NKD with a nice pop.

  • http://evilspeculator.com molecool

    So guess what? Leaches you get nothing! 

    LOL – you crack me up, volar :-)

  • http://evilspeculator.com molecool

    So guess what? Leaches you get nothing! 

    LOL – you crack me up, volar :-)

  • http://evilspeculator.com molecool

    Well, looks like I’m going to have to retire ZeroFX – too bad, I really thought it has a nice edge.

  • http://evilspeculator.com molecool

    Well, looks like I’m going to have to retire ZeroFX – too bad, I really thought it has a nice edge.

  • Anonymous

    Don’t do that! It has a better edge than regular zero IMO due to the blue spikes. ¬†It may take awhile to catch on. ¬†This is the slow time of year. ¬†Many are not trading. ¬†How long did it take for your other systems to catch on? ¬†I am just starting to find its’ usefulness in correlation to ES trades.

  • Anonymous

    Don’t do that! It has a better edge than regular zero IMO due to the blue spikes. ¬†It may take awhile to catch on. ¬†This is the slow time of year. ¬†Many are not trading. ¬†How long did it take for your other systems to catch on? ¬†I am just starting to find its’ usefulness in correlation to ES trades.

  • Anonymous

    Thanks Volar. ¬†This tape is tough to trade. ¬†We have a swing day setup for tomorrow which should lead us down… but that’s only good for 1 day. Is there any data on how long a VIX buy signal is good for on average?

  • Anonymous

    Thanks Volar. ¬†This tape is tough to trade. ¬†We have a swing day setup for tomorrow which should lead us down… but that’s only good for 1 day. Is there any data on how long a VIX buy signal is good for on average?

  • Anonymous

    Thanks for the great post Volar.   

    Your Math Skills are brilliant. ¬†Your points on back testing are well taken and is something that I certainly believe in. ¬†Heck, I’m still blown away by the Historical 5 Day VIX Data Chart. ¬†I’ve never seen anything quite like that before. ¬† :)

  • Anonymous

    Thanks for the great post Volar.   

    Your Math Skills are brilliant. ¬†Your points on back testing are well taken and is something that I certainly believe in. ¬†Heck, I’m still blown away by the Historical 5 Day VIX Data Chart. ¬†I’ve never seen anything quite like that before. ¬† :)

  • Anonymous

    RTV buy in AUDUSD in hourly trade.

  • Anonymous

    RTV buy in AUDUSD in hourly trade.

  • Anonymous

    I’ll miss the blue spikes. Oh well.

  • Anonymous

    I’ll miss the blue spikes. Oh well.

  • http://evilspeculator.com molecool

    Well, it’s a rather low count thus far, so I don’t know. Let’s give it a few more days until everyone had a chance to vote.

  • http://evilspeculator.com molecool

    Well, it’s a rather low count thus far, so I don’t know. Let’s give it a few more days until everyone had a chance to vote.

  • Anonymous

    In the meantime you could turn it back on for the peeps who like it!

  • Anonymous

    In the meantime you could turn it back on for the peeps who like it!

  • volar

    remember that the VIX chart the green is 75% an Red is 25% so it is only giving a  net 50% range.

    Or its not that we cant say the vix cannot spike, it is more of a seasonal thing to keep in mind.

  • volar

    remember that the VIX chart the green is 75% an Red is 25% so it is only giving a  net 50% range.

    Or its not that we cant say the vix cannot spike, it is more of a seasonal thing to keep in mind.

  • Anonymous

    Thanks Volar, 20% average increase in VIX between Sept and Nov followed by reversion to norm at 20 in following 2 months. Wish I’d seen this a few years ago, great post

  • Anonymous

    Thanks Volar, 20% average increase in VIX between Sept and Nov followed by reversion to norm at 20 in following 2 months. Wish I’d seen this a few years ago, great post

  • volar

    Very telling indeed!

    As for the soy/corn I would not recommend ETFs :(

    I did the math on NOV and DEC for a very specific reason, and I dont believe the math works for spot futures. So very careful, the devil is in the details.

  • volar

    Very telling indeed!

    As for the soy/corn I would not recommend ETFs :(

    I did the math on NOV and DEC for a very specific reason, and I dont believe the math works for spot futures. So very careful, the devil is in the details.

  • Anonymous

    Thanks, yes I figured it out that the ETFs were not very well correlated with the longer dated futures (after opening my small position), but it was an interesting experiment.

  • Anonymous

    Thanks, yes I figured it out that the ETFs were not very well correlated with the longer dated futures (after opening my small position), but it was an interesting experiment.

  • Anonymous

    Awesome stuff Volar. Thanks.

  • Anonymous

    Awesome stuff Volar. Thanks.

  • volar

    have a look at the seasonality posts mole and i have done here…. very reliable

  • volar

    have a look at the seasonality posts mole and i have done here…. very reliable

  • bisq

    Thanks Volar , im going to start going long after this gap down open : i think the risk/reward is looking good for the next few weeks at this level and your data backs that up.

  • bisq

    Thanks Volar , im going to start going long after this gap down open : i think the risk/reward is looking good for the next few weeks at this level and your data backs that up.

  • tradingmom

    Any chance for a trendline on the rough hourly zero? 

  • tradingmom

    Any chance for a trendline on the rough hourly zero? 

  • Anonymous

    Agree. Bought SSO calls at $48.90.

  • Anonymous

    Agree. Bought SSO calls at $48.90.

  • Anonymous

    Doesnt look like the daily zero has been updated

  • Anonymous

    Doesnt look like the daily zero has been updated

  • tradingmom

    Crazy morning, thinking about going long here at SPX 1265.

  • tradingmom

    Crazy morning, thinking about going long here at SPX 1265.

  • nyse

    What up wit it, Vanilla Face? How we lookin’ today?

  • nyse

    What up wit it, Vanilla Face? How we lookin’ today?

  • nyse

    Volar, this is great once again. Thanks

  • nyse

    Volar, this is great once again. Thanks

  • Anonymous

    Zero stuck in neutral….so am I

  • Anonymous

    Zero stuck in neutral….so am I

  • Anonymous

    /ES hourly could turn out to be an inside candle. If so, long on a break of 165.50.

  • Anonymous

    /ES hourly could turn out to be an inside candle. If so, long on a break of 165.50.

  • Anonymous

    10:26 AM 

    As of this moment, I don’t see internals improving on the 5 minute charts and it looks like a trend day. ¬†

    I know there is a natural tendency to want to go against the grain. ¬†But FWIW, I don’t see anything yet to go counter trend at least on a Swing Basis. ¬†

    OTOH, quick in and out scalps might be a different story but that’s not my game. ¬† ¬†

  • Anonymous

    10:26 AM 

    As of this moment, I don’t see internals improving on the 5 minute charts and it looks like a trend day. ¬†

    I know there is a natural tendency to want to go against the grain. ¬†But FWIW, I don’t see anything yet to go counter trend at least on a Swing Basis. ¬†

    OTOH, quick in and out scalps might be a different story but that’s not my game. ¬† ¬†

  • Anonymous

    Where is ES hourly 165.50?  Mistake on your post or am I missing something?

  • Anonymous

    Where is ES hourly 165.50?  Mistake on your post or am I missing something?

  • Anonymous

    Whoops, my mistake. 1265.50

  • Anonymous

    Whoops, my mistake. 1265.50

  • tradingmom

    I LOVE THIS!!!!!!!!!!!¬† Sorry, couldn’t help myself.

  • tradingmom

    I LOVE THIS!!!!!!!!!!!¬† Sorry, couldn’t help myself.

  • Anonymous

    OK.  As discretion is the better part of Valor, I just re-shorted some July 128 Puts for $1.44 Better than I covered them for yesterday morning.  This accomplishes two things as it reduces the size of my current Negative Delta and guarantees that my original Bull Put Combo Trade that I initiated Monday will be profitable no matter what.

    Sometimes this stuff falls into place nicely. ¬† ¬†Today’s Internals still suck but “a bird in hand” and all that rot. ¬† ¬†:)

  • Anonymous

    OK.  As discretion is the better part of Valor, I just re-shorted some July 128 Puts for $1.44 Better than I covered them for yesterday morning.  This accomplishes two things as it reduces the size of my current Negative Delta and guarantees that my original Bull Put Combo Trade that I initiated Monday will be profitable no matter what.

    Sometimes this stuff falls into place nicely. ¬† ¬†Today’s Internals still suck but “a bird in hand” and all that rot. ¬† ¬†:)

  • Anonymous

    Me too TM.

    Nothing wrong with a little warm and fuzzy glow and I’m going to enjoy it. ¬† :)

  • Anonymous

    Me too TM.

    Nothing wrong with a little warm and fuzzy glow and I’m going to enjoy it. ¬† :)

  • nyse

    Smart. Well done.

  • nyse

    Smart. Well done.

  • Anonymous

    Man that UK close bull-run is pretty consistent.

  • Anonymous

    Man that UK close bull-run is pretty consistent.

  • Anonymous

    Hey Mole, having trouble with loading the Zero several times past 5 mins

  • Anonymous

    Hey Mole, having trouble with loading the Zero several times past 5 mins

  • Anonymous

    Internals got a little better for awhile but still nothing to write home about. ¬†ES above VWAP but there’s only a 9 Point Range from 2.0 to 2.0 From the Open. ¬†

    Continuous running ES is still below VWAP.  Internals getting a little worse as of 12:21 PM as Down Volume is Leading Up Volume by the strongest level of the Day.  

    Should be an Interesting Afternoon.  

  • Anonymous

    Internals got a little better for awhile but still nothing to write home about. ¬†ES above VWAP but there’s only a 9 Point Range from 2.0 to 2.0 From the Open. ¬†

    Continuous running ES is still below VWAP.  Internals getting a little worse as of 12:21 PM as Down Volume is Leading Up Volume by the strongest level of the Day.  

    Should be an Interesting Afternoon.  

  • Anonymous

    NYA is now looking like it may close bellow the 200 for the first time since the flash crash.

  • Anonymous

    NYA is now looking like it may close bellow the 200 for the first time since the flash crash.

  • Anonymous

    VOLAR: in the second paragraph shouldn’t it be VIX and SPX down? Could somebody fix it?
     

  • Anonymous

    VOLAR: in the second paragraph shouldn’t it be VIX and SPX down? Could somebody fix it?
     

  • tradingmom

    zero not updating?

  • tradingmom

    zero not updating?

  • tradingmom

    I hate it when my own take on the charts does not line up w/ the zero.  For example, on the 5 min es, we are up against that upper band, which all by itself can be a good place for a short scalp.  On the hourly SPX, sure looks bear flaggy to me.  But the zero is too enthusiastic for that.

  • tradingmom

    I hate it when my own take on the charts does not line up w/ the zero.  For example, on the 5 min es, we are up against that upper band, which all by itself can be a good place for a short scalp.  On the hourly SPX, sure looks bear flaggy to me.  But the zero is too enthusiastic for that.

  • tradingmom

    Fixed.  Might have been my own computer which has been acting up a lot.

  • tradingmom

    Fixed.  Might have been my own computer which has been acting up a lot.

  • Anonymous

    better now.  I have been having issues w/ zero and home page this am

  • Anonymous

    better now.  I have been having issues w/ zero and home page this am

  • Anonymous

    Internals getting better as Calvary comes riding in. ¬† It’s a long way to the close but I’m now close to neutral with Gamma favoring the Long Side. ¬†

  • Anonymous

    Internals getting better as Calvary comes riding in. ¬† It’s a long way to the close but I’m now close to neutral with Gamma favoring the Long Side. ¬†

  • Anonymous

    Jesus died at Calvary.¬† I’m sure you mean horses:¬† CAVALRY

  • Anonymous

    Jesus died at Calvary.¬† I’m sure you mean horses:¬† CAVALRY

  • volar

    NEW POST ūüėČ

  • volar

    NEW POST ūüėČ