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