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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 😉 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 😉

[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 😉

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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.