Author: joachin

Another algorithm for crude

Posted on by joachin

We are building an option price index based on a call price index and put price index. When dividing the CPI/PPI we get the OPI.

If the OPI falls, we take bidder’s side. If it rises, we go to the ask’s team.

Doing this since July 27th 2009 the equity curve would look like:

image

 

26% total return (crude has done 19% since) and the good news is that we got a z-value = 1.8 which suggest a little more effort in risk and money management and we might have tradable idea either in the USO or in the CL future.

pd. The OPI is based on the “oiwap” of all options available. It weights the last quote of each option against the total open interest. Oiwap = open interest weighted average price.

Nice signals

Posted on by joachin

There is a little strategy I have for sugar, corn and gold.

If today’s volume is above the 20% daily average, take the opposite position of today’s market performance tomorrow at the opening and get out near the close.

 

CZ9 = 2% profit

GCZ9 = 1% profit

 

I have to test those signals since what the first thing my brain came out after placing the first orders on my own.

testing oil intra day with the Vwap

Posted on by joachin

Signal of the coach: go long at 830am if yesterday you had a positive VWAP. If not, do nothing.

 

from July 3rd to November 5th.

Result: It would have been better parking the money on a long position get it out today. The market return was higher and we are not considering transaction and slippage costs.

image 

You might say: try leverage!

Well I am not sure with this facts:

z value: 1.05

w/L ratio: 1.29

 

So what I will do is run the whole process back testing the adverse intra day scenarios. Leverage to use will be 1:3 since the max loss is -3.7% then that would be 12% draw.

Any way the short z value tells me that with leverage I just will turn figures up. Unless I systematize the leverage: check if the strategy has a pattern to increase positions because of a given opportunity.

 

Also using only price, and a good z-value means some supply/demand effect converted intro profits.

At bat = at Trade

Posted on by joachin

I was thinking yesterday in my way to the gym that one should approach trading a certain market in the way a baseball hitter would approach his/her at-bat.

Would I be willing to face Mariano Rivera with overweight and relative ignorance of hitting mechanics?

Hitting skills are acquired at early ages. The grip of the bat, the transference of body weight from back to front when swinging, keeping the eyes on the ball, stay on the tip of your feet, hip movement, recognizing if the pitch is a fast ball or any thing else, and such and such are skills that the hitter begins to practice at about eight years old. Only the daily improvement in such skill will allow him/her to fight an at-bat against a regular pitcher.

MLB’s players take batting practice before each of the 162 games during regular season. They never stop seeking improvement their hitting skills. You see a Derek Jeter that goes on December to Florida for taking some swings, Robinson Cano, Yankees’ 2nd baseman, goes with his dad to his country and both train together on the hitting mechanics, Arod makes swings at his pool.

Also a hitter’s odds are always against him. Actually 33% probability of getting on base by making a swing is a very good average since most of the time a good hitter will fail on the main goal of his at-bat.

The important question is what mechanics do you think a wannabe-trader should learn to start as a trader? What kind of routines would you propose him? So far I have an answer but I’d like to see you speaking your mind.

pitch count and trading

Posted on by joachin

Probably my experience in baseball is as documented as in trading. Very low for an average standard. I am not in the major league in my country [which is very bad in a word standard] neither I am a full time trader taking and handling positions with my own money. In baseball I just pitch for a 3rd level league (Mantarrayas is the name) and in trading I am just a commodity markets risk analyst. I suppose to manage hedging positions of clients but that is another story. Even though I do manage positions, not of my speculative mine, but the hedging account of my boss who is a 10-year-experienced trader. For example now I am looking 2 options-spread trades one in  the SP500 mini and other in the euro futures. Also a paper trade of mine which I just posted last time I decided to write here.

 

Well enough BS. I planned to talk about the relationship between the strike/ball account and the performance of a system or a trader.

 

As a pitcher the best thing you can have is either a strikeout [3 strikes] or a hit managed by your defense like a ground ball or a fly ball.

 

Pitching is hard because first of all you have to be able to put the ball in the strike zone at a decent velocity. The pitchers you see in the TV are the exception of the rule because most of the time they are able to make more strikes than balls. Most of humans that like baseball cannot locate a decent fastball more than 2 or three times around the strike zone. Much less people can play with the catcher hitting the corners and moving the ball with plain vanilla curve balls or only variation of a fastball. Pitching is hard and most of the times homo-sapiens don’t realize until we try it.

 

As I extend in my lunch time while I see the TY, SP and CL, I try to make a point, I am just getting stuck with baseball.

 

Ok. Few days back a I saw a mlb playoff game and one of the pitchers had 101 pitches 69 of them strike. That’s a strike ratio of 2.15, meaning 2 strikes for one ball. He was able to get ahead of the hitter most of the time. If you consider a win/lose ratio of a trading system, for example one I am testing now: it is a -0.6% avg lose and +0.2% winner, or a strike/ball ratio of 0.39. That like a 101 pitches with 29 strikes, a very very poor performance.

I have made about 14 trades in the corn futures. two of them were profitable. And losses were extremely heavy. I have opened about 4 games in my baseball career since 2008, and only one of them were mediocre, the rest were very bad. I don’t have the strike/pitch count.

 

What system or approach should I use to improve in these both environments that I like so much? I even gained weight and every day I am very poor making it impossible to even put some dollars for a little spread trade in the oil market. Is this really for me? Was I designed for baseball and trading? What strategies must me thought to accelerate the truth of these questions?

Let us short a correlation

Posted on by joachin

67 day correlation between CL and HG is 0.60. 1400 day correlation is 0.37. This is saying that both commodities have been extremely friendly each other and that is not regular.

 

This is a paper trade of 90 days, so I will chose January options:

I will be willing to risk two thousand dollars and would be satisfied with with a R of 3, so a profit of six would be a like double play in a tied game.

 

B 1 CLF10-9500C @ 1.08

B 1 HGF10-240P @ 0.08

Debit account if margin would equal 100% = -1.08*1000 -25000*0.08 = -$3080 minus fees and commissions.

 

I should notice that I am seeing CL and HG but actually I would be trading derivatives on these futures; i.e. options prices might not be correlated and risk is being amplified.

 

The fact that both positions will be long options doesn’t mean risk of loss is being reduced because of greek fundamentals. I mean, The max loss would be 100% of the position, but the probability of hitting -100% is higher, so the trade is actually quite maverick-like. Using futures volatility is high, but liquidity risk is lower.

 

image

 

 

According to my position, both red and blue line will go up. Maybe it would better using spreads instead of naked long options.

 

 

THIS POSITION WILL BE CLOSED ON FRIDAY DECEMBER 18 2009.

Checking Amaranth’s strategy

Posted on by joachin

image

I happen to be a teacher in a futures workshop for UFM’s business school for the students on the financial carrer, MFIN. We checked the Amaranth’s case and we came up with the idea of replaying this strategy.

 

Amaranth’s leverage, according to the written case published at a financial journal, was 1:5. There you can see a little negative spike of -$3700 to -$6040, meaning a 60% movement against the position. Using a 1:5 leverage means that we control $100 worth using, or having, only $20; so if the position moves 5% against us [which is quite natural in this mkt] we are losing 5/20 or 25% of the position.

What seems was the Amaranth’s case is that they got at leas a 50% adverse move which means an imminent wipe out.

They got plenty of margin calls, phone calls from the exchange and all of that ended in convocation of other nat gas traders to take care of these positions.

As the chart can tell, months later, the trade was a pure winner, but the trader wasn’t because misuse of leverage.

This make thing of a baseball play. Two men on base, double play setup in the infield. I am a left hand pitcher facing a right and weak hitter. As I prepare for facing the hitter, the center fielder stars arguing with the short stop about his way of playing. They finally calm down, although the SS refused to hear what the other guy was saying, so I come up with the pitch [inside fastball] and nice and easy ground ball goes by the short stop position, but he couldn’t get it because did not move himself as the CF was telling him. Nice strategy, poor risk management. We ended up facing about 5 more hitters and finally lose the game.

Confession of a crude oil trader wanna-be

Posted on by joachin

I’ve been checking the crude oil strategy and I notice that there is a bias towards finding the good things about the strategy and not in trying to improve. Like how well it manages the trend intraday, the percentage return with out leverage, and how nice is the system treating the structure of the last 3 sessions.

 

I tend to think: “wow, this is so nice, If would be trading with only technical analysis I don’t now how would I approach the market, I wouldn’t know what to tell to a possibly market opportunity, ufff systems are so nice”.

 

But something in my mind tells me that there is something I need to do a to improve. I think on the stop loss, I think on the process execution of the signal, in the fact that I am no trading it with real money…  ajhh still so distant to having a good approach towards risk management and even worse: I am located so far away of having the kind of money for testing such strategy with my own funds.

 

It’s kind of frustrating.  As far as I know I should sell a weak volatility and buy the wider ranges in the crude oil, according to the relative ATR to the closing price, on 22d.

I think I have faith on that some day I will tune up this strategy [and many more] and will be able to press the bid or ask using my opportunity costs represented in dollars.