Monday, January 24, 2011
Friday, January 21, 2011
Closing GOOG
Closed 2/18 610 Strike call at 23.00.
The near month call at strike 640 expires worthless pocketing the $770 payoff.
The near month call at strike 640 expires worthless pocketing the $770 payoff.
Thursday, January 20, 2011
Interesting times
Google near term options trading at implied well north of 100%. Market pricing in another +/-5% move. Anyone wants to take the other side of this bet? A simple approach would be to take two at the money call or put options, sell the short dated and buy the longer dated. Of course the downside kicks in if google is trading at more than 655 or below 605 after earnings!
Close PLL Put
Close Strike 50 put at 0.65. Reducing loss on this. Will probably add some direct shorts or sell calls on PLL soon.
Friday, January 14, 2011
Rolling GOOG Call Spread
Closing 1/14 Call at 1.95
Sell 1/21/2011 Call on GOOG strike 640 at 7.7.
2/18/2011 Call at strike 610 continues to be open.
Sell 1/21/2011 Call on GOOG strike 640 at 7.7.
2/18/2011 Call at strike 610 continues to be open.
Friday, January 7, 2011
Thursday, January 6, 2011
Moving to Collective2
Finally have setup my portfolio on collective2. Thank you everyone that has followed these posts. If you've followed any trades and made money, congratulations. If you have lost on some trades, I'm sorry for that. Sometimes patience does pay.
As I'm writing this I'm watching ZUMZ coming back to earth. I didn't have the patience to wait, but if someone did then you would have done very well. ZUMZ did come as a short through the models. But the actual execution and conviction grew based on some mall visits, and looking at the website visit of ZUMZ. Also that's the beauty of retail. Today's darling is tomorrow's dog. ARO, ANF are names that come to my mind. Same will eventually happen to TIF. It will be brought back to earth.
I've tried my best to be dispassionate in all these posts with the the goal of generating positive returns. If I've been short a company it has to be either from a risk management point of view or purely based on valuation.
You can follow me at Pairs Trader
The main reason for using collective2 is because it provides legitimacy to the trade ideas and removes the burden of keeping track of your performance and hopefully will provide the funding required to continue our research on statistical arbitrage and build a better system .
You can get one month of free subscription for the trading system. The trading approach will continue to be the same that has been followed here.
This blog will continue as a financial education/ trading ideas place. Not sure I'll continue live blogging here for the time being.
As I'm writing this I'm watching ZUMZ coming back to earth. I didn't have the patience to wait, but if someone did then you would have done very well. ZUMZ did come as a short through the models. But the actual execution and conviction grew based on some mall visits, and looking at the website visit of ZUMZ. Also that's the beauty of retail. Today's darling is tomorrow's dog. ARO, ANF are names that come to my mind. Same will eventually happen to TIF. It will be brought back to earth.
I've tried my best to be dispassionate in all these posts with the the goal of generating positive returns. If I've been short a company it has to be either from a risk management point of view or purely based on valuation.
You can follow me at Pairs Trader
The main reason for using collective2 is because it provides legitimacy to the trade ideas and removes the burden of keeping track of your performance and hopefully will provide the funding required to continue our research on statistical arbitrage and build a better system .
You can get one month of free subscription for the trading system. The trading approach will continue to be the same that has been followed here.
This blog will continue as a financial education/ trading ideas place. Not sure I'll continue live blogging here for the time being.
Wednesday, January 5, 2011
New Trade (GOOG)
Time Spread
Sell 1/07/2011 Call at strike 610 --- $3.4
Buy 2/18/20111 Call at strike 610 --- $23.4
Sell 1/07/2011 Call at strike 610 --- $3.4
Buy 2/18/20111 Call at strike 610 --- $23.4
Year 2010
December ended well for the portfolio. Was up 2.8%. Main contributors were MSFT which we closed, time spreads/bullish calls on GOOG, and strangle on TIF . Some other pairs that were held for a very long time showed some signs of life as well.Ex:- KRC/EQR pair, GDP/TLM pair. Both were closed with overall loss. But the losses were reduced quite a bit in December. The drag was PNR/PLL, and the short on MAR which is continuing to hurt. The HPQ/ORCL spread opened at the end of December started making money from day one. This pair is now approaching our close out ratio.
Year 2010 Summary
The portfolio is up 5.8% with annualized volatility of 8.5% compared to S&P total return (including dividends) of 15.1% (volatility 17.4%).
From inception the portfolio is up 33.8% with realized volatility of 9%.
Rough attribution estimate:
In terms of return contribution, pairs contributed roughly 2%, and the rest came from the options positions.
The worst draw down came in February. Worst one month draw down is -5.17%. Worst one week is -3%.
Month by month performance summary since inception is attached below.
Year 2010 Summary
The portfolio is up 5.8% with annualized volatility of 8.5% compared to S&P total return (including dividends) of 15.1% (volatility 17.4%).
From inception the portfolio is up 33.8% with realized volatility of 9%.
Rough attribution estimate:
In terms of return contribution, pairs contributed roughly 2%, and the rest came from the options positions.
The worst draw down came in February. Worst one month draw down is -5.17%. Worst one week is -3%.
Month by month performance summary since inception is attached below.
Monday, January 3, 2011
Back test results
Happy New Year to everyone. Now for a little update on the algos and some results that we have from simulations as promised in one of the previous posts.
The snapshot only shows the info for the last date of the simulation. However some of the ratios shown do capture the essence and point us to the industries where we see the most promise for convergence. As seen from our results for the year the performance is not stellar for 2010, however with appropriate leverage, and adjustments to the algos based on the volatility regime shifts one can guarantee better results. There are industries that have posted very good returns on a longer time frame.
Now for some parameter specs used while running the algo. The algo uses daily adjusted closing price from yahoo for US stocks (about 6000 are considered).
Market - US stocks broken by industry. Pairs have to be in the same industry to enter a trade.
Volume - Only stocks with daily and last 20 day average volume greater than 40,000 are considered for this simulation. We ran the simulation for a volume floor of 20K also (which will also be posted). This volume filter should make sure that we are using tradeable companies.
Beta - One year beta to S &P 500 based on daily data is used in calculating the raw beta based on a linear regression. The betas are recomputed for each stock on a daily basis. No mean reversion adjustments are made to the calculated beta (Ex:- Bloomberg uses a mean reversion factor to adjust the raw beta). Stocks with a beta difference of less than 0.2 are used in the sample set for trading (another mechanism to reduce volatility).
Price - Volume criterion should filter low priced stocks. However we do have a low price barrier of $1. The reason for using this low barrier is because we use adjusted closing prices. When you use adjusted closing, even highly liquid stocks can have very low price when we go back 20 years (dividend adjustments and stock splits).
Mean - The average price ratio over 252 days is used in calculating the mean.
Std. Dev - 252 day daily data is used in calculating the std. Dev.
Co-integration test - The test is performed for testing stationarity over a 252 day period for all pairs. A p-val of less than 0.01 is required for a pair to be tradeable.
Std.Dev threshold - A 1.6 Std. Dev move from mean is used as entry criterion for each trade.
Separate simulation with 2 Std. Dev move was also considered.
Profit Limit : Profit limits of 10%, and 5% in separate simulations. Profit limit of complete reversion to mean is being tested right now (will be available later).
Loss Limit : Stop loss limit of 20% with 10% profit limit, and 10% with 5% profit limit are used.
If a pair is entered then it is not repeated the next day until it reverts or until the close out date is reached.
Close Out criteria: 100 days from opening up the trade or when profit or loss limits are hit.
Leverage : Leverage is limited to 300% on a gross basis in most simulations. An unconstrained (high leverage of 20) is also run to keep track of all historic pairs.
Sharpe ratio : We calculate annualized five year and one year Sharpe ratios. We also calculate a 3 month Sharpe ratio (without annualized returns). Risk free rate of 1% is used to calculate the Sharpe ratio.
Trading Cost : Assumed to be $1 per 1000 shares for both entering and exiting a stock.
Capital: Assumed to be $100K at the beginning.
Concentration limit: 6% of capital for each leg of a pair.
Hit ratio: Is calculated as the ratio of profitable pairs over total pairs for a given time frame. We calculate 5 year, 1 year, and 6 month ratios on a rolling basis. A pair is considered profitable if it makes 5% or more at the time of exit.
The summary results as of 12/08/2010 (last day of simulation) are at the bottom of the page. However 5 year Sharpe ratio should give a good idea of where the opportunities lie.
First image (highthreshold) shows results for profit limit of 10%, and second one (lowthreshold) shows results for profit limit of 5%. As we see with lower profit limit per pair we can achieve better Sharpe ratio. Basically that's what we were seeing in 2010. It was a different picture in 2009. A snapshot of 2009 shows the picture is different (reverses). Which takes us to the next important topic of volatility regimes. When the volatility in general is coming down the opportunity starts to shrink, however with better calibration and more trading one can still achieve fairly decent returns.
In our own experience a Sharpe of 0.6 or higher is good. As long as you are in positive territory you are still not losing money although you may not be doing all that well relative to the risk you are taking.
Additional charts and analysis will be provided for some of the industries soon. We have all the data on a daily basis in SQL DB. Just a matter of building a web interface to chart/present the data in a user friendly way. All the pairs info from the time of simulation inception to end date is also stored in the DB. There is scope for further data mining and adding additional conditions for better trading.
Data in xls format can be provided upon request. For some reason blogger doesn't allow me to upload spreadsheets.
The snapshot only shows the info for the last date of the simulation. However some of the ratios shown do capture the essence and point us to the industries where we see the most promise for convergence. As seen from our results for the year the performance is not stellar for 2010, however with appropriate leverage, and adjustments to the algos based on the volatility regime shifts one can guarantee better results. There are industries that have posted very good returns on a longer time frame.
Now for some parameter specs used while running the algo. The algo uses daily adjusted closing price from yahoo for US stocks (about 6000 are considered).
Market - US stocks broken by industry. Pairs have to be in the same industry to enter a trade.
Volume - Only stocks with daily and last 20 day average volume greater than 40,000 are considered for this simulation. We ran the simulation for a volume floor of 20K also (which will also be posted). This volume filter should make sure that we are using tradeable companies.
Beta - One year beta to S &P 500 based on daily data is used in calculating the raw beta based on a linear regression. The betas are recomputed for each stock on a daily basis. No mean reversion adjustments are made to the calculated beta (Ex:- Bloomberg uses a mean reversion factor to adjust the raw beta). Stocks with a beta difference of less than 0.2 are used in the sample set for trading (another mechanism to reduce volatility).
Price - Volume criterion should filter low priced stocks. However we do have a low price barrier of $1. The reason for using this low barrier is because we use adjusted closing prices. When you use adjusted closing, even highly liquid stocks can have very low price when we go back 20 years (dividend adjustments and stock splits).
Mean - The average price ratio over 252 days is used in calculating the mean.
Std. Dev - 252 day daily data is used in calculating the std. Dev.
Co-integration test - The test is performed for testing stationarity over a 252 day period for all pairs. A p-val of less than 0.01 is required for a pair to be tradeable.
Std.Dev threshold - A 1.6 Std. Dev move from mean is used as entry criterion for each trade.
Separate simulation with 2 Std. Dev move was also considered.
Profit Limit : Profit limits of 10%, and 5% in separate simulations. Profit limit of complete reversion to mean is being tested right now (will be available later).
Loss Limit : Stop loss limit of 20% with 10% profit limit, and 10% with 5% profit limit are used.
If a pair is entered then it is not repeated the next day until it reverts or until the close out date is reached.
Close Out criteria: 100 days from opening up the trade or when profit or loss limits are hit.
Leverage : Leverage is limited to 300% on a gross basis in most simulations. An unconstrained (high leverage of 20) is also run to keep track of all historic pairs.
Sharpe ratio : We calculate annualized five year and one year Sharpe ratios. We also calculate a 3 month Sharpe ratio (without annualized returns). Risk free rate of 1% is used to calculate the Sharpe ratio.
Trading Cost : Assumed to be $1 per 1000 shares for both entering and exiting a stock.
Capital: Assumed to be $100K at the beginning.
Concentration limit: 6% of capital for each leg of a pair.
Hit ratio: Is calculated as the ratio of profitable pairs over total pairs for a given time frame. We calculate 5 year, 1 year, and 6 month ratios on a rolling basis. A pair is considered profitable if it makes 5% or more at the time of exit.
The summary results as of 12/08/2010 (last day of simulation) are at the bottom of the page. However 5 year Sharpe ratio should give a good idea of where the opportunities lie.
First image (highthreshold) shows results for profit limit of 10%, and second one (lowthreshold) shows results for profit limit of 5%. As we see with lower profit limit per pair we can achieve better Sharpe ratio. Basically that's what we were seeing in 2010. It was a different picture in 2009. A snapshot of 2009 shows the picture is different (reverses). Which takes us to the next important topic of volatility regimes. When the volatility in general is coming down the opportunity starts to shrink, however with better calibration and more trading one can still achieve fairly decent returns.
In our own experience a Sharpe of 0.6 or higher is good. As long as you are in positive territory you are still not losing money although you may not be doing all that well relative to the risk you are taking.
Additional charts and analysis will be provided for some of the industries soon. We have all the data on a daily basis in SQL DB. Just a matter of building a web interface to chart/present the data in a user friendly way. All the pairs info from the time of simulation inception to end date is also stored in the DB. There is scope for further data mining and adding additional conditions for better trading.
Data in xls format can be provided upon request. For some reason blogger doesn't allow me to upload spreadsheets.
Subscribe to:
Posts (Atom)