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You might assume that I, personally, completely agree with those who classify technical analysis as astrology for traders... But do I?

Well, sure, I hate the ‘bullish flags’ or ‘bearish harami’ or whatever wacky candlestick patterns are out there.

But, the notions of trading with the moving average, support, and resistance do work, and there is evidence of it.

Trading greats like Stanley Druckenmiller, Paul Tudor Jones, and so on have employed this form of technical analysis while making a fortune, along with predicting market crashes pretty well.

Now, obviously, me, and even probably you, lack the braincells needed to do this, but I just may have found something that has worked in the past, and may work again in the future.

It is a form of technical analysis that feels stupid to use … and that is exactly why it just might work.

I have a metric that is quite good in predicting market declines or rallies in TLT (20+ Year Treasury Bond ETF)

TLT is an ETF(for newbies, a fund that behaves as a stock) that tracks long-term bond prices. It is pretty inversely correlated to the S&P 500, which is widely accepted as the benchmark for US Stocks:

Basically, when S&P goes up, TLT goes down … and vice versa.

One might think that if they know where one of the tickers would go, they can predict where the other would go. And that is pretty true … most of the time.

Remember, stocks can defy all the rules they are supposed to obey, whenever they want:

I had to post the scene from Wolf of Wall Street above

But, for simplicity, we shall assume that whenever TLT goes down/up, S&P HAS to go up/down.

So, let’s see the chart for TLT:

Going entirely based on technical analysis, you can see that the TLT is set for a rebound, and is set to increase.

But, is there a method that would have allowed us to predict the other increases in the past, when it was not near the white line?

Probably.

Have I found it ?

Probably not.

But here is what I think:

Basically, a hard-and-fast rule about bonds is that when Bond Yields increase, Bond prices decrease, and vice versa.

TLT measures Bond prices(roughly)

So, if TLT goes down, Bond yields go up.

There is an Index that tracks the Bond yields as well, known as TNX:

You can see that they are VERY inversely correlated.

The next part is a little wacky.

I don’t know which of my stupid-ass brain cells thought of this, but I decided to see if there is something interesting in the slope(derivatives … not the financial kind, but the calculus kind) of the 25-day moving average of the  ratio between TLT and TNX.

Yeah … very random, but when I plotted it:

SHITTTT

Honestly, it was very surprising to me that I found something that looks like a pattern.

The yellow line is not TNX/TLT for each week’s close, but instead the slope of 25-day moving average of the ratio between TNX and TLT.

The interesting thing is … whenever the yellow line enters the top channel, it lingers a bit, and starts descending to the bottom channel.

During this descent, almost always, you can see a pretty big pump in TLT.

And, whenever the yellow line enters the bottom channel, it stays there for a while, and when it starts ascending to the top channel, we can see that the TLT enters a decline.




This is what I meant when I said that this is an unconventional method of technical analysis … We are literally applying principles of support and resistance to a fuking derivative (well, slope of a curved line).

Betting on an increase in TLT is a high-conviction trade because:
1) Price is near a support level, and I think we are due for a bounce
2) Yellow line is in the top channel, and I would hit the buy order for TLT the moment the Yellow line starts descending and leaves the top channel.


I also have a low conviction bearish case on S&P:

I did the same thing as above, but here, the yellow line is the slope of the 25 day moving average of the ratio between TLT and SPY.

We can observe the same exact thing … A Market declines whenever the yellow line is descending, and a rally when the yellow line is ascending.

But, at the moment, the Yellow line is a bit too much higher than the channel, but we can see a mini resistance level formed from 2021 to 2023.

If I were to short the S&P:
1) I would sell when the Yellow line is in a descent, maybe if it dips below the top blue line of the upper channel.
2) I would also short the S&P because I wrote about a high-conviction buy-case of TLT, and we know that TLT and SPY(S&P) are inversely correlated.

I hope to do more with this slope technical analysis thing.

I have plans for upcoming writeups using the same method for some other markets.

A few inspirations that made me think about TLT, TNX, and SPY:

(Investopedia)

Right from the get-go, I can recall a few instances where I thought I would find price discrepancies. For example, the VIX, at the time of publishing, is an instrument for hedging against recession, and, of course, speculation by the gamblers.

Guilty, as charged

So, let’s calculate the equation for the VIX.



Call Price = 3.7
Strike Price = 17
PV(x) = Strike price/(1 + risk free rate)^{Time to expiration in years}

Put price = 1.51
VIX Spot: 17.3
Time to expiration = 0.25
Risk-free-rate: 0.426

Now, let us calculate both sides of the equation given above:

PV(X) = 17 / (1 + 0.426)^0.25

PV(X) ≈ 16.7571

C + PV(X) = P + S

3.7 + 16.7571 = 1.51 + 17.3

20.4571 ≠ 18.81

This means that there is an arbitrage opportunity, since the left-hand-side does not equate to the right-hand side. But, then again, I think to make it riskless, you will need to buy the RHS, and sell the LHS. Buying the RHS means you will need to buy the VIX, which isn’t possible, so we look for other opportunities.

Let’s look at this calculation for SPX, because I imagine there is a lottt of hedging pressure, speculation, etc, with the recession rumours and all that.

We have:
Call: 92.5
Put: 73.85
PV(X) = 4370 / (1 + 0.436)^0.08333333333

PV(X) ≈ 4360.876

S&P E-mini Spot: 4.380,00( Since we can’t directly buy SPX, we shall adjust with the futures)

So, let us calculate the equation:

C + PV(X) = P + S

92.5 + 4360.876 = 73.85 + 43800
4453.376 ≠ 43873.85

Well, this means that there is a price discrepancy, probably caused by fear of a recession or whatever.

ORRR

Our calculation is outright shit, and using the price of futures for spot was a huge mistake … But eh what can you do right ? Just to be safe, let’s calculate the numbers with SPOT SPX:
4453.376 ≠ 43771.56

Ok, we are still good, I guess … Still would argue that it is very probable we messed up somewhere.

But, now that we think that we have a market discrepancy, how do we exploit it ? We buy the cheap side and sell the expensive side

Pledge an amount to the Noob Quant

Steps:
1) Sell the call for 92.5 per contract (Sell 100 at a time)
2) Borrow money for the time period with interest being the risk-free rate for that period (selling debt ?)
3) Buy a put for 73.85 per contract (buy 100 at a time)
4) Sell SPX futures

At first glance, SVXY can be seen as a great way to beat the market. After all, it returned about 40% YTD in 2023, compared to 20% by the S and P 500. But, over the long term, that is not the case. Since SVXY’s inception in 2011 has returned 277%, while the S and P 500 returned 262%. While it has outperformed the market, the margin is unimpressive. This is because in 2018, the SVXY collapsed by about 90%(sounds like a gamble… I’m in)

About SVXY

SVXY is an ETF that aims to provide exposure to short positions on the VIX futures market. The VIX is known as the fear gauge of Wall Street. It measures the Implied Volatility of the S and P 500, derived from the supply and demand of call and put options. This means the SVXY falls whenever the VIX rises, and vice versa. In other words, they are almost inversely correlated. ‘Almost’, since the VIX futures behave differently than the VIX itself. Here’s how:

Source: Google Finance

Blue: VIX

Yellow: SVXY

The VIX can be seen as mean reverting. It will return to the middle if it goes too high or low. But, the S and P 500 VIX Futures index looks completely different:

Source: https://seekingalpha.com/article/4397979-svxy-solid-long-term-volatility-play

There are periods where the index does rise(quite drastically) but about 80-90 per cent of the time, it’s in a decline. This is why the SVXY goes up most of the time but falls severely, should the VIX rise by a lot.

Someone who shorts the index just before it spikes up must be unlecky as hellll(prolly me in the future)

The reason for this is: VIX futures are more expensive than the VIX itself, about 80-90 per cent of the time. So,  futures prices decrease to the VIX’s spot price, as the expiration date draws near.

There is a premise for this: Whenever the VIX has fallen, a lot of people start betting that it will go back up(since VIX is mean reverting) and start buying futures. This increases futures prices, while the spot price remains unchanged. Over time, these futures contracts lose value, giving a boost to the SVXY.

But, again, it might not seem like a good trade due to the violent drops. But, what if we can almost predict this ? 

First, let’s look at how the spread between VIX spot and futures price looks like in the past:

Red is the difference, and blue is a moving average plotted.

We know SVXY increases whenever the futures are priced above the spot. But, whenever the spot price outpaces the futures price by a lot and quickly, the SVXY is seen to dip most of the time:

 What if we can close our long position when desired metrics are fulfilled (indicating that the spot may soon outpace futures)? 

So, I set out to devise a crude strategy for this. Calculate the difference between the spot and futures of the VIX for each day and close position whenever the 30-day moving average of this dips below 0.8. Of course, these metrics can be changed to suit the investor’s desired strategy. Re-enter the buy position whenever the slope of this moving average is positive again(I concluded that SVXY would have hit market bottom if the spread between futures and spot started decreasing).
I backtested this for dates since the inception of SVXY, and the results were intriguing:

Source: Tradingview

We outperformed both the SVXY and S and P buy-and-hold strategies for this period!

The reason for the low win rate is because the conditions for the closing buy orders were met a lot of times, not always followed by a market decline. But, still it made impressive profits while perfectly closing positions before every big crash in the SVXY.

But, we can improve this, and get results like the one below by implementing short-selling:

Methodology:

• Get difference between VIX spot and futures for each day

• Plot 6 day Exponential Moving Average for this difference.

• Code it to buy-and-hold from start

• If the Difference goes below -1.5 and slope of moving average is negative, exit buy trade, and enter short trade.

• Exit short trade whenever slope of moving average is positive again, and difference is above 1.5, exit short trade, and Re-Enter buy trade

• Maximum capital invested into strategy for each trade/

Note:
This strategy is most probably a shit one for two possible reasons:
1) Overfitting(Idt I did that much, but the possibility is there)

2) doesn’t work again since market conditions change

3) In 2018, SVXY changed it’s leverage from -1.5x VIX futures, to -0.5x, so returns will be lower, but trading methodology should be intact

BOTTOM LINE:

DOESN’T MAKE A DIFFERENCE SINCE WE’D LOSE MONEY ANYWAY

Roaring kitty is one of my idols in investing and trading.

This legend rode the wave of GME’s meteoric rise, with his 50,000 dollar position being worth 48 million dollars at one point.

Yeah, this guy’s strategy works.

His strategy is known as Deep Value investing. It is a more extreme version of value investing, and Roaring Kitty had a huge risk appetite.

He would buy stocks of companies near bankruptcy and financial problems, since that would mean the stock would be at a discount, and whenever the companies came out of their hurdles, the stick would shoot up, giving him a profit.

This strategy is high risk and high reward, and is not advised for stupid retail degenerates like us to go all in on our positions in near-bankrupt companies, Unless you’re roaring kitty

One of his ‘screens; for stocks is clustered insider buying after the stock has had a considerable dip in price.

We can get this insider trading data at opensinder.com

The reasoning is, company executives only buy their stock(most of the time) for one reason: They think it’s gonna go up, and that the present stock is at a discount from where it’s gonna be.

Now, this happens when the company is in distress, hence the high-risk investment.

Roaring Kitty also takes into other factors, like analysing credit ratings, bonds, whether this dip is a seasonal thing, and a lot of other things, for which I’m not smart enough for.

I wanted to make a quick-dirty strategy which could capitalise on this insider buying.

The strategy:
Get a list of tickers on the openinsider site which have:
1) Had cluster buys from company executives

2) Difference between filing date and trade date less than 5

3)Filing date ranging from max 3 months back to now

4) Share purchase value 250,000 Dollars or above.

I backtested this strategy, and the returns from beginning of may, to now(nearly August) was: 8%!


For context, this portfolio had 60 tickers.

Normally, I would be very very pleased with this, but the S and P 500 still outperformed us. In this timeframe, it rallied almost 11%.

I analysed the data and saw that there were a few trades that lost a lot of money, and if we exit the market before the losses get too big, we may get outperformance.

I added a condition to exit the trade at any point in time if the losses exceed 10%, and also exit the trade if profits exceed 30%. I am not not sure if these values are actually good, but this is just a trial.

These numbers may seem way too spread-out, but trust me: These stocks are volatile. I’ve seen stocks which dip 40% after the insider buy, and then rally like 200% later.

My gambling-addicted ass just wants to outperform the US Market… not make the fullest of profits that I can make. Hence, the vague 10 and 30% metrics.

Backtest results:
Past 3 months:
1) S and P 500: 8.3%
2) OpenInsider strategy: 17.5%

Past 4 years really really surprised me due to the degree of outperformance:

Past 4 years(about a 1000 tickers):
1) S and P 500: About 50%
2) OpenInsider strategy: About 95%

Now, that may seem like a good strategy, using the outperformance as evidence.

It’s not

You never know what could go wrong. You could always outperform this model by actually doing due diligence. Who knows? As time goes on and markets evolve, maybe the 10%-30% Risk-Reward ratio won’t work anymore.

I mean, The fact that I, a 15 year old wannabe stonk man found this to ‘outperform’, may be all the evidence you need to not use this strategy.

BUT

For all the risk-takers out there, this might be something worth a shot.
Maybe you guys could modify it, with employing position sizing respective to the insider trade size, and number of executives who bought it.

Anyways, I’ll get back to my gambling stonk market obsession.

I am not entirely sure what is happening in a macro-economic scale, Since I mainly live under a rock. 

But I had read on twitter that there is something up with Chinese stocks or whatever, and the whole BRICS fiasco.

Not entirely sure whatever that is about, and I definitely know that my 10 whole braincells cannot comprehend it. But, my gambling nature pushed me to just take a glance at the charts of IV and RV spreads.

I found an ETF that gives exposure to the Chinese yuan, called the WisdomTree Chinese Yuan Strategy Fund(CYB).

Now, let’s look at the typical volatility mispricing element:

Big events + Retail Degenerates gambling and speculating = Vol mispricing.

Both of which are present right now.

I checked data on various timeframes for the CYB Implied and Realised Volatility data and I found something hella interesting in the 60 day window:

From the get-go we can see that degenerates gamble so much that Implied Volatility is almost always higher than Realised Volatility.

But, the major part of the thesis is:
The options market is implying a high volatility… which was never realised before.

Sooo many people high on caffeine and adderall drove the speculation soo high that the options market has implied something about 20-30 times in the past, and it never happened, and yet, it implies the same volatility again.

I feel that this kind of graph is something every volatility arbitrageur would want to see.

To all the high speculators, Thank you

The trade:

The OTM call and put are used as a hedge to make my risk defined, since all trades have risks, let alone trades carried out by me.

An alternate trade:

For those of you that don’t have it in your risk appetite, to hold longer dated option, I saw that this situation is even seen in the 10 day Implied and Realised volatility spread. Sadly, you lot will have to wait a bit from the date of this writing to have a 10-day holding period option in your horizon.

I came across the AP Microeconomics and AP Macroeconomics course on Khan Academy, but what really interested me was the Finance and Capital markets course.

I skimmed through some of the videos, since the instructor worked previously at a hedge fund, and maybe is bound to know his shit.

I came across this module called ‘Hedge Fund strategies’, and it basically explained the concept of merger arbitrage.

If you want to know a little bit about merger arb, here is a pretty good resource.

I’ll try to give a crude summary:
1) One company want another company

2) Company agrees to buy the shares of target company at a premium to its current trading value

3) Target company’s stock rises, but not quite to the level of the buyout price

4) A merger arbitrageur would weigh the probabilities and decide whether the transaction would go through, and based on that, takes a long or short position in the target company. The long position’s max profit is the buyout price, and the short position’s max profit is essentially 100%.

btw I forgot to mention: I’m a trading noob and there is a very very high chance this trade will return -2000%.

Some hedge funds are specialised for this kind of analysis, and I’ve read that this is not really suited for retail investors for some reason, (prolly cuz we all are stupid and cannot really move the markets, so the reason for our existence is pretty much … none)

Now, during this time between the announcement of the merger and the actual deal closing, a few interesting things should happen(this is just guesswork, i’ve no idea on how to use excel or whatever to retrieve options volume data, there doesnt seem to be a website to give this stuff for free):
1) Institutions and retail crowd hedge their positions 

2) Institutions and retail crowd TRY to conduct merger arb

3) Institutions and retail crowd speculate A LOT.

This gives rise to some volatility mispricing, BIG TIME.

I do not make my trades based on IV alone, I mostly look at the spread between IV and RV, calculated by IV/RV ratio by a pretty dinky code I programmed in about a day or so.

The fact that I am manually scraping the data from an external source (this isnt really supposed to be done tbh) through the inspect element in chrome gives me doubts about the technical aspects about our prediction, but eh who cares, we were about to lose this trade anyway.

See, what happens is the actual stock price slowly and steadily climbs towards the target buyout price(well there is a violent arge after the announcement, but after that its relatively stable ascent), but the implied volatility isnt reflective of this. After a while, implied volatility DOES fall, but still the RV is way lower.

HZNP: An Opportunity

Horizon Therapeutics Public Limited company is being taken over by Amgen Inc, at a buyout price of 116.6 dollars per share, with the current price trading at 102.63 dollars per share.

Assuming ‘everything is priced in’, I’d say we are still a bit far apart from the deal from materialising, since it needs about a 13% increase in the price. If the deal was close to being closed, I’d say the price would reflect that.

But, the IV/ RV spread ? Goddamn its high

Here is a chart of the spread over the past 8 years of the 10day IV and 10d RV:

In the graph above, the average over the whole period was a little below 2.5, meaning on average, IV was 2.5 times the RV.

But if we look at the same chart for the past 4-5 months or so:

The average is at about 3 - 3.25, meaning the average spread has increased after the announcement due to the amount of hedging, speculation and arbitrage attempts (i guess ? idk)

The reason I used 10 day IV and RV is that I’m looking to sell relatively shorter dated options, since the more time there is until expiration, the more the risk of the deal actually being closed, and RV skyrocketing and destroying our position.

So, I sold a call and a put with 10 days until expiration with the strike price being 105 Dollars.

Only time will tell how much money I will lose in this trade.

WARNING: PLS PLS DONT DO WHAT I AM DOING, IM NOT HEDGING ANYTHING, AND QUITE FRANKLY TAKING A HUGE AMOUNT OF RISK, OWING TO MY SHIT ABILITY OF DOING DUE DILIGENCE.

Other ideas:

AJRD:

I can see a similar situation as above with the AJRD stock, with Aerojet Rocketdyne being purchased by L3Harris for 58 dollars per share, and AJRD is trading rn at 54.85 per share.

Past 8 years spread IV/RV spread:

Average at about 2 or 1.8 above.

Recent IV/RV spread after announcement:

Average now is maybe like 4.8.
But, the spread seems like it is heading towards below 1(this indicates RV has outpaced IV, which can trigger losses for selling our straddles)
But, nevertheless, an interesting opportunity for the next few days.

Trade results(10 days later):

Well, will you look at that ! The trade printed money.
I do have to warn you though, this is, in a way, gambling.

You are betting on the fact that no major news will come in the 10 day window in which your short straddle is open. This trade was kind of bound to work since research shows Biotech deals take a while.

This is IV/RV values for UVXY.

Now, if you sell options and hedge away all directional risk, your profits are based on the spread between the IV and subsequent RV(also obv its great to see theta working for you)

Now, I started hunting places for this spread is high relative to its mean.
One good example is UVXY tbh, but I would wait until the spread is even higher ig, or when its trajectory is already sloping downwards

GOOGL

I found an opportunity with googl stock options for arbitrage

The IV/RV value was pretty high, and always seemed like it would fall immediately after it started its downward descent.

At the end of the graph, we can see there is a pretty big mispricing of volatility. In the past, this degree of mispricing is mostly followed by drop in IV.

So, I decided to sell a straddle (Probably should do a lot more DD than this but… eh… as i said, im a bad trader and i accept this)

Soooooo it didnt backfire YET ( it will prolly, we still have 27 days to go, imagine what would happen if googl just announced ‘GOOGLE HEADSETS’)

All in all, bad trade due to bad due diligence,but MIGHT not end that bad due to theta.

Things I should've done(reflekshuns):

I had decided to sell a straddle 30d away. For the safer side, I should've sold shorter-dated options since theta is high, and the chances of a big market move destroying our position would be low. will do next time. my spoilt ass was attracted to the big premium, and used only 30d options since the data I parse from alphaquery is 30d implied and historical volatility.

Other ideas:
1) Im looking into IV correlation trading between SVXY and UVXY(basically inverses of each other)
2) Indian stock market has some interesting qualities since NSE(national stock exchange) gives a variety of indices to trade (like nifty 50, nifty bank, nifty low vol, nifty small-cap 250) and i can see some arb opportunities