The Jacked Quant
@JKevin2011
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AI/ML | Quant Finance | Health Tech
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Joined August 2010
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Last Seen Profiles
Retail trader: "Buy the dip"
Vol Quant: "Use the ornstein-Ulhenbeck process as a model that captures the mean reverting profile of a security and assesses its fair value."
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Top 5 stocks by short interest:
$GME GameStop 138.08%
$SPCE Virgin Galactic Holdings Inc 81.53%
$AMC AMC Entertainment Holdings Inc 68.93%
$BBBY Bed Bath & Beyond Inc.Nasdaq 66.62%
$LGND Ligand Pharmaceuticals Inc. 4.24%
Let's see what happens.
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A quick and dirty tutorial on how to implement different volatility measures in R:
- Close-to-Close vol
- Yang Zhang Vol
- Parkinson Vol
- Glass-Karman (GK)
The next piece will be on intraday rvol analysis. Enjoy.
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1/N
Notes from Sinclair's Webinar on directional options trading:
- Instead of using volatility forecasting models, it's best to find situations where we're less likely to overpay for volatility
- When taking directional bets, always remember the spot/vol correlation. $SPX
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107
Since realized vol has been declining recently as we're entering a new "vol regime" it might be a good idea to revisit of few methods that help identify new vol regimes
THREAD
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Fintwit Gurus: "Don’t worry about all these complex equations, maths isn’t that useful, these models are useless etc"
2nd Round Interview at Citadel: "I want you to use the Riccati equation to find the optimal minimum of the following functional J"
Me: 👀👀
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This is an excellent paper on detecting regime shifts. The author also claims that long memory effects in the volatility process might be due to structural breaks in the process itself 👀
Paper:
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I'm starting to realize that most patterns in finance are completely random. We need to find evidence and use logic before accepting a pattern as meaningful. We're built to see patterns even when none exist.
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60
One of the best papers on trend following: "Two centuries of Trend Following"
Link:
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Per my backtests, $SPX bull put spreads 45-60 DTE have produced the highest returns + highest win rate. It's probably time to go back to the basics and frequently collect risk premia.
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Here are my top Volatility/Derivatives Resources.
1- Hull Options Futures and other Derivatives (8th Edition or later)
2- Option Volatility & Pricing by Natenberg
3- Positional Option Trading by Sinclair
4- Volatility Trading by Sinclair
5- Trading Volatility by Bennett
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Realized volatility constructed from high-frequency intraday returns offers a myriad of interesting insights. Something to think about w.r.t. volatility forecasting. $VIX $SPX
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Jim Simons: " I make money with simple regression analyses"
Fintwit gurus: "Regression is useless, you need to look at the heteroskedasticity properties of the returns while properly calibrating various vol surfaces"
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34
"Earnings don’t move the overall market; it’s the Federal Reserve Board. Focus on central banks, and focus on the movement of liquidity.
Most people in the market are looking for earnings and conventional measures. It’s liquidity that moves the market."
— Stan Druckenmiller
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If I could trade options full time, I’d try to focus on harvesting risk premia in single names.
- Scan the universe of US equities, look for VRP in single names
- Establish a trade structure that’ll capture the aforementioned VRP
- Size my bets (1/2 Kelly), Delta hedge, etc
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When you can hedge, you won’t. When you need to hedge, you can’t.
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1/ Knowing who is on the other side of my trades (short $VXX) is certainly crucial [inspired by
@therobotjames
"useful questions"]
Q: Who's buying $VXX because they have to?
A: Fear-driven managers, investors, and traders looking to "protect/hedge" their portfolios
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In trading, often times the most consistently profitable strategies are unsophisticated and appear "boring".
Same in life. To prevail you need to find pleasure in boring and repetitive activities e.g. a simple workout routine executed for years, dieting, etc
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"Earnings don’t move the overall market, it’s the FED board. Focus on the central banks, and focus on the movement of liquidity. Most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets."
— Druckenmiller
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Notes on realized volatility forecasting:
ATM option-implied volatility is the most predictive of future realized volatility (Bondarenko, 2003; Granger et al, 2003). $SPX $VIX
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"If the option maturity is long enough, trend can take us far enough away from the strike that it's okay to overpay."
-- Jim Leitner
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Fintwit quants and gurus, what are your thoughts on technical analysis/charting? $SPY $VIX
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If you want to be good at anything in life, embarrassment is the cost of admission for mastery.
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A quick and dirty approximation of a stock’s expected move as a function of the ATM straddle price:
Expected Move = Spot * Vol% * Sqrt(time)
=> Expected Move ~ ATM Straddle * 1.25
The proof is left as an exercise to the reader.
$SPY $VIX
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Method
#4
: This is probably the most complex one. One can use Hidden Markov Model (HMM) to capture the tendency of markets to change their behavior abruptly
Here is a beginner-friendly guide on regime-switching models:
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1/n A momentum-based trading strategy for cryptos/meme coins 🧵
Consider a basket of trending meme coins
We'll use the rate of change (ROC) by comparing the current price to the price n periods ago
Buy if ROC is above a threshold (0.002)
Short if ROC is below (-0.002)
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21
New Trade: Long-dated $UVXY calls (11/18)
Thesis:
- $VVIX ~ 87 ( $UVXY options are cheap are these levels)
- Theo edge (~170%)
- Upcoming Macro catalysts (Opex, Jackson Hole, Meme stocks, FOMC, etc)
- Seasonality: Late Aug. & Sept. are the most volatile months of the year
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Interesting VIX related papers:
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@SqueezeMetrics
@bennpeifert
@TheStalwart
@MylesUdland
So it’s ok for hedge funds to use cutthroat tactics to win but when WSB piles into a trade, all of a sudden it needs to be regulated 🤔.
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It's easier to react to events than predict them. The Sharpe ratio of reacting to events is higher than the Sharpe ratio of trying to predict them.
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Don’t forget about this trade. It’s that time of the month.
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1/x A quick thread on pricing cash-secured puts using expected value analysis + Implementation (recall: EV = win*P(win) + loss*P(loss)). The idea is to look at our trades like bets, and we only want to place bets when EV > 0. 👇🏿👇🏿👇🏿
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Vol regime modeling is truly fascinating. Some use the inevitable 200MA as a way to identify different vol regimes (high vol if SPY < 200MA, low vol otherwise) while others might use implied ranges/gamma levels or even the $VIX TS (low vol = contango, high vol =backwardation,etc)
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4/N
- When theta cost is greater than the expected return from delta, roll, or exit
- Don't use "stops" & stop yourself out of a long option position since you've already paid for the limited downside
- Pay attention to the historical distribution of implied volatility vs Rvol
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Notes on IV forecasting:
According to numerous studies, fundamental factors could be used to forecast IVOL:
- E.g: Options with the lowest diff. between RVOL and IVOL tend to be underpriced (IV factor)
- small-cap options tend to have overpriced vol. (Size factor). $SPX $VIX
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Interesting idea: Use cross-market correlation to analyze/measure deviations from "fair value". For instance, we can create a simple regression model to track momentum in two or more "logically" correlated markets. Lead/lag effects can give us a forecasting edge. $SPY $VIX
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Why the Sharpe Ratio sucks (Thread + Codes):
1/n In science, "point estimates" without confidence regions are essentially meaningless.
Why is the Sharpe Ratio the gold standard when it comes to evaluating trading strategies?
What's the confidence region of your Sharpe?
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@bennpeifert
Junior derivatives trader interview question: "What happens if you buy YOLO OTM weekly calls on the most talked-about stocks on WSB and Tik Tok?"
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