Thursday, February 24, 2011

XVIX: VIX futures calendar spread ETP

XVIX: short .5 front month VIX contracts for every long back month contract. It's a pair trade, somewhat similar to the VXX/VXZ Trade mentioned at the Surly Trader, which actually gives a pretty nice equity curve.

What makes it cool is that volatility measures like the VIX, VXN are generally easier to forecast than actual financial asset price evolutions. I've mentioned a research paper around VIX seasonalities and distribution patterns. Naturally this implies easier trading profits.

Like ETFs, Exchange Traded Products (ETPs) are listed on US exchange so that the invested products are more accessible to the general public. Yes, they are here.

Monday, February 21, 2011

Curve fitting, life, and etc.

Every decision we make in life is founded upon historical performance, often witnessed off the past generation. Whether it be attending university or creating a business, we do things in pursuit of personal dreams because, "...they've worked before, for someone else".

It doesn't always work

The world changes, and it is time to adapt or be left behind. Quick example: just 2 decades ago, the average law school graduate did quite well making a living, not so today partially due to globalization. In fact, a good number of majors at the local universities have little to offer in terms of skill demand in the near term future.

So what gives?

We must embrace critical thinking, on individual levels. It is unfortunate that society today discourages it, where we're constantly told what to eat, wear, or think... As difficult as it may seem, but we need to realize that while the older generation may be old, they are not always that wise.

Friday, February 18, 2011

Dealing with volatility

Phil Galfond of Bluefire Poker mentioned in an interview (at Poker Static) that many players have a hard time dealing with "variance", i.e. volatility of performance over time; this probably applies to not just poker and hedge funds, but all business models today for those not proficient in statistics.


Naturally, when volatility jumps negatively, someone of little understanding in probability theory would feel inclined to give up entirely. This probably explains the high numbers of business failure each year.

On the other side of the coin, in cases where volatility spikes positively in the short run, it fools amateurs (poker, trading, business...) into becoming over confident which usually leads to taking unfavorable risks.

Down swing management

As conventional businesses (excluding poker/financial trading) depend heavily upon local economic growth, any slow down in inflation means lower purchasing power of potential customers, which hurts profit. In this regard, business managers must learn to estimate probability of economic growth to prepare for (hopefully) limited losing periods while maximizing profits in good periods. Again, this comes back to statistical expectancy.

Wednesday, February 2, 2011

Kth Nearest Neighbor Algorithmic Predictions

So I noticed that Adaptive Trading Systems claimed to have achieved a fairly nice looking equity curve forecasting S&P500 Futures via KNN (Kth Nearest Neighbor) with the below inputs,

S&P500 Futures
S&P500 Index
Russel 2000 Index
OEX Put/Call Ratio
Fundamentally, these variables look at sentiment, futures basis, and relative performance, and are probably the main causes for this strategy's success.

Applying KNN

Here's a simple guide to implementing KNN in Excel. There're also a number of Matlab packages available.