The January Effect – Idea for Nov 2019

Based off the posts from Part 1, the time has come to implement the bullish call for Nov and Dec.

TLDR: Buy 1-month 310 Calls  - you can't beat the index but you can get better Sharpe

One way to do this is to buy calls, especially since now VIX is quite low. The question is which strike to buy? Buying deeper ITM would cost us a lot, but knowing that Nov isn't a particularly high-skew month also means that many OTM calls would likely end up worthless.

Profiling the equity curve of a hypothetical backtest would help. Here the option prices for each strike is taken and simulated through all the years of % change to obtain the option portfolio equity curve. It takes into account the premium paid.

Naturally, the lower the strike, the more it resembles an outright investment in SPY. Further OTM calls have an equity curve that is highly dependent on very good years, but minorly decline in most years.

A very crude way to evaluate this balance of a smoother equity vs lower total profits is the good old Sharpe ratio. The current price of SPY is 306, and the optimal Sharpe is at 309, just at 1% above current price.

Of course, lots of historical assumptions are inbuilt, but at least it's an answer and a starting point.

Reconstructed equity curves for each strike vs SPY equity (in price points)

The hunt for the ESG factor

Personally I don't fully believe there exists an ESG risk premia. I think it's very difficult to find a big enough and uniform group of companies that can achieve a dual mandate of profitability and high ESG focus.

To be able to pick a few of these companies would also prove difficult and may not be worth the effort.

However I do believe that in the near future, there will be a tide of investors (millennials or the next generation perhaps) who will fanatically invest only in such companies.

Because of that, there is upside to this theme.

So what I hope to do is ride the short term trend when it is in fashion in an almost bubble-like way, then exit (if my assessment of no long term premia still holds).

When good is bad – Non-Farm Payrolls 2019-07

It's one of the stranger times when a better than expected report leads to an equity market sell off, and USD strength.

The logic is indirect (better economy = less chance of rare cut = bad for stocks) but it's interesting how market participants usually only focus on one narrative and ignore the others, such that price action is decisively in one direction instead of a mixed response.

For further study, it would be interesting to look through historical payroll reports and the corresponding price action.

Insurance and Emotional-Monetary Basis Risk

There's no hedge against adverse circumstances in our lives.

Of course, no monetary amount can be exchanged for many of the things in life that are so critically important. But on a monetary exchange level, insurance transfers current money to possible future money at a time when we need it more, and when it could possibly make you feel a little better. For that, I am willing to pay.

When I buy insurance on cancer, it is almost like a 'basis risk' between my emotional/physiological state and my monetary state which is hedged.

What's my hedge ratio? I've never been through such a  state yet to be able to estimate it. The hedge ratio is related to the gain in monetary amount that would help buffer emotional loss (at least to some degree). I'm not sure if it does, but I would think that if I do get in to such a state, there is a possibility that some income would make me feel just a little bit better.

Flash Crash CHF 2019-02-10

1% move in the CHF at dawn with heavy volume coming in at 22:33 UTC

Awaiting news sources to come up with a story of what happened.

[Update]

No catalyst and so it's reasonable to attribute it to lack of liquidity, also known as the 'Japan Curse' due to these crashes occurring on Japan holidays when Japanese traders aren't around to provide liquidity in the early Asia hours.

But since this is now widely on the radar, it's less likely to repeat. For safety, algo orders will likely be suspended on these dates, and so these moves should become more rare and less exaggerated.

 

Upcoming Japan holidays falling on a Monday

  • May 06 (May 03 Friday to 06 Monday is Golden Week)
  • Jul 15
  • Aug 12
  • Sep 16
  • Sep 23
  • Oct 14
  • Nov 04