surfing the waves
Post on 12-Jul-2015
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Macro/Micro Wave StrategyJay A. Leavitt, PhD
Combine Successful
Time Tested Concepts
with
Emerging Trading Ideas
SPY, SPDR S&P 500 Index ETF
TLT, iShares 20+ Year Treasury Bond ETF
What to Trade
Entry Criteria
Exit Criteria
SPX Hull Timer
Bull Trade Stocks in Rising Markets [concept]
SPY ActiveBull Put Spread 2 Strikes Wide
Short Strike 75% POS
Bear Trade Bonds in Falling Markets [concept]
TLT ActiveBull Put Spread 2 Strikes Wide
Short Strike 75% POS
POSProbability of a Successful Trade
Bull Trade Stocks in Rising Markets [concept]
SPY ActiveBull Put Spread 2 Strikes Wide
Short Strike 75% POS
BearTrade Bonds in Falling Markets [concept]
TLT ActiveBull Put Spread 2 Strikes Wide
Short Strike 75% POS
Hull Micro Wave
Hull Bull [Green] Hull Bear [Red]
Hull[25]
Bull Profit Exit >= Credit/2
Loss Exit <= Risk/4
Bear Loss Exit <= Risk/8
Exit with any Profit
Entry Not Allowed
Limit of 25% of Equity at Risk per TradeBull Loss Exit = Equity/16
Bear Loss Exit = Equity/32
The SPX Hull Timer keeps trades on the right side of the market
Bear Micro Waves keep you out of the market when it’s against you
Stops
When the SPX Hull Timer changes it is a Stop
When the Micro Waves turn bearish it is NOT a Stop
The 75% POS of the short strike puts the odds in your favor
The exit at 50% of credit improves these odds and raises the daily return/trade
When the Micro Wave is bearish the per trade exit is only 3.125% of equity
1st 14 days of Micro WaveTake advantage of trough when likelihood of winning trade highest
Move spread 2 strike closer to ATM unless IV Rank >= 50
Waves 30 days or longerReduce risk when likelihood higher for wave to crest
Move spread 1 strike further from ATM
Other refinementsAfter a losing trade skip 1 bar
During a Bear Wave close trade with any profit
Average Days in Trade
9.23
Average Days in Losing Trade
8.39
Percent of Winning Trades
82.31%
Maximum Draw Down
-14.46%
Maximum Quarterly Draw Down
-9.03%
Compound Rate of Return
31.38%
Percent of Equity Available for Other Trades
75.00%
Wave reversals lasting 3 or fewer days
Two typesBull Bear Bull
3 occurrences
These are of no consequence
Bear Bull Bear
8 occurrences
3 were losses
One resulted in the largest Draw Down
The Macro/Micro Wave Strategy, from before the 2008 crash through the 1st quarter 2014, greatly out performed all mutual funds as measured by draw down and annualized rate of return. Even the Warren Buffett stocks [BRK.A] weren’t a challenge. Its draw down was over 3½ times worse and annualizd rate of return insignificant in comparison.
Risk associated with this type of option strategy, OTM Bull Put Spreads, is alwayssmaller than trading the underlying equity. The Probability of Success for trading an underlying equity is always smaller than the option’s.
The Macro/Micro Wave Strategy is highly intuitive:
buy stocks in rising markets and bonds during falling,
buy low and sell high,
by placing only a portion of equity at risk keeps the balance available for opportunities.
The Macro/Micro Wave Strategy is permitted in IRA accounts.
Jay A. Leavitt, PhD
leavitt@buffalo.edu
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