January effect

[probtrader]

Going long a microcap index and short the SP500 from the end of December to the end of January gives a very good expectancy based on stock market returns over the last 10 years.
Here I used DFSCX as a proxy for the microcap index:

Period: [1996-Jun-20/2006-Dec-14]
Trades: 10
Avg trade: 5.15686%
Std dev: 6.52797%
Skew: 94.5309
Pos trades: 8 (80%)
Neg trades: 2 (20%)
Avg pos: 6.74405%
Avg neg: -1.19191%
Best: 19.5775%
Worst: -1.21317%
Max cons pos: 6
Max cons neg: 1
Max Drawdown: -1.21317%

Problem is, I don't know of any product that I can use to leverage a microcap index position. There is a Value Line future, traded on the KBOT, but my broker doesn't support this exchange. The Russell 2000 e-mini, based on small caps, gives good results, but not as good as DFSCX.

Does anybody have an idea of how to implement the long side of the spread? I also looked at DITM IWC options but I'm not too familiar with options and spreads look very high.

--
DFSCX: Bought 1 4.79 1996-Dec-20 (Fri), Sold 1 5 1997-Jan-29 (Wed), Factor 1.04384
SP500: Shorted 1 748.87 1996-Dec-20 (Fri), Covered 1 772.5 1997-Jan-29 (Wed), Factor 0.969411

DFSCX: Bought 1 5.77 1997-Dec-22 (Mon), Sold 1 5.89 1998-Jan-29 (Thu), Factor 1.0208
SP500: Shorted 1 953.7 1997-Dec-22 (Mon), Covered 1 985.49 1998-Jan-29 (Thu), Factor 0.967742

DFSCX: Bought 1 5.26 1998-Dec-21 (Mon), Sold 1 5.65 1999-Jan-29 (Fri), Factor 1.07414
SP500: Shorted 1 1202.84 1998-Dec-21 (Mon), Covered 1 1279.64 1999-Jan-29 (Fri), Factor 0.939983

DFSCX: Bought 1 6.67 1999-Dec-20 (Mon), Sold 1 7.65 2000-Jan-28 (Fri), Factor 1.14693
SP500: Shorted 1 1418.09 1999-Dec-20 (Mon), Covered 1 1360.16 2000-Jan-28 (Fri), Factor 1.04259

DFSCX: Bought 1 6.42 2000-Dec-20 (Wed), Sold 1 7.74 2001-Jan-29 (Mon), Factor 1.20561
SP500: Shorted 1 1264.74 2000-Dec-20 (Wed), Covered 1 1364.17 2001-Jan-29 (Mon), Factor 0.927113

DFSCX: Bought 1 8.14 2001-Dec-20 (Thu), Sold 1 8.4 2002-Jan-29 (Tue), Factor 1.03194
SP500: Shorted 1 1139.93 2001-Dec-20 (Thu), Covered 1 1100.64 2002-Jan-29 (Tue), Factor 1.0357

DFSCX: Bought 1 7.32 2002-Dec-20 (Fri), Sold 1 7.22 2003-Jan-29 (Wed), Factor 0.986339
SP500: Shorted 1 895.76 2002-Dec-20 (Fri), Covered 1 864.36 2003-Jan-29 (Wed), Factor 1.03633

DFSCX: Bought 1 11.53 2003-Dec-22 (Mon), Sold 1 12.44 2004-Jan-29 (Thu), Factor 1.07892
SP500: Shorted 1 1092.94 2003-Dec-22 (Mon), Covered 1 1134.11 2004-Jan-29 (Thu), Factor 0.963698

DFSCX: Bought 1 13.56 2004-Dec-20 (Mon), Sold 1 13.14 2005-Jan-28 (Fri), Factor 0.969027
SP500: Shorted 1 1194.65 2004-Dec-20 (Mon), Covered 1 1171.36 2005-Jan-28 (Fri), Factor 1.01988

DFSCX: Bought 1 14.64 2005-Dec-20 (Tue), Sold 1 16.02 2006-Jan-27 (Fri), Factor 1.09426
SP500: Shorted 1 1259.62 2005-Dec-20 (Tue), Covered 1 1283.72 2006-Jan-27 (Fri), Factor 0.981226

[nodoodahs]

I'm gonna post on this on the blog, not your specific instance, but similar, so I'll keep it short here.

With in-the-money, the same risk capital (premium) controls fewer contracts. Your payout matrix at expiry is similar to long stock, in that you have to take a big adverse move to lose your risk capital. Each contract is x $ per y points of movement.

With at-the-money, you control more contracts, so each move past in-the-money is better and bigger. However, any adverse move causes loss of risk capital at expiry. You would need to trade out of the options at some point if they don't make it. However, if the move is in your favor, but still out of the money at trade time, you have exercised greater leverage (returns on risk capital) than you would have with in-the-money.

Similar thoughts with out-of-the-money, still more contracts and still more leverage, you need to trade prior to expiry if not in the money.

This is all assuming your bet size (risk capital allocated) is constant.

I haven't examined your trade in detail, but from some work I've done with equal bet sizes, non-in-the-money options provide the most $ per point moved and the least capital commitment, but! I don't like the payout matrix or the need to trade out of them. In the money, not as much $ per point, but less capital for an equal risk size and can hold to expiry.

Hope that helps.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[rffrydr]

Yeah, slip of the finger. But I'm really surprised your broker doesn't KBOT. The platforms now link pretty much globally--and if not, I've always been able to phone in the order (traded the old ECUnint bonds vs. German bonds--not good on the margin stats when one country is on catholic holiday schedule)

Futures 5% margin, way to go. Deep in the money options cost and bid/ask on the deep outs in the numbers you need to get the leverage will eat big chunks--and many ofthe ETF options are illiquid anyway.

This effect has also been demonstrated across nationalities so not entirely a tax-effect. But this isn't an ordinary year, and the large caps ARE now the contrary play. GE is taking off--could be defensiveness with consumer non-cycles. I've done this trade with the Russell; wouldn't do it with that now. And balance those dollar values!

PS I think the effect is stronger leaving out the last week.
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Today is the Tomorrow you worried about Yesterday!

[probtrader]

[probtrader]

[probtrader]

[nodoodahs]

At the money or deep out of the money will give you most leverage, if you equalize risk exposure. Of course, then you need to trade them prior to expiry ...

Spread is probably the least of your concerns if the trade is good.

Low vol means good low premiums.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[probtrader]

[rffrydr]

Check again, maybe they just don't want to. Any futures broker that trades grain trades the KBOT--and that means any broker who's been around for more than 10years.

Make sure you have enough $ to equal dollar-ratio the two sides and still take the volitility. And watch that they give you the margin credit.

You can also pick a basket of stocks--but may have margin problems or dead money problems.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

How about using IWC? The Russell microcap ETF? As opposed to a futures contract?

[nodoodahs]

You've got 10 days to find another broker?

I like the thought process ...
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.