January effect

probtrader · Senior Poster Joined: 22 Oct 2005 Posts: 130

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

rffrydr · Posted: Thu Jan 08, 2009 11:38 am Post subject:

It's working:

http://stockcharts.com/h-sc/ui?s=$RUT:$SPX&p=DAILY&b=5&g=0&id=p25008674666
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rffrydr · Posted: Wed Jan 30, 2008 12:48 am Post subject:

From the Broker:

So far, the S&P 500 has posted one of its worst performances for the month of January in history. There are a few trading days left in January, but at writing the S&P 500 was down about 7.40%. If the market closed at this level, this would be the second worst performance going back to 1928. Only 1970, with its 7.65% decline, would be worse. The table below displays what could be the 10 worst performing January’s since 1928. Five of the nine years in which the market performed poorly (2008 excluded) in January coincided with a recession, although the definition of a recession and its meaning are not really relevant to capital market price action.

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rffrydr · Posted: Sat Jan 19, 2008 9:57 am Post subject:

So goes january depends on your views of the 30's:

http://www.marketwatch.com/news/story/january-seems-sure-down-month/story.aspx?guid=%7BEB3A97E0%2D4CE4%2D4ECA%2DB2A9%2D06448FF62974%7D

Which is why I believe it.
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TRS · Veteran Poster Joined: 11 Aug 2005 Posts: 188

Probtrader

I see you already have your trade on, so good luck. Another way to trade the same theme would be to find a well enough correlated ETF or index to that of the IWC. In this casd the IWM does a well enough job and you will not have to worry about liquidity issues on the options. They are priced in some cases just penny's apart. With options your main considerations should be liquidity, time, delta (in the money).
I like your idea, I would trade a call spread, by buying IWM Jan 74.00 calls for 5.00 and SELLING SPY Jan 152.00 calls for about 1.30. The premium you receive from the calls sold on SPY, reduces your cost on the IWM to 3.70 each. So you are in the money on the IWM calls by almost 1.00. You can also consider to use a stop on the SPY calls if you chose and the IWM calls also. The lack of of using an illiquid vehicle in the long run with options will end up killing your profits.
The negative is you tie up more margin by selling naked calls, but I would rather accept that then lack of liquidity.

http://stockcharts.com/h-sc/ui?s=IWM&p=D&yr=0&mn=8&dy=0&id=p94906853710&a=125837913

rffrydr · Posted: Fri Dec 21, 2007 11:34 am Post subject:

Here we go again. Probabably a better shot this year. I'll be looking for this to get short the spread again.

Distressed Assets Anyone? Scroll through a sampling here, DEC and JULY. Pimco Floating Income for a start. Lehman Structured for a "finish."?

http://www.nyse.com/regulation/memberorganizations/Threshold_Securities.shtml?date=20071220
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rffrydr · Posted: Wed Jan 31, 2007 10:30 pm Post subject:

From Decisionpoint's Trader's Corner:

"I am indebted to Yale Hirsch of the Stock Trader’s Almanac for the
following bit of market history. The Month of January is now in the
books and it was an up month. Since 1950 there have been 36 higher
Januarys excluding this one. In 32 of those cases, the remainder of the
year has been higher. This works out to an 89% batting average."

http://www.decisionpoint.com/TAC/TODD.html

http://money.cnn.com/2007/01/31/markets/markets_january/index.htm?postversion=2007013113
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probtrader · Senior Poster Joined: 22 Oct 2005 Posts: 130

rffrydr · Posted: Wed Jan 31, 2007 12:43 pm Post subject:

Call it a wash?

http://stockcharts.com/h-sc/ui?s=$RUT:$SPX&p=DAILY&b=5&g=0&id=p
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Today is the Tomorrow you worried about Yesterday!

probtrader · Senior Poster Joined: 22 Oct 2005 Posts: 130

rffrydr · Posted: Thu Dec 21, 2006 10:11 am Post subject:

See if you can verify that the bulk of this effect is in the first ten trading days?
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probtrader · Senior Poster Joined: 22 Oct 2005 Posts: 130

Alright, I'm long IWC $57.97, short SPY from $142.14 for a 2:1 leverage. I opted for ETFs in the end.

probtrader · Senior Poster Joined: 22 Oct 2005 Posts: 130

probtrader · Senior Poster Joined: 22 Oct 2005 Posts: 130

I agree DITM options is a better way to go for this kind of strategy. The high gamma of ATM options makes it more complicate to readjust the short leg delta. That's the way I understand it, but my background is very theoric.

I didn't think about the trade-out situation. Indeed with DITM options you might benefit from not having to trade the exit, but only at the condition that options expiration match the strategy exit day. In my case, I need to exit the spread on Jan 30 so I would have to trade out of the options anyway.
Am I right on this? I'm not ready to pay 1% spread on a strategy average return of 2.55%.

nodoodahs · Moderator Joined: 06 May 2005 Posts: 2408

Yeah, DOTM is a speculation only.

At the moment, I'm favoring DITM with a strike equivalent to where my stop would be on a direct play, because the expiry payout ratio and amount at risk are equal to a direct play on the underlying.

Given the same risk parameters as a direct play with stop, and the loss represented by the move from entry to stop equating to option premium, the actual dollars per point are less with the options play than they are with the direct play, BUT the amount of capital committed is far less. Therefore if the amount of capital is held constant, one can increase the risk load.

The main advantages are the hard limit on loss (no "black swans") and the smaller amount of capital allowing multiple plays.

Definitely a trade-off.
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rffrydr · Posted: Tue Dec 19, 2006 5:25 pm Post subject:

Don't forget that "Y" moves that "X" disproportionately. That variable, that "Delta," ATBE is approx. .5 (two options equal one position); deep-in-the-money moves almost one-to-one; deep out-of-the-money (and time) can do nothing for a long, long time even with sharp moves--not the way to be trading a spread. But it's why option writers sometime get caught and have to cover and cover again a position they had already covered!--the self-fufilling breakout.

And the bid-ask sucks.

Save the options for an outright spec. or money management and balance spread that VL vs. SP and crossyourfingers.