Open Up!

This is kind of a weird one.

I was mulling over the question of what happens when the market opens up, i.e. above its previous close. Is the day likely to be an up day? A down day? I got out my data and started poking around. I looked at all “open-up” days with an open at least 0.25% above the previous day’s close. I looked at only days that opened up after a previous close-to-close down day. And the reverse.

The statistics were not significant, although it appeared there was something of a shorting opportunity there. I therefore put together a backtest for shorting at the open and holding to the close, and that looked like utter garbage. Continue reading Open Up!

Synthetic VXX/XIV Data

Anyone who trades VXX or XIV ETFs knows that their history is unfortunately too short. They track the VIX futures, but only go back to 2009. How would they have performed during the Kerfluffle of 2008?

A number of people have come up with ways to use the futures data from prior to the ETFs’ inception, and create synthetic data to use in testing. Many charge for this data.

A friend pointed me to a website that has the data for free. With a little know-how, you can create a synthetic version of VXX and XIV and import into your favorite backtesting software. It seems to track very nicely too.

In the above graph, the red line is actual traded XIV, and the blue is the synthetic version going all the way back to 2004. Looks close enough to me! The tail end is a prediction that the creator cooked up, which you should ignore for testing purposes.

I am relieved to find that my medium-term XIV system would have been out of the market for most of 2008. Very reassuring.

If you were looking for synthetic VXX/XIV data, head on over here.

Read also: What I Trade.

“These Aren’t The Gains You’re Looking For” (Leveraged ETFs)

“These aren’t the droids you’re looking for.” (Flickr/donsolo, CC BY-NC-SA)

Ah…leveraged ETFs. All that beta without all the embarrassment of trying to borrow money from your broker (or cousin) to leverage your returns. Is the regular ETF not volatile enough for you? Buy the 2x version! Still too tepid? Perhaps the 3x version is what you’re looking for.

Unless you’re new to trading though, you’ve probably heard about beta slippage. This is where leveraged ETFs, using a combination of volatility and pesky math, end up losing as compared to their 1x versions over the long haul. Leveraged ETFs aim to provide a 2x or 3x return on an intraday basis as compared to a 1x version (or the index they’re tracking). But, over time, these leveraged returns decay.

For example, let’s take a look at two gold miner ETFs, which track an index of gold miner stocks. We have the plain vanilla version, GDX, and then a triple-leveraged version, NUGT. These are managed by two different investment funds, so we’d expect there to be some day to day discrepancies. Starting at the beginning of 2011, here are the results of a buy and hold approach to each:

Continue reading “These Aren’t The Gains You’re Looking For” (Leveraged ETFs)

Comparing Overlapping Systems (Part 2)

Do your systems overlap?

In the last post, I compared three systems that traded the same instrument (SPY) in different ways, and also compared the combination of the three systems. Combining those systems reduced risk, which allowed us to increase our position size (either through more cash or using leverage). We could then realize a larger profit for the same amount of risk as we’d experience using just one of the systems.

There is still however a risk of our systems being overly correlated. We might end up throwing two buckets of money at the market, when we thought we were just throwing one bucket. How do we figure that out?

Continue reading Comparing Overlapping Systems (Part 2)