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TRANSFORMING RAW DATA INTO INSIGHT & ACTIONABLE INFORMATION After reading the book Moneyball for the first time, I built a factor model in hopes of finding a way to finally be competitive in my fantasy baseball league - which I had consistently been terrible at.  It worked immediately.  By taking raw data and turning it into actionable information, I was able to solve a problem that had long perplexed me.  It was like discovering a new power.  What else could I do with this? Today, I build models for everything and have come a long way since that first simple spreadsheet but still use a lot of the same concepts. To build a traditional factor model, you would regress a dependent variable against a series of independent variables and use the resulting beta coefficients as the factor weights... assuming your resulting r-squared and t-test showed a meaningful relationship of course. Variables typically fall into one of two categories... continuous or dichotomous.  Dichotomous variables

HOW SELLING SHORT-DATED OPTIONS IMPACTS RISK ON POSITIVE GAMMA POSITIONS WHY PAY RETAIL? One popular options trading strategy is the calendar spread where short-dated and, generally, lower absolute delta options are sold to finance options with longer-dated maturities and higher absolute deltas.  The intention is to reduce the purchase price of the long-dated option, but the structure also impacts the risk/return profile of the position  and the passage of time makes that relationship more dynamic than a traditional long or short option by itself.  To illustrate the point, I built out the Optimized Positive Convexity model to account for variable maturity positions. http://tancockstradingblog.blogspot.com/2015/08/follow-up-on-qihu-short-trade.html I structured a bearish position around the SPY  which I fully expect to breakdown in the coming days and weeks. The position is composed of the following legs and the risk profile at inception is reflected in the chart below. Long: 200 share

MARKETS ARE SET UP FOR ANOTHER FALL   Equity markets are setting up for their third bout of pronounced volatility in the past ten months as a confluence of factors form like storm clouds on the horizon.  Global macroeconomic concerns, domestic rate expectations and bearish technical indicators have been going concerns for several months; and while they're certainly not mutually exclusive, all three factors are now flashing red at the same time! CHINA The issue of China's slowing growth and mounting debt are nothing new... http://tancockstradingblog.blogspot.com/2016/05/is-china-next-japan-continuing-case.html However, China related stocks and ETFs had enjoyed a small relief rally... until recently that is.  Anything associated with the country is under fire again and not even huge investments from Apple can seem to save them. THE DOLLAR Similar to Chinese stocks, the dollar had recently reversed its own longer trend... it just so happened to be a bullish one.  However, the doll

The Dollar is showing signs of strength which has already had an adverse impact on non-energy commodities... if it continues to rally, oil is likely to be adversely affected as well. Here's one way to play it. SCO is a leveraged inverse ETF on oil and can swing wildly when oil is falling.  By using a call ratio backspread, we can virtually eliminate the downside if oil does not break down and capture an exponential upside if it does. Here's the trade: SCO is trading at $80.72 USO is trading at: $11.9 Short 1 June 17 $75 call at: $16.1 Long 3 June 17 $100 calls at: $3.4 Long 4 June 17 $110 calls at: $1.95 Breakeven price is approximately $111 Max loss is $2,700 If all options expire worthless the total loss would be $190 SCO at $150 would represent an approximate gain of 10x mas risk

APPLE STOCK IS BREAKING DOWN Apple is trying desperately to prop up its stock... but buying back more than $100 billion worth of shares in the last year and increasing dividends to record levels isn't helping.  After Q1 results that beat estimates, reports of supplier cuts lead investors to dump shares as it signaled iphone demand is crawling to a halt. Furthermore, the technical pattern is setting up for a good sized breakdown: Apple is obviously a large component of the technology sector which continues to lag the broader market and is also in a technical breakdown pattern.  If the broader market comes under stress, it could be a bumpy ride down for Apple shares. Here's a bearish Optimized Positive Convexity trade for AAPL: The projected return for AAPL to the June 10th expiration is -11.13% The implied volatility is for the at-the-money put is a staggeringly low 20.4% vs a projected volatility of more than 27%! This is also the day before a large dividend is to be paid out..

STUCK IN THE MIDDLE WITH YOU U.S. equity markets finished the first week in May on a positive note Friday following a rise in short-term volatility which saw the S&P settle inside of a technical range that I call the 'Moving Average Variance Gap.' http://tancockstradingblog.blogspot.com/2015/09/the-fill-gap-pattern.html The 50-day moving average acted as a support level for S&P which is being tested for the first time since the market's broad based recovery rally began following January's selloff. The big question now is, what happens next? Currently the S&P is in a bullish trend pattern which is characterized by a positive long-term trend (signified by the 50 day moving average) and a low variance to that trend.  Technical trend patterns typically form after an index or stock has experienced a pullback following a prolonged move in a particular direction.  A typical trend pattern will resume the longer term trend move following the pullback.  However, if ma

"Shares of Lockheed Martin are breaking out to the upside."  This headline could have basically been copied and pasted to financial articles for the past 15+ years; and for good reason too as the price of LMT stock has appreciated 600% since the beginning of 2001 (not to mention the 3% annual dividend distribution).   That would be an amazing run for an innovative 21st century technology start-up company... but Lockheed is a large-cap defense contractor whose stock has been publicly traded since 1977 .  One can't help but notice that this run directly coincides with the company's $1.5 trillion contract with the U.S. Department of Defense to develop the, then next generation , F-35 Joint Strike Fighter. http://www.cnbc.com/2014/07/31/how-dods-15-trillion-f-35-broke-the-air-force.html The Joint Strike Fighter program was originally intended to be an economical, one size fits all, utility aircraft for multiple branches of military service.  Variants of the core design w

IN THE EYE OF THE STORM The past twelve weeks have brought a welcome calm to Asian markets following eight solid months of gut wrenching, heart breaking pain that saw volatility skyrocket, asset prices crumble and governments grasping at straws... desperately trying anything and everything just to stop the bleeding. China is having its 2008... but they'll be lucky if it's only that bad. More bad news appears to be on the horizon as markets are signaling that the current respite may soon be over.  Like the passing eye of a storm, the end of the nightmare was just a dream. UNCOMFORTABLE NEIGHBORS IN HISTORY AND UNFORTUNATE NEIGHBORS IN POLICY To understand the scale and implications of China's problems, you don't have to go very far to find a cautionary tale that went unheeded.  Japan's post-war growth had been dubbed an economic miracle.  Benefiting from American interests during the Cold War and ample lending supply, the island nation rose from the ashes of World Wa