In an attempt to find my own *money machine* (besides my money honey), I developed a system to use options in order to exploit the market’s overreactions. As a self-proclaimed optimistic long investor, this process seemed counterintuitive That said, I am looking for the Dark horse.
The System:
For two weeks, I selected the highest/lowest percentage one-day change of all American traded securities and bought the applicable put/call shortly before closing bell. The next day I sold the options regardless of performance. Simple enough.
The Results:
Over the course of the two-week study, the portfolio had a return of 300%. For an annualized return of 7,800%. Ridiculous, right? The put options had a return of 600%, while the call options had a return of -10%. During the span of the case study, the S&P had a return of .34% and the Wilshire 5000 had a return of .27%.
Observations:
One of the limitations I found was that most of the securities identified as significant one-day changes did not have actively traded options. Roughly, a third of the securities’ illiquidity caused no change. The standard deviation of the portfolio was 12%. I was surprised to see multiple securities with a 100% bid/ask spread, indicating the extreme volatility of the securities held. The results mentioned above are net commission return of $20 per trade, typically resulting in .01% to 9% of net return.
Random thought-- I can’t wait for the WNBA to start. In conclusion, my contrarian play had a very positive performance. This study has increased my fascination with irrationality and the opportunities it creates to increase two-fold. I look forward to employing and re-developing this strategy.
Two-4-the-Money
Sunday, January 6, 2008
Friday, January 4, 2008
Do What U Do...
Subscribe to:
Posts (Atom)
