S&P500 Option Volatility Scorecard

As I wrote in my last S&P500 Option Volatility Report, I predicted that volatility in S&P500 options would close higher on this past Friday than the Friday before that.  The results are in this morning and sure enough the prediction was correct!  Last Friday’s historical volatility close was 0.214090, UP from 0.213821 the Friday before that. 

For this week’s prediction, you have to read my S&P500 Option Volatility tweet (you can follow me on Twitter here), I will be keeping score on Monday mornings to see if this model truly is 60% accurate for predicting the direction of volatility.

SP500 HV-07209

 

Links for July 18th

These are my links for July 18th:

  • Northern Gray Treefrog – Northern Gray Treefrog (Hyla versicolor) and Southern (Cope’s) Gray Treefrog (Hyla
    chrysoscelis) Southern Gray Treefrog is a State Endangered Species
  • Northern Gray Treefrog – Northern Gray Treefrog (Hyla versicolor) and Southern (Cope’s) Gray Treefrog (Hyla
    chrysoscelis) Southern Gray Treefrog is a State Endangered Species
  • Hyla chrysoscelis – Wikipedia, the free encyclopedia – We found this little guy on our deck after the wicked overnight wind/rain storm

Links for July 17th through July 18th

These are my links for July 17th through July 18th:

  • Chinese Question Police Absence in Ethnic Riots – NYTimes.com – The bloodletting here on July 5, in which ethnic Uighurs pummeled and stabbed ethnic Han to death, was just the latest episode in a nationwide upswing in large-scale street violence that had already prompted concerned officials in Beijing to look for new ways to defuse such outbursts. In all of the recent cases, not only were officials and security forces unable to contain the violence, but average people clashed with the police en masse — a sign of the profound distrust of local authority throughout much of China.
  • Atheist Melon | Unreasonable Faith – If the roles were reversed. Brilliant.
  • AAR Railroad Reporting Marks – An AAR (Association of American Railroads) reporting mark is two to four letters that uniquely identifies the owner of a piece of railroad rolling stock. The reporting mark is generally derived from the assigned company's initials. All cars in interchange service must be labeled with a reporting mark.
  • AAR Railroad Reporting Marks – An AAR (Association of American Railroads) reporting mark is two to four letters that uniquely identifies the owner of a piece of railroad rolling stock. The reporting mark is generally derived from the assigned company's initials. All cars in interchange service must be labeled with a reporting mark.
  • Investors.com – It’s Not An Option – It took just 16 pages of reading to find this naked attempt by the political powers to increase their reach. It's scary to think how many more breaches of liberty we'll come across in the final 1,002.

Do You Feel Stimulated?

I was, and still am, against any governmental stimulus plan.  The plain and simple answer as to why is because they don’t work and usually create noise in the economy.  The only way things will get better is when the mal-investment is worked out of the system and assets flow from the weak hands to strong hands. 

Now with talks of another stimulus plan floating around, on the heels of this year’s $787 Billion stimulation, I can’t help but wonder if we would make the same mistake twice?

The stimulus plan passed in February “is executing pretty much as expected,” yet it “won’t affect the economy’s primary problems, which are falling values of assets like homes and stocks,” said Doug Holtz-Eakin, who was director of the Congressional Budget Office from 2003 to 2006 and is now president at DHE Consulting LLC in Washington. [via Bloomberg]

Executing pretty much as expected? Wait, and it won’t affect the economy’s primary problems?  Why the hell should we dream of stimulating a second time? 

Want to know how to really help the situation and truly firm up the economy FAST.  Have the government bailout all middle to lower class residential property owners by forgiving their second mortgages.  A large chunk of foreclosures will go away immediately, people will have debt relief and the ability to spend again, and all those subprime portfolios will start to perform again.

 

Real Estate Not So Hot in Phoenix

My friend at Paper Economy is testing out his new data visualization engine and he pulled together a scary chart of Year over Year house prices in Phoenix, Arizona. Can you believe it? We are below 2000 prices?

 

 

This is truly a frightening chart and I suspect that real estate prices could go even lower in Arizona, and the rest of the country for that matter, if people continue to get laid off.  This would confirm my observation from earlier this year about real estate and equity prices having further to fall.

Links for July 15th through July 16th

These are my links for July 15th through July 16th:

  • Xavier Llorà » Blog Archive » Large Scale Data Mining using Genetics-Based Machine Learning – We are living in the peta-byte era.We have larger and larger data to analyze, process and transform into useful answers for the domain experts. Robust data mining tools, able to cope with petascale volumes and/or high dimensionality producing human-understandable solutions are key on several domain areas. Genetics-based machine learning (GBML) techniques are perfect candidates for this task, among others, due to the recent advances in representations, learning paradigms, and theoretical modeling.
  • Edward O. Thorp – His hedge funds and his personal portfolio have been profitable in 42 of the subsequent 43 years. Based on his work, he and Jay Regan launched the first market neutral hedge fund in 1969. Dr. Thorp, with Claude Shannon, also invented the first wearable computer in 1961 to win at roulette. He has also written Elementary Probability (1966), The Mathematics of Gambling (1984) and numerous mathematical papers on probability, game theory, and functional analysis.
  • Paper Economy – A US Real Estate Bubble Blog: Burning Like a Phoenix: Crash and Burn for Phoenix Area Residential Home Prices – When a boom goes bust many participants would be happy to simply snap back to the life as it was in the pre-boom era but that’s just wishful thinking… the reality is, it will be many years of cleaning up the aftermath during which time prices will likely overshoot the mean and drop lower than anyone expects.
  • First half foreclosures break records – Jul. 16, 2009 – "What this means is, despite the intensity of the efforts on the part of government and lenders we don't have a handle on foreclosures yet," said Rick Sharga, a spokesman for RealtyTrac. – WHAT THIS MEANS IS THAT GOV'T INTERVENTION DOESN'T WORK.
  • Verleger Predicts $20 Oil This Year on ‘Devastating’ Crude Glut – Bloomberg.com – “Prices would be much lower today, but for the very large incentive to build inventories,” Verleger said. “You need forward buyers, which we had when people were fearing inflation, but as concerns turn toward deflation” that will no longer be the case. – MAYBE
  • At a Factory, the Spark for China’s Violence – NYTimes.com – During a four-hour melee in a walkway between factory dormitories, Han and Uighur workers bludgeoned one another with fire extinguishers, paving stones and lengths of steel shorn from bed frames. – IT'S US VS THEM MENTALITY.
  • Yoga Retreats With Chores Attract the Weary and Unemployed – NYTimes.com – Now he spends his days on the Himalayan Institute’s 400-acre wooded campus, practicing hatha yoga and meditation, studying spiritual texts, biking, walking and preparing meals in the institute’s kitchen. In exchange for his cooking duties and an annual fee of $3,000, he gets a private room, three vegetarian meals a day and unlimited access to the institute’s classes, seminars and other events. – ONE DAY I WILL START A NEURAL NET OR ENGINEERING RETREAT AND CHARGE MONEY FOR SPIRITUAL AWAKENING
  • At a Factory, the Spark for China’s Violence – NYTimes.com – During a four-hour melee in a walkway between factory dormitories, Han and Uighur workers bludgeoned one another with fire extinguishers, paving stones and lengths of steel shorn from bed frames. – IT'S US VS THEM MENTALITY.
  • Yoga Retreats With Chores Attract the Weary and Unemployed – NYTimes.com – Now he spends his days on the Himalayan Institute’s 400-acre wooded campus, practicing hatha yoga and meditation, studying spiritual texts, biking, walking and preparing meals in the institute’s kitchen. In exchange for his cooking duties and an annual fee of $3,000, he gets a private room, three vegetarian meals a day and unlimited access to the institute’s classes, seminars and other events. – ONE DAY I WILL START A NEURAL NET OR ENGINEERING RETREAT AND CHARGE MONEY FOR SPIRITUAL AWAKENING
  • Economy in China Regains Robust Pace of Growth – NYTimes.com – The robust growth in China’s economy came as the United States and several other leading economies remain mired in recession, hobbled by the aftereffects of bad lending, weak real estate markets, and the uneven results of economic stimulus packages. – NOTE, THEY ARE USING AGGRESSIVE BANK LENDING
  • Rail Funds Give Chicago Hub a Lift – WSJ.com – Rail congestion in Chicago is so bad that some freight is taken off trains at one side of the city, driven across town on trucks and placed back on another train. Paul Nowicki, assistant vice president at Burlington Northern Santa Fe Corp., said that is particularly true for perishable goods transiting Chicago via Western states.

S&P500 Option Volatility Report

I know that this is late but I just dusted off my S&P500 option volatility prediction model.  For this week only, I will be posting my S&P500 volatility predictions on my blog, after that I will be posting the predictions on Monday mornings via my Twitter account. 

You can follow me on Twitter here

FYI, this model is correct roughly 60% for the direction of volatility only, its no good for actual magnitude. 

Some strategies to use in cases where the index option volatility is predicted to increase would either be a long straddle or long strangle.  In cases where the volatility is predicted to decrease you’d consider using a short straddle or short strangle instead.  60% odds are very good and with good money management you have a great edge!

Here is the prediction: For the week ending 7/17/09, a historical volatility (HV) predicted close for the S&P500 is 0.2736, UP from last week’s close of 0.2183. Remember, the direction is what counts in this model (UP or DOWN), not the actual HV number.

SP500-HV-071509

Links for July 14th through July 15th

These are my links for July 14th through July 15th:

Derivatives and Stimulus Money to Create Another Crisis?

I agree with fund manager Mobius that derivatives are a bad thing but banks love them because they make a lot of money from them.  The problem I see is that all the recent acqusitions of failing derivative portfolios (Bear Stearns, Lehman Bros) by other firms, such as JP Morgan, allows fewer and fewer firms to have more and more derivatives.  All you need now is one large financial institution to go down and you’ll drag the entire system down.

Here’s what Mobius has to say about derivatives:

“Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” he said.

Remember, too big to fail is very dangerous because large complex systems have to fight really hard to remain organized in the face of some large negative events.  In Nature, the more complex and organism is, the quicker it can destabilize.

Regarding the stimulus money.  First off I love the stimulus money because my engineering industry is benefiting greatly from it and its preventing a lot of my friends from being laid off.  However, the long term danger I see is that we’re either going to create another inflation boom or spend ourselves broke, maybe both.

Here’s what Mobius as to say about being stimulated:

A “very bad” crisis may emerge within five to seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending.[via Bloomberg]

Most likely he’s right but I’m not too sure about the timing of it.  I guess we’ll have to wait and see.

 

Actual vs Predicted Spreads NFL Football Neural Net Model

NFL Predication SetI wanted to take a moment and say thanks to Tibor, one of my 12 readers, for forwarding me some really interesting research papers on modeling NFL and NBA games with neural nets. There are some really good nuggets of information in those papers, especially the discussion on setting the right momentum and learning rates.

I used that information to fiddle around with my neural net model and I’m posting some recent results from my DRAFT NFL neural net point spread model.  As you can see, the model is pretty good at determining if the home or visiting team will win (a negative sign means the home team wins) but the predicted spreads are way off relative to actual spreads.

This leads me back to developing some sort of ranking system to feed the model, which I wrote about in my "Thoughts on Ranking Football Teams" post.  The good news is that the research papers that Tibor sent me allude to a type of football match system where the model learns the results of previous games and then applies its statistical analysis to new match ups.  Despite this good nugget of information, I feel that I have a long way to go to get something solid before the season starts.

In the interest of science, and because I love my 12 readers, I’m uploading my EasyNN Plus data file for this particular model.  However, you’ll have to have the full version of EasyNN Plus to use this file because the model uses 980+ example rows and the test version only allows you 100 rows.  If you follow the link above and buy EasyNN Plus from there, I will get a small commission from Steve.

 

Links for July 13th through July 14th

These are my links for July 13th through July 14th:

  • Bus rapid transit – Wikipedia, the free encyclopedia – Bus rapid transit (BRT) is a term applied to a variety of public transportation systems that use buses to provide a service that is of a higher speed than an ordinary bus line. Often this is achieved by making improvements to existing infrastructure, vehicles and scheduling. The goal of these systems is to approach the service quality of rail transit while still enjoying the cost savings of bus transit. The expression BRT is mainly used in North America; in Europe and Australia, it is often called a busway, while elsewhere, it may be called a quality bus.
  • Comments Dead, Twitter Holds Smoking Gun – At the recent Real-Time CrunchUp 2009, Khris Loux, CEO of one of the web's largest commenting services, announced the
    "death of the comment". This declaration was extremely significant as Loux's JS-Kit is currently installed on over 600,000 sites. He blames the death on social media sites like Twitter and Flickr and the rise of "parallel channels away from [the] product". In essence, dialogue has moved from a singular destination to a series of parallel but separate social networking channels. – I DON'T KNOW ABOUT THAT, TWITTER IS A LOVE/HATE THING.
  • Approval by a Blogger May Please a Sponsor – NYTimes.com – When Ford Motor flew her to Detroit this year for a test drive of the Fusion hybrid, she says, she expressed her true assessment on her blog, saying that she thought the vehicle would work for a family with teenagers, but would not fit the needs of her three children and a dog.

    “I still wrote my honest opinion,” said Mrs. Presnal, who did not receive a fee from Ford, but had her travel expenses paid. “If you don’t, in the long it’s going hurt your credibility.”

  • Chinese Steel Inquiry Broadens Beyond Rio Tinto – NYTimes.com – It now includes accusations of widespread bribery in business dealings, as well as allegations that the four workers paid for detailed government trade and manufacturing data to give Rio Tinto executives an edge in iron ore negotiations with Chinese state-controlled steelmakers. – WAIT, BRIBERY IS NORMAL BUSINESS PRACTICE THERE!
  • China Seeks Dominance in Clean Energy – NYTimes.com – China has built the world’s largest solar panel manufacturing industry by exporting over 95 percent of its output to the United States and Europe. But when China authorized its first solar power plant this spring, it required that at least 80 percent of the equipment be made in China.

    When the Chinese government took bids this spring for 25 large contracts to supply wind turbines, every contract was won by one of seven domestic companies. All six multinationals that submitted bids were disqualified on various technical grounds, like not providing sufficiently detailed data.

    This spring, the Chinese government banned virtually any installation of wind turbines with a capacity of less than 1,000 kilowatts — excluding 850-kilowatt designs, a popular size for European manufacturers. – HAHA, TYPICAL TACTICS BY CHINA, REMEMBER WE FEED THEM OUR MONEY FOR CRAPPY PRODUCTS, LET'S STOP THAT AND BUILD IN THE USA!

  • China Risks Apple’s Reputation by Letting Factories Flout Law – Bloomberg.com – Apple Inc., which relies on Chinese manufacturers for its iPhones and iPod music players, found 45 of the 83 factories it audited last year didn’t pay proper overtime and 23 provided less than minimum wage, according to its 2009 progress report on supplier responsibility. The Cupertino, California-based company required them to adjust practices to ensure correct payments, it said in the report.
  • Neural Network Prediction of NFL Football Games – Neural Network Prediction of NFL Football Games – Here's how he did it. Got a high accuracy rate but nothing on point spreads