This page is converted from the PPT of My Zoom lecture regarding investment trading models hold on March 21, 2021. Over 500 people attended this Zoom lecture.
Due to the time constraints, we skipped the discussion of the Risk On Risk Off model and risk signals, portfolio hedging, and hedging selections.
However, we briefly discussed these topics during the lecture’s Q&A session. These topics’ slides are included on this page.
Megapro has released the Zoom lecture recording video via its Youtube channel:
https://www.youtube.com/watch?v=7UNpb86HYfI
Investment Trading Models
What to buy?
Algorithms generated stock lists and handpicked stock lists
When to buy?
Trend Following and Mean Reversion
When to sell?
Risks and Topping signals
Vision To See. Courage To Buy. Patience To Hold.
Megapro 6A System
We pioneered the 6A investment system.
We analyze the financial market from six diversified areas and
use the 6A data to generate trading picks and trading signals.
* TA = Technical Analysis
* MA = Money Flow Analysis
* EA = Event Analysis
* PA = Political/Policy Analysis
* FA = Fundamental Analysis
* SA = Sentiment Analysis
We use MA as an example to show a variety of MA related data we collected:
Megapro 6A Data: MA
Stock Money Flow
Options Money Flow
Block Trades
ETF Net Flow
Darkpool Flow
Insider Trades
Hedge Fund/Institution Flow
Corporate Buybacks
Inverse ETF Flow
Margin Debt
Fed Money Supply
Fed QE Asset Balances
We use EA as an example to show how we use EA data to do stock price forecast:
Megapro 6A Data: EA
EA events play a significant role in stock price movement. For example, the March 2020 stock market crash bottomed on the day when Fed announced unlimited QE.
Our hand-picked stocks can be found on our Discord server, in the 10-bagger-stocks channel:
What To Buy: Leading Sectors
You can find our hand-picked stocks in the Pinned messages:
What To Buy: Leading Sector Leaders
Trendy Themes: fast growing industries, fast growing sectors, fast growing user bases
Vision: Change the world, change mankind, change people’s lives, change an industry, business model or technological innovation, have great imagination
Execution: product performance, cost performance, huge ecosystem (unicorn)
Performance: rapid growth in users, rapid growth in sales, and rapid growth in profitability, high profit margin
Our algorithm-generated daily popular stocks can be found on our Discord server, in the megapro-top-stocks channel:
What To Buy: Popular Stocks
Our daily popular stocks are ranked based on our 6A data：
What To Buy: Rotation
Country Rotation
Sector Rotation
What To Buy: RORORO Model
*Asset Class Rotation
*Country Rotation
*Sector Rotation
Our RORORO model helps us to find which asset class, which country, or which sector the hot money is flow in.
When to Buy: Trend Following
Base Breakouts
*Good consolidation base;
*Price actions:
big bull candles；
gaps；
*Large Volumes or Flows：
stocks volumes；
options call volumes；
money flows；
When to Buy: Base Breakout
*Long consolidation bases: Good support level, Good rising time length and height
*6A data in Sync to filter out faked breakouts
*Our data sometimes can predict breakouts before big moves in prices
Theme: Gamestop short squeeze
AMC ranked top 3 in short interests
Stock volume, options call volume and Bull money flow surge
Options Analysis (OA)
Traditional TA:
Price + Volume
–> stock indicators: RSI, MACD, KDJ, …..
–> stock chart patterns
Options Analysis (OA):
Options price, option volume
OI, Calls Volumes vs Put Volumes, IV, Delta, Gamma, ….
–> options indicators,
options chart patterns,
Stock high volume: start an uptrend or a downtrend
Option high call volume: start an uptrend
Option high put volume: start a downtrend
A lot of people trade options based on TA
We use OA (+ MA + EA + Sector/Theme) to trade options
Options Data
* One-minute options data
includes IV and option Greeks
*Daily options data
includes IV and option Greeks
*Options Time & Sales data(per trade data)
includes condition ID
Megapro Stock Chart
When to Buy: Mean Reversion
Data has a Mean Value over a period chosen by you
Data has the lowest value in the period
Data has the highest value in the period
Mean Reversion: SA
Mean Reversion: FGI
Mean Reversion: Smart Money
Mean Reversion: MA
Negative Correlation: Smart Money
2020/4 Buy high sell higher (trend following) with smart money data
2021/02/16 Top signal. NASDAQ had an over 10% correction afterward
Mean Reversion: FA
When to Buy: Sell Puts
Trend Following
*ITM/ATM/NTM Puts
*Market Conditions
*IV or ATR
*TA + MA
* Buy stocks at discounts
When to Buy: Sell Puts
RBLX stock price at $70. STO RBLX 4/23 $65 Put. Received $5/share premium.
If RBLX price goes up, we earn a $5/share premium. That’s about 7% premium income for a month. Over 80% return a year.
If RBLX price drops below $65 at the expiration, we will be assigned RBLX stock at $65/share price. We still keep the $5/share premium.
The actual cost for our acquisition of RBLX shares is $60 a share.
We are profitable as long as RBLX price does not drop below $60/share.
When to Buy: Sell Puts
Mean Reversion
*OTM/Deep OTM Puts (good tolerance for error)
*Market Conditions
*IV or ATR
*TA + MA
*High winning rate: 90%
*Robot trading, Short Term Trades
*100% cash backed Sell Puts
*Willing to be assigned stocks
Sell OTM Puts: 90% Winning %
Tesla TSLA stock price at $650. STO TSLA 4/23 $420 Put. Received $5/share premium.
The probability of TSLA price stays above $420 before the expiration is 90.32% So the probability for us making this $5/share premium is over 90%.
In the case of the 10% worse cases, TSLA price drops below $420 we buy Tesla stocks at $420 a share which is a good price.
When To Sell
*Topping price actions
*Smart money flow, Dumb money flow
*Sentiments
*Fundamental events
*Rotations
When To Sell: Stop Loss
Long Term positions:
*FA bad
*EA bad
*Bear Market
*Rotations (most often)
Sell Covered Call
Free Run
Short Term positions:
*TA (include OA) + MA stop loss signals
*Sell Puts: Assign stocks or Roll
Position Management
1. LONG Positions: Max 80%
LEAP Calls: Max 30%
Long Term Stocks: Max 30%
Short Term Positions: Max 20%
2. SHORT Positions: Max 20%
Include Hedge Positions
The maximum amount to invest in one stock: 6% of account total balance
High conviction trades may be exceptions
3L Investing
Market Level:
Risk High –> Risk Off mode
Actions: Close risky positions, sell sell sell, add hedging
Risk Low –> Rick On mode
Actions: Take on risks, buy buy buy, reduce hedging
Sector/Theme Level:
Which sectors/themes are hot?
Actions: jump on hot sectors/hot themes ASAP
Individual Stock Level:
Which stocks are hot?
Trade on hot stocks until they topped
Risk On Risk Off: Market Risk Signals
We generate market risk signals from our 6A data.
Following are some sample market risk signals.
Risk Signal: RORORO Model
2021/2/26 Friday Our RORORO model showed huge risks
Top 20 have 15 SHORT ETFs
Top 10 are all SHORT ETFs except one: URA
The market had a very bad correction the following week
Risk Signal: Put Call Ratio
Risk Signal: Darkpool Index
Risk Signal: Bitcoin Indicator
In recent months, Bitcoin is a leading indicator of the US stock market.
Risk Signal: KBW Index
KBW index near 120 is a topping signal
Risk Signal: XLU SPY Ratio
XLU SPY Ratio Negative Correlation
Portfolio Hedging
*Simple Hedging: Hedging ratio: 10-1
100k LONG position vs 10k SHORT position
LONG drops 1%, Hedge increases 10%
LONG drops 10%, Hedge increases 100%
we choose hedging targets with high leverages
*Delta Hedging (complex hedging):
Portfolio sum of all deltas = 0
Hedging: Option Delta
Buy Calls: Positive Delta; Buy Puts: Negative Delta
Sell Calls: Negative Delta; Sell Puts: Positive Delta
Options Pricing
s=stock price of the XYZ stock
p=option price of the XYZ stock
p=f(s), p is a function of s.
f(s) is hard to figure out
Black Scholes Model
Black Scholes Merton Model (BSM Model)
Scholes and Merton won the 1997 Nobel Prize
(Black passed away two years before 1997)
The entire options market is built on BSM Model.
Now the options market is bigger than the stock market.
Black Scholes Merton Formula
The Black-Scholes model makes certain assumptions:
* The option is European and can only be exercised at expiration.
* No dividends are paid out during the life of the option.
* Markets are efficient (i.e., market movements cannot be predicted).
* There are no transaction costs in buying the option.
* The risk-free rate and volatility of the underlying are known and constant.
* The returns on the underlying asset are normally distributed
Options Taylor Formula
Regardless of stock price goes up (s>a) or stock price goes down (s<a),
the option price is always up if gamma is positive, or the option price is always down if gamma is negative!
Portfolio Hedging
*VIX:
VXX, UVXY
VIX, VXX, UVXY Calls
*Inverse ETFs:
SPXU, SQQQ, TZA
SPXU, SQQQ, TZA Calls
*ETFs:
SPY, QQQ, IWM Puts
UPRO, TQQQ, TNA Puts
ARKK puts …
*Stocks:
TSLA puts, PLUG puts, …
Hedging with Put Options
Hedging with Call Options
Quantitative Trading
*Stock scanners
*Trading algorithms and buy/sell signals
Paper trading, backtests
Analyze backtest data, improve algorithms
*Connect to Broker API
robot trading
Stock Market Reality
*Eugene Fama: 2013 Nobel Prize Winner
In the 1960s, Eugene Fama demonstrated that stock price movements are impossible to predict in the short-term and that new information affects prices almost immediately, which means that the market is efficient. The impact of Eugene Fama’s, results has extended beyond the field of research. For example, his results influenced the development of index funds.
*Warren Buffett million dollar challenge
In 2008, Warren Buffett issued a challenge to the hedge fund industry, which in his view charged exorbitant fees that the funds’ performances couldn’t justify. Protégé Partners LLC accepted, and the two parties placed a million-dollar bet.
Buffett has won the bet, Ted Seides wrote in a Bloomberg op-ed in May. The Protégé co-founder, who left in the fund in 2015, conceded defeat ahead of the contest’s scheduled wrap-up on December 31, 2017, writing, “for all intents and purposes, the game is over. I lost.”
Stock Market Hopeful
*Peter Lynch (FA driven)
As the manager of the Magellan Fund at Fidelity Investments between 1977 and 1990, Lynch averaged a 29.2% annual return, consistently more than double the S&P 500 stock market index and making it the best-performing mutual fund in the world. During his 13-year tenure, assets under management increased from US$18 million to $14 billion.
*Renaissance Technologies (Data driven)
Renaissance’s flagship Medallion fund, which is run mostly for fund employees, is famed for the best track record on Wall Street, returning more than 66 percent annualized before fees over a 30-year span from 1988 to 2018.
Simons ran Renaissance until his retirement in late 2009. Simons stepped down as Chairman in 2021. The company is now run by Peter Brown (after Robert Mercer resigned). Both of them were computer scientists specializing in computational linguistics who joined Renaissance in 1993 from IBM Research.
