Investment trading models

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.