Altucher J. Trade like a hedge fund: 20 successful uncorrelated strategies & techniques to winning profits
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END;
END;
// end of “find the best correlated symbol” code
// ****************************************************************************
// ############################################################################
Stock1 := GetSymbol; // the symbol of the Price Series that is currently being
operated on
Stock2 := CurrentSymbol; // the symbol with the best correlation
// ############################################################################
// compute series
SetPrimarySeries( Stock1);
Close1 := #Close;
SetPrimarySeries( Stock2);
Close2 := #Close;
RestorePrimarySeries;
ActualRatioSeries := DivideSeries( Close1, Close2);
ActualRatioSMASeries := SMASeries( ActualRatioSeries, MAPeriod);
DeltaSeries := SubtractSeries( ActualRatioSeries, ActualRatioSMASeries);
DeltaSMASeries := SMASeries( DeltaSeries, MAPeriod);
DeltaDifferenceSeries := SubtractSeries( DeltaSeries, DeltaSMASeries);
DeltaNormSeries := DivideSeries( DeltaDifferenceSeries, StdDevSeries( DeltaSeries,
MAPeriod));
// correlation coefficient
Value := Correlation( Close1, Close2, 0, BarCount - 1);
// graphics
HideVolume;
EnableNotes(false);
RatioPane := CreatePane( 100, True, True);
PlotSeries( ActualRatioSeries, RatioPane, #Navy, #Thick);
PlotSeries( ActualRatioSMASeries, RatioPane, #Blue, #Thick);
DrawLabel(‘Ratio ‘ + Stock1 + ‘/’ + Stock2 + ‘ and its ‘
+ IntToStr(MAPeriod) + ‘ Period Moving Average’ , RatioPane);
StDevPane := CreatePane( 100, True, True);
PlotSeries( DeltaNormSeries, StDevPane, #Red, #ThickHist);
DrawHorzLine( Up_Threshold, StDevPane, #Black, #Thick);
DrawHorzLine( Down_Threshold, StDevPane, #Black, #Thick);
DrawHorzLine( Exit_Down_Threshold, StDevPane, #Blue, #Thick);
DrawHorzLine( Exit_Up_Threshold, StDevPane, #Blue, #Thick);
DrawLabel(‘no of standard deviations’, StDevPane);
TextPane := CreatePane( 40, False, False);
DrawText( ‘Correlation: ‘ + FormatFloat(‘0.####’, Value), TextPane, 10, 10, #Black,
18 );
// procedures
How to Play the QQQ-SPY Spread Using Unilateral Pairs Trading 45
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PROCEDURE Close_Positions();
BEGIN
if (ShortSymbol = Stock1) then LongSymbol := Stock2
else LongSymbol := Stock1;
SetPrimarySeries( ShortSymbol);
CoverAtMarket( Bar + 1, LastPosition - 1, ‘Cover ‘ + ShortSymbol);
SetPrimarySeries( LongSymbol);
SellAtMarket( Bar + 1, LastPosition, ‘Sell ‘ + LongSymbol);
RestorePrimarySeries;
END;
PROCEDURE Enter_Positions();
BEGIN
if (ShortSymbol = Stock1) then LongSymbol := Stock2
else LongSymbol := Stock1;
SetPrimarySeries( ShortSymbol);
if ShortSymbol = stock1 then
ShortAtMarket( Bar + 1, ‘ShortSell ‘ + ShortSymbol);
SetPrimarySeries( LongSymbol);
if longsymbol = stock1 then
BuyAtMarket( Bar + 1, ‘Buy ‘ + LongSymbol);
RestorePrimarySeries;
END;
// main loop
FOR Bar := MAPeriod + 20 TO BarCount - 1 DO
BEGIN
setprimaryseries(Stock2);
atr2 := ATR(Bar - 1, 125);
restoreprimaryseries();
atr1 := ATR(Bar - 1, 125);
if atr1 / priceclose(Bar - 1) > atr2 / GetSeriesValue(Bar - 1, Close2) * 1.0 then
begin
// applyautostops(Bar);
IF LastPositionActive THEN
BEGIN
IF ((GetSeriesValue( Bar, DeltaNormSeries) < Exit_Up_Threshold) AND (ShortSymbol
= Stock1)) THEN
BEGIN
ShortSymbol := Stock1;
Close_Positions();
END; // < Exit_Up_Threshold
IF ((GetSeriesValue( Bar, DeltaNormSeries) > Exit_Down_Threshold) AND
(ShortSymbol = Stock2)) THEN
BEGIN
46 TRADE LIKE A HEDGE FUND
4199_P-02.qxd 12/30/03 3:15 PM Page 46
ShortSymbol := Stock2;
Close_Positions();
END; // < Exit_Up_Threshold
END // if LastPositionActive
ELSE // no position active
BEGIN
IF GetSeriesValue( Bar, DeltaNormSeries) > Up_Threshold THEN
BEGIN
if (priceclose(Bar)> priceclose(Bar - 1) * 1.02) then
begin
ShortSymbol := Stock1;
Enter_Positions();
end;
END; // if > Up_Threshold
IF GetSeriesValue( Bar, DeltaNormSeries) < Down_Threshold THEN
BEGIN
ShortSymbol := Stock2;
if priceclose(bar) < priceclose(Bar - 1) * 0.98 then
Enter_Positions();
END; // if < Down_Threshold
END; // else
END;
END;
How to Play the QQQ-SPY Spread Using Unilateral Pairs Trading 47
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49
TECHNIQUE 3
Buying
Bankruptcies
S
ome of the best systems are discovered the hard way: by losing
money. When United Airlines (UAL) went bankrupt on December 9,
2002, I was in the process of moving homes, and the next time I
looked at the market, I noticed UAL had bounced from a low of 64 cents to
over a dollar. I assumed that, of course, the market was happy to give me
free money and I shorted at 1.09 only to watch it quickly go up to $2 a few
days later.
When looking at more bankruptcies, I saw this was not an uncommon
pattern. In many cases a company will go bankrupt, the stock will get
halted, open much lower after the halt, and then promptly double. So many
people had anticipated the bankruptcy, with the thought that the shares
would then automatically be worth zero, that immediately after the halt is
lifted, a short squeeze occurs.
Table 3.1 shows some recent large bankruptcies that were liquid
enough after filing Technique 11 to trade around. The data are not signifi-
cant, there being only six occurrences, and bankruptcies are seldom liquid
enough to play. That said, I do think high profile bankruptcies will continue
to fall under this pattern.
4199_P-03.qxd 12/30/03 3:16 PM Page 49
EXAMPLES
UAL
UAL filed for Chapter 11 on December 9, 2002. The stock opened that day
at 0.64. By December 13, the stock was at 2.09. (See Figure 3.1.)
Kmart
Kmart had been in a losing battle for several years to avoid bankruptcy, and
finally on January 22, 2002, it happened. After the halt, the stock reopened
at 70 cents and six trading days later on January 30 it reached a high of 1.63.
(See Figure 3.2, page 52.)
WCOM
WCOM disintegrated into thin air in the first half of 2002. In February of
2002 I had been playing a mean reversion system on stocks and had bought
WCOM in the 6s and sold a week later in the 9s. I was feeling pretty good
about myself at the time, but there was one moment when I was reading an
article in Fortune magazine about how the credit derivatives of WCOM
were basically crashing even as the stock was going up. I was thinking to
myself, how could that be? I had perused some of their filings and had de-
termined that although they had a plate full of debt, hardly any of it was due
for at least a year. Corruption explained things pretty quickly, and a short
while later the stock was trading near zero. (See Figure 3.3, page 53.)
WCOM filed for bankruptcy on July 21, 2002, and the next day the stock
opened at 10 cents. A day later it hit a high of 21 cents, over 100 percent
higher.
50
TRADE LIKE A HEDGE FUND
TABLE 3.1 Recent Bankruptcies
Date of Open After High After
Technique 11 Halt Lifted Halt Lifted Return
Stock Filing ($) ($) (%)
FAO Schwarz (FAOOQ) 1/13/02 0.25 0.63 152
UAL Corp. (UAL) 12/9/02 0.64 2.09 226
Kmart (KMRTQ) 1/22/02 0.70 1.63 133
Enron (ENRNQ) 12/3/01 0.26 1.26 385
WorldCom (WCOEQ) 7/21/02 0.08 0.17 113
US Airways 8/14/02 0.25 0.75 200
4199_P-03.qxd 12/30/03 3:16 PM Page 50
Buying Bankruptcies 51
Volume
4.80
4.60
4.40
4.20
4.00
3.80
3.60
3.40
3.20
3.00
2.80
2.60
2.40
2.20
2.00
1.80
1.60
1.40
1.20
1.00
0.80
1.51
50.00M
40.00M
30.00M
20.00M
10.00M
FIGURE 3.1 UAL.
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52 TRADE LIKE A HEDGE FUND
Volume
5.00
4.80
4.60
4.40
4.20
4.00
3.80
3.60
3.40
3.20
3.00
2.80
2.60
2.40
2.20
2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.99
120M
100M
80.00M
60.00M
40.00M
20.00M
FIGURE 3.2 Kmart.
4199_P-03.qxd 12/30/03 3:16 PM Page 52
Buying Bankruptcies 53
Volume
0.24
0.23
0.22
0.21
0.20
0.19
0.18
0.17
0.16
0.15
0.14
0.13
0.12
0.11
0.10
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.14
80.00M
60.00M
40.00M
20.00M
FIGURE 3.3 WCOM.
4199_P-03.qxd 12/30/03 3:16 PM Page 53
Now, one can argue, 10 cents? How can I make any money on that? And
if you argue that in general, then you are probably right. However, in this
case, the volume was over 70M shares on both the day the halt was lifted
and the day after. The average investor using a direct access broker (and
paying $5 commissions one way) could have easily picked up 100,000
shares or more in either direction. Not bad for one day’s work.
54
TRADE LIKE A HEDGE FUND
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55
TECHNIQUE 4
Using the TICK
W
hile there are many sentiment indicators out there—put/call ratio,
the VIX, the advance/decline line, and so on—the New York Stock
Exchange (NYSE) TICK indicator is perhaps the rawest expres-
sion of investor sentiment at any given second during the day. The TICK can
be used to generate trades designed to profit from intraday shifts in senti-
ment. In this technique I describe two systems for working such trades.
The NYSE TICK indicator represents the number of stocks that ticked
upward (within the past second) minus the number of stocks that ticked down-
ward. For instance, if the TICK is at +300, then 300 more stocks upticked
than downticked within the past second. At that moment, the market is
most likely moving upward, since 300 more stocks are moving up than
down. If the TICK is at –300, then at that moment 300 more stocks had just
downticked than upticked. If the TICK is at –300, the market is probably
moving down at that moment.
During a typical day, the TICK ranges from +400 to –400. Extreme read-
ings can get as high as +1,000 and –1,000. In the week after September 11,
2001, there were many cases of extreme –1,000 readings. Similarly, in the
comeback period after that week, +1,000 was not uncommon. Readings of
greater than +1,000 are considered to represent overbought conditions be-
cause supposedly too many companies are upticking. Readings of –1,000
represent oversold conditions because supposedly too many companies are
downticking. It is at those moments of panic that we look for opportunity.
Likewise, if the TICK is steadily negative for an entire half hour without
any real positive movement, this position also might indicate an oversold
condition—too many people have sold in panic. Or if the TICK is steadily
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