SUNDAY UPDATE: UNDERSTANDING THE MATH

 

“And so it is with math & trading!”

First up, the WTI & Nat Gas 20 Day Range MA’s, directly below.

 

click to enlarge ALL

As you can see, a little drop off, more in Nat Gas than in crude, but quite 

frankly crude can’t stay elevated up here without major trading damage to a 

great many players … it needs to settle down some and go lower.

In Friday’s blog, I wrote about some of the mathematical thought behind 

positioning a NADEX “call spread volatility strategy” … specifically, the trade 

in the RUT2000. Here is further explanation and mathematical logic to finding 

and trading these almost “slam dunk” positions for profit.

 

Directly above, 𝝁 is the data mean [simple moving average], and 𝞼 is the 

standard deviation of the mean [SDEV]. As you can see, probability theory 

predicts that all data points in your sample, which accurately represents the 

entire population of data points if large enough, for the most part will fall 

within 3 𝞼 of the mean, both low [left] & high [right]. “Obviously, we would like 

to see a market as volatile as possible, cuz it has large ranges, while at the same 

time the pair of “call spreads” [CS], which have a common floor & ceiling, are as 

small as possible … this gives us the greatest probability of successful profit 

opportunities in a “straddle” trade that you’re ever going to see! … the question 

becomes, though, what is the criteria for trades, so that I know I’m buying the 

best CS’s for the price relative to the volatility in the market, and NOT overpaying 

for volatility”?

To the right of the top 𝞵 in the bell curve is where we’d like daily market 

ranges to be … to the left of the top 𝞵 is where we’d like the total cost of the 

two “call spreads” that represent the cost of the “straddle” in terms of the daily 

range … and obviously, the lower the better. For example, if we had the 

opportunity to do a “straddle” in crude oil, and given the fact that daily ranges 

currently are about $1.80 - $2.50 per day … and what if, somebody offered the 

“straddle” at $0.30, 20 hours before the day was over when it expired? … the 

question is, do you think crude will move 30 cents over the next 20 hours, 

when daily ranges are between 1.80 & 2.50? … “you’d be all over this trade like 

white on rice, simply cuz when it moves it would equal profit”.

Directly below the 20 Day Range MA of the Russell 2000 [RUT2000] for 2018.

 

And from all this data represented in the chart above, here is the important 

data: for the year 2018, the average daily range = 21.57 index points … the 

SDEV for 2018 = 12.18 index points. Each week, take the current 20 Day 

Range MA, and divide by 21.57 … take that number and multiply by 12.18. 

For this week, that would be 1.45 and then 17.70 … 17.70 is the approximate 

SDEV for the upcoming week … what we’re looking for, are trades that are ⅓ 

to ½ [the lower the better] of the SDEV, which currently is 5.90 (⅓) - 8.85(½). 

If the 2 “call spreads” nearest the underlying futures market are roughly equal 

to each other, make the trade if the price for both falls into this range … the 

trade I made the other day in the RUR2000 was at 6.7 index points, so clearly 

this is a trade I want to do, cuz my probability of success based on market 

history is greater than 99%!

As we move to the end of 2018, and start 2019, I’ll have a table in “Download 

Links”, in the right hand column [not there yet, but it’s coming], with all of the 

23 NADEX markets and their 20 Day Range MA’s for 2018, & the SDEV for 

each as well … it’s a “shipload” of work, but you need the information to be 

successful in trading your own account if you don’t sign up for our signal 

service and have us do all the work … at literally pennies a day after the free 

trial service, it’s up to you.

That’s it for today … we’ll be ready for tonight’s open at 6 PM EST … I’m 

outta here … until tomorrow mi amigos … Onward & Upward!!

Have a great rest of your weekend everybody!

-vegas

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