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

OUR NADEX SIGNALS SERVICE IS UP & RUNNING … DAILY 

WTI CRUDE OIL SIGNALS & “VOLATILITY” STRATEGIES IN 20 

OTHER MARKETS, INCLUDING COMMODITIES, FX, & STOCK 

INDICES! … “what on earth are you waiting for”?

  

MULTI DIMENSIONAL TRADING

 

“Heads I win … tails you lose!”

“Well, that didn’t take long” … and we were right there at the 6 PM EST, 

NADEX open last night, where we hit the “daily double”, so to speak, first 

with some more “Binary Options Arbitrage Strategy” risk free winners in the 

RUT2000, and then more fortuitously, a “Call Spread Volatility Strategy” in 

the RUT2000 as well … and now for the details.

First the binary options in the RUT2000 … all markets go in cycles, and a few 

weeks ago, we here at -vegas HQ were doing risk free “arbing”, in GBPUSD 

and Copper … well, NADEX has dropped Copper from the binaries list, along 

with soybeans, so those simply have the “call spreads”, and soon to be “touch 

brackets” … now, though, lately we’ve been getting good arbitrage 

opportunities in the Russell  2000 [RUT2000] stock index … and again last 

night, right out of the gate seconds after the 6 PM EST open for the new day, 

somebody is giving money away … “ummm, OK, we’ll take some”! … and so 

first up is buying the 1472 binary @ 11.25 on a 5 lot, and then immediately 

selling the 1474 binary @ 19.00 on a 5 lot; that’s 7.75 for 5 = $38.75.

NADEX margin for this trade, although risk free and the computer system 

doesn’t recognize the spread, is about $100 per 1 lot. So, when you see me do a 

5 lot for the signals service, you can rest assured it’s a “slam dunk” … simply 

cuz I’m assuming an account size that is below $1k … if you don’t have enough 

in your account to do a 5 lot, simply do a 1 lot. In any event, it’s risk free 

money, with an added kicker that $38.75 has a low probability of seeing an 

additional $88.75 if the RUT2000 closes at 4:15 PM EST, between 1472 and 

1474 … which about 5% of the time, will hit and you’ll feel like a genius … if it 

doesn’t, no matter if the RUT2000 is at 0 or 2,000+, the gain is the same at 

$38.75. Directly below the NADEX TRADE EMAIL CONFIRMATIONS.

 

click to enlarge ALL

 And a few minutes after the open, I initiated a position for the signal service, 

utilizing the NADEX “Call Spreads” in RUT2000 as well. Combining two [2] 

“call spreads”, one with a floor and the other with a ceiling equal to the same 

index price, IS EQUIVALENT TO BEING LONG AN OPTIONS 

STRADDLE [long call & long put at the same strike] AT A EQUAL STRIKE 

PRICE.

The first “call spread” I bought was a 1 lot in the RUT2000 1455 - 1485 Call 

Spread (CS) @ 1457.9 … this CS has a 1455 floor, so price cannot go below 

1455, no matter what the underlying RUT2000 does, and it has a ceiling of 

1485, and price cannot go above 1485, no matter what the underlying 

RUT2000 does … in between the limits, it trades like a CFD or futures, and 

around the limits it has an “optionality” to it, cuz with any time until 

expiration, it still has time value left for the market to come back. I bought 

this with an approximate 20 hour time to expiration [4:15 PM EST] @ 1457.9, 

meaning my total theoretical risk in this CS is 2.9 index points, or $29 per 1 

lot.

The second “call spread” I sold was a 1 lot in the RUT2000 1425 - 1455 Call 

Spread (CS) @ 1451.2 … this CS has a 1425 floor, so price cannot go below 

1425, no matter what the underlying RUT2000 does, and it has a ceiling of 

1455, and price cannot go above 1455, no matter what the underlying 

RUT2000 does … in between the limits, it trades like a CFD or futures, and 

around the limits it has an “optionality” to it, cuz with any time until 

expiration, it still has time value left for the market to come back. I sold this 

with an approximate 20 hour time to expiration [4:15 PM EST] @ 1451.2, 

meaning my total theoretical risk in this CS is 3.8 index points, or $38 per 1 

lot.

My short position is equal to being LONG A PUT with strike price of 1455, 

and my risk is 1455- 1451.2 = 3.8 index points or $38. My long position is equal 

to being LONG A CALL with a strike price of 1455, and my risk is 

1457.9 - 1455 = 2.9 index points or $29 pe 1 lot. Add it all up, 29 + 38 - $67 per 

1 lot, AND THIS IS MY MAX THEORETICAL RISK OF LOSS IN THE 

POSITION AT EXPIRATION IF THE RUT2000 IS EXACTLY AT 1455.

Directly below, the 2 NADEX EMAIL CONFIRMATIONS for the volatility 

trade.

 

 

Ok, this synthetic straddle has a total risk of $67 per 1 lot, or 6.7 index points 

… EXIT QUESTION: “do you think the RUT2000 will have a range today in 

excess of 7 index points"? … if so, the straddle will make money … overnight, I 

missed selling the small rally high by 0.4 index points on a limit sell order. 

Nonetheless, when stocks opened today, the necessary volatility shows up 

[didn’t need much] and on the initial “Thelma & Louise” drop, I liquidated the 

profitable short position right near the low of the move @1446.9. The 

RUT2000 chart from NADEX directly below, with the black pencil mark to the 

left of the red M1 near my price.

 

Here is the NADEX CONFIRMATION EMAIL OF THE LIQUIDATION 

FILL.

 

Ok, time to liquidate the other side. Filled @ 1457.0

Here is the NADEX CONFIRMATION EMAIL OF THE LIQUIDATION 

FILL.

 

OK, let’s analyze this … 1451.2 - 1446.9 = +4.3 index points = +43 

… 1457.0 - 1457.9 = -0.9 index points = -$9 … $43 - $9 = + $34 profit per 1 lot. 

My MAX theoretical risk was $67 … actual risk is about half that … “So, my 

percentage profit on theoretical risk was about 50%, and my return on actual risk 

was about 100% per 1 lot … and this is on a trade where all the RUT2000 has to 

do over 20 hours is move a handful of points and I make money … as I said 

earlier in a previous blog, this is the way to trade! … sit back and let the scumbag 

LP banks do whatever the hell they want to longs & shorts cuz I don’t care … you 

work for me now fellas!! … all I need is a minimum of intraday volatility and I 

got about a 99.7% probability of profit … I like those odds”! 

Granted, in hindsight, which is always 20/20, it would have paid to hang onto 

the short CS … however, making 50%+ a day on risk capital in a trade ain’t 

anything to sneeze at, and you simply must take advantage of the “Thelma & 

Louise” waterfalls to exit short positions … anybody can look back, but I’m 

totally fine with 50%+, almost each and every time I utilize the “Call Spread 

Strategy”!

In addition to these first two trades, there were algorithm buy signals 

generated, for the signals service, in both crude oil & nat gas as well 

… directly below, both trades in succession.

 

 

 

 

Add it all up for the day, and we got $38.75 + $34 + $5 + $9 = $96.75 before 

commissions … on a small account with less than $1,000 in it, and considering 

the first profit was guaranteed, the second had a greater than 99% probability 

of success for profit, and the other 2 were for scalps, if it was my account, I’d 

be rather happy with the result … like I said, a different way to trade AND a 

better way to trade!

Now, I’ll admit, for Newbies, this is a lot to wade through and digest … but in 

today’s trading environment, this is the way to think and the way to trade … if 

you’re simply buying/selling and putting a stop in, you have no flexibility and 

no way to play volatile markets with a very high reward to risk ratio …  and as 

you’ve seen today, it makes NO DIFFERENCE WHICH WAY THE MARKET 

GOES, if it moves at all over the course of the day, you make money! … and we 

did in the RUT2000!

I’m looking at oil still, but with little time to the NADEX close, it’s time to pack 

it in and call it a day. Onto tomorrow, or tonight on the open, and we’ll be there 

to scan, analyze and place risk free and/or highly probable, and profitable 

trading positions on for the upcoming day … if you need help, write me at the 

email address in the header, and I’ll be glad to respond ASAP … I’m outta here 

… until tomorrow mi amigos … Onward & Upward!!

Have a great day everybody!

-vegas

OUR NADEX SIGNALS SERVICE IS UP & RUNNING … DAILY 

WTI CRUDE OIL SIGNALS & “VOLATILITY” STRATEGIES IN 20 

OTHER MARKETS, INCLUDING COMMODITIES, FX, & STOCK 

INDICES! … “what on earth are you waiting for”?