It is interesting that regardless of the approach taken, most edges are seeking levels of capitualtion which in turn reveal extremes of supply and demand. A great example was given by the Rydex cash flow ratio in 2002/03 when the last bull capitulated, leading into the next bull market:
The lines I draw create bounces far more often than random lines. In fact in the 90s I owned a website called careerdaytrader.com. I told traders to look at the points we posted as having gravity. Then we looked for an reason to believe our trades were either going towards or pulling away from our black holes. The method was very profitable for many of the traders in our llc. It always amazes me when people say t/a does not work. It works great in markets without tons of noise. I will let others to figure out noise is.
I played around at one point in the past with using the risk-neutral distribution for the underlying price implied by the current options premiums (the entire chains puts/calls etc.) I think I need to revisit that line of research, as at the time I was a little limited by the data I had. The idea is basically that, with some math expertise, you can take all option premiums and with very mild assumptions (no black scholes or anything) figure out what the market expects of the underlying. I have not properly tested the edge of this in trading, but currently that distribution implies that the most likelye closing of SPY at Feb expiration should be in the 89-91 range.
>Thanks for the wonderful insights >Maestro. >http://www2.warwick.ac.uk/newsandev...starlings_help/ Here is the pdf link of this paper: http://arxiv.org/PS_cache/physics/pdf/0612/0612198v2.pdf
The problem is even they get it wrong most of the time, , e.g. the market move less or more than the "predicted" breakeven, you still can't make money out of it as you don't know you should long or short straddle in each time
You are absolutely wrong! The expected move is ZERO! But if you mean in your mind that the move is a standard deviation from current price in one of the direction, then you are also wrong, as you are missing a 50%: One standard deviation is almost equal (but a bit less) than 150% the price of the straddle. Run it on a calculator, and you should be able to assess the numbers. PS: for all my friends here, I say hello. I have been absent from disussions/visit/reading, so I wan to say hello.
the above post is similar to a poet giving a mathematical proof: it sounds right, but it is wrong in substance, and what matters. The market must be forgiving since characters such as Nitro are making money even if most of what they have in their heads is the opposite of what is right.