Proctology Portfolio

Picking bottoms #1

Time for something a little different. Well, really its already been one of the 5 triggers to get into the equity portfolio, so instead of “trigger_4” it just has a more disgusting but formal name.

This separate idea will be executed on futures using options. These are what are known as weak edges and we are executing not on our normal strength of signal, but at a weakness. Hence the name.

Due to this weakness utilising options limits our losses due to the known premium outlay.

I will not be laying out exact strikes or options, just laying out the trade.

OK this week we have four potential trades BZ (brent) IBOV (brasil) ZN (10year note) 6S (swissie). One I favour more than the others today.

This first chart shows the expected 60-day return of the three assets after our trigger condition is met. Alongside the percentage positive for all occurrences. I think the next chart will show why bonds skew very differently.

ZN returns of all occurrences are shown on the RHS of the chart. You can see there are far more negatives. BZ shows the reason why we should use options. The left tail could see -65% and the right tail +105%.

All 4 assets have triggered on this “bottom picking” metric. Only one of them BZ is currently a long using the same momentum and trend measures that we use in other portfolios.

Concentrating on BZ

Here are the shorter-term returns using the same trigger the % positive is almost above 50% for all. Where the expected return takes a real jump is going out over 60 days.

If we take the 8% expected return on the first trigger which was the 24th May that would put us somewhere around $88.

I am no options expert maybe people can chime in about how you would play this and help all of us learn along the way.

Would you go out and go straight for JULY $88 Calls? Would you do price spreads? Calendar spreads? How much should we take into account this last chart?

This is an open post any and all feedback is welcome.