06.26.22 | Two Algorithms for Two Key Drivers

Volatility-based Algorithm Shown Here

The driving forces behind price movement today are uncertainty, information flows, and forced rebalancing in derivatives markets.   Acting as independent variables, their impact on the auction market process often materializes at different times.

Within this setting, we employ two ensemble type timing models:

1) gamma exposure as a measure of ex-ante skewness, and
2) a proprietary volatility signaling algorithm as a negatively predictor of future delta-hedged option payoffs.

Our volatility-based model for timing S&P 500 entries and exits is shown above.   Note that the algorithm has only signaled two “SELL” signals since March 29.

Postscript

AI-enabled equity trading algorithms dominate today’s financial markets.   Equities trading has become so replete with information that knowing how to code and how to game an algorithm is as important as understanding the ebbs and flows of the markets themselves.

While we leave timing signaling to the algorithm, we do the heavy lifting – quantitative modeling, research and pragmatism.