As you may know, I’ve been trading a simple, contrarian system based off the CBOE’s index put:call ratio ($CPCI) since spring/early summer. While its performance hasn’t been earth-shattering (especially in a year when the S&P was up 20%+), it has most definitely satisfied my expectations… In fact, considering the ultimate simplicity of it, I’m quite pleased.
Essentially, whenever the day’s reading (published after the market’s close) is more than 1 standard deviation away from the 6mo. moving average, I either go long or short SPY (via calls/puts) at the next open. The contrarian part is where I go long if the reading is too bearish (1+ std.dev. above the put:call ratio) and short if the reading is too bullish (1+ std.dev. below the put:call ratio).
Simple, easy, effective.
Its latest trade, and the first one for 2010 (since it always books the trade on the 2nd day) will be to short the SPY via Feb’10 112. puts. The entry signal was today’s reading of 0.99, which is just below the lower “threshold” (6mo. sma – std.dev.) of 1.08 (1.34 – 0.26).
The system performed amazingly well over the summer (16 straight wins); “just ok” since then. It ended the year with back-to-back losses, which hopefully won’t carry over into 2010.
Overall, for 2009, we have a net ROI of 6.91% with 33 wins and 12 losses.
A hypothetical $100k account trading it at 2% risk would’ve had shown a gain of 6.32%. Not too bad, especially if you increase the position sizing. Hypothetical returns at 4% risk (with options, I always take the entire position to be the total risk) would’ve been 13.32%, while at a still reasonable 10% (since it would literally take a black swan for an ATM SPY call/put position to get completely wiped out in 2 days) your returns would be an impressive 34.65%.
Trade detail:
