A reader recently sent me a strategy for trading $AAPL and asked if I’d take a look at it. The strategy was published on Seeking Alpha and can be read here: An Apple Story: Alpha, Algos And A Poorman. The strategy is very simple. As I love simple strategies, I coded it up and tested it. Unfortunately, except for a year or so of good performance, running the strategy over any length of time will probably result in complete separation of the trader from his capital.
What is the Strategy?
The author, Mr. Lewis, believes that options are heavily influencing $AAPL trading and he noticed an anomaly which he believes is caused by the high number of $AAPL calls that are traded. If you want more detail, read his explanation. Anyway, the strategy seeks to exploit the anomaly caused by the options trading.
- Buy $AAPL at the close on Friday.
- Sell $AAPL at the close on Tuesday.
- Short $AAPL at the close on Wednesday.
- Buy-to-Cover $AAPL at the close on Friday.
Thus, the strategy is always in the market, except for Wednesdays.
Let’s look at recent (2011 to the present) performance of this strategy:
Not including commissions or slippage, the strategy has returned a compound annual rate of 93.28% with 61.24% of trades winning and a maximum system drawdown of -10.85%. The Sharpe Ratio is 3.28. To put it plainly, those are awesome results. Just buying and holding $AAPL over the same time period resulted in a compound annual rate of 48.02% and a maximum drawdown of -16.58%. The strategy doubles the return and reduces the drawdown by almost a 1/3rd.
What’s not to like? Well, we might want to look and see how the strategy has performed over a longer period of time.
Now let’s look at the results generated from trading the strategy over all of $AAPL history.
Using all $AAPL history the strategy has returned a compound annual rate of -5.16% with 50.19% winning trades and a maximum system drawdown of -94.86%. The Sharpe Ratio is 0.06.
I decided to remove the short requirement from the strategy. The results are below.
Since 2003 the strategy has returned 27.88%. While it looks like the long-only, buy Friday close and sell Tuesday close has kicked butt, buying and holding $AAPL from 2003 to now has resulted in a return of 58.75%. It makes sense that holding a company only 2 of every 5 days while it has been in a massive bull run will result in a lower return.
At the end of his article, Mr. Lewis provides these insturctions:
You cannot decide to trade this some weeks and not others or your results will severely be altered. It is designed to be traded as if you were a robot, there is no thinking. You have set instruction [sic] that should be followed at all times.
Mr. Lewis finishes with his “true goal” for publishing this strategy:
My true goal is for Apple to trade at fair value and unabated. If these artificial waves are going to stay in Apple, I want everyone to make money off of them. They will either become so big that the whole world will start riding them, or they will go away. But, until then, surf’s up dude.
I would be careful with this strategy. Perhaps the author is correct and there is an options anomaly to be exploited. I offer that correlation does not imply causation. My guess is that his strategy has worked the last 1.5 years because the buy Friday, sell Tuesday, short Wednesday, cover Friday approach has been curve fit to recent $AAPL short-term cycles. As the long-term equity curve shows, this cycle has worked before, and then abruptly stopped working. The strategy has also spent almost 9 years doing generating flat returns. If I were going to trade a strategy “as if [I] were a robot,” then I’d want to be sure that returns have been robust over a long period of time. The returns from this $AAPL strategy certainly have not been.
2 Responses to Be Careful With This Sour $AAPL Strategy
I added the following comments on the SA site as well…. Woodshedder, IMO weekly options is the cause of this anomaly. Travis stated that weekly options started trading on AAPL in July 2010. I’m not sure if a back test beyond July ’10 is applicable. Just my 2 cents. It’s Travis’ strategy, but I would be curious to see your results from July ’10 to date.
@BlackBetty on Stocktwits was guessing that the weekly options might be the cause as well. Since July 10 the strategy has a compound annual rate of 64.15%. Buy and hold of AAPL over the same time yields 54.57%. From July 10 to January 11, the strategy does absolutely nothing. The equity curve is almost table-top flat. It starts to take off in early 2011.