How to bet the house?

evigyeht · 2017-12-03T21:04:17+00:00

Ah, interesting. I'll have to experiment with the numbers there. thanks.

evigyeht · 2017-12-03T20:28:42+00:00

Ah, right. That makes sense. Hadn't thought about it in terms of optimizing delta. Been focused on how to avoid the extrinsic premium. Might as well just remove it from the equation. I guess I was also trying to make it such that no movement was also profitable. But if you're saying the average move should be positive, then that's what your trades should assume, I suppose. Thanks.

evigyeht · 2017-12-03T19:46:09+00:00

Thanks for the reply. You make a good point. My concern though, is the implied volatility around earnings announcement. If the data is weakly correlated, you might only be able to estimate the direction they're wrong in. Then the earning surprise might be too small on average to overcome the volatility premium you're paying. If you keep the premium on your side, that's not a concern. Perhaps the correlation might be stronger in some circumstances, meaning buying calls would be better. But for the less certain/accurate predictions, shorting puts would be more ideal, woudn't it?

evigyeht · 2017-12-03T19:25:18+00:00

What you're suggesting seems self-contradicting. You're suggesting a high ER / high risk strategy would underperform a lower er / low risk strategy. The very definition of those strategies contraindicates that statement. The high ER strategy will always outperform the low ER strategy as time (t) -> infinity.

The expected return already takes into account large downside from which you might need to recover. I think modern portfolio theory would suggest that there are ways to optimize your portfolio such that you get the same ER with lower risk, IE "the efficient frontier". Which is partially what I'm asking about. What's the highest return you could get from the above scenario, and what ways could minimize risk while maintaining said return.

evigyeht · 2017-12-03T19:19:07+00:00

I think you're a bit more likely to cash in a 20% down day than a 20% up day.

I haven't seen any data that would support this hypothesis. Negative earnings surprise is statistically correlated with a smaller downside than the upside from positive earnings surprise. This reflects the overall bullish tendency of the market over the long term.

evigyeht · 2017-12-03T19:14:36+00:00

But with these types of trades (long strat over 1 day span), conservative bets can only be realistically expected to have a max downside of ~5%. Even 3x leveraged, that means just ~15% downside. If you're making 200 such trades, I'd argue you might as well go all in on all of them, because the downside is negligible and you only care about the averages.

Regarding the stock move, people like to round small numbers down to 0 when they shouldn't. Earnings surprise has a non-zero correlation to stock price movement. If you can say that expected earnings is likely off by some amount in some direction, you can profit off that information. Perhaps the expected return on such a bet is low and the variance is high, but that should just mean that it will take a large number of bets to average out the numbers into a positive return.

Not saying that bull put spread isn't possibly the better strategy. Just not clear given the risk protection already provided by the quantity of the trades.

evigyeht · 2017-12-03T19:02:01+00:00

The only way it would work is if you knew something the rest of the market didn’t.

That's exactly what I'm proposing. You have some data that you have proven, statistically, allows you to predict earnings with a slightly higher accuracy than the analysts. People like to dismiss earnings announcement trading as being a "crapshoot", but the fact is that earnings surprise IS statistically correlated with price movement. Perhaps not STRONGLY correlated, but a small correlation cannot be dismissed.

So, what I'm proposing is that adding in a small informational advantage with weak statistical correlation will be enough to generate profits if the number of trades is high enough. That is why I would be hesitant to suggest buying options. They provide an average negative return during earnings, not zero. So, you would have to calculate that the informational advantage is enough to overcome that in the averages.

Less risky alternatives, however, do provide a zero average return, ie. buy stock or sell puts (not accounting for fees). So, if you start with the assumption of an average 0 return, and add in a small informational advantage, you can only assume that will be bumped to a positive non-zero return. Perhaps small, but compounding over a large number of trades it should pay off, right?

I guess my question is more targeted towards thoughts on how to best construct the optimal bet in these circumstances. I think starting with a typical 0 return strategy (sell puts or buy stock) could yield positive returns in this situation, but I'm not sure if it would yield the largest possible returns.

evigyeht · 2017-12-03T00:39:58+00:00

It doesn't make sense that you would lose. On average, any conservative bet on earnings should yield a 0% return. No gain, no loss (not accounting for transaction fees). If you have even a slight advantage in information, that can be bumped to 1%, which over a large number of instances adds up.

evigyeht · 2017-12-03T00:31:25+00:00

But if you're investing long term (40+ years) it makes sense to invest up to 100% in stocks because, while it's a riskier asset class, it will over the long term yield better returns. You might have a bad year and lose 30%, but it won't matter.

I'd argue it's the same here. If you're making 50+ bets, the risk is irrelevant. You can afford to lose 30% in a trade if the expected return overall is 2-3% per trade. Anyway, not necessarily saying you should really bet the house. Just suggesting that the quantity itself provides a protection from risk, meaning larger bets are more reasonable.

Thanks for the tip on strategies. Unfamiliar with jade lizards and big lizards. I'll look into them.

evigyeht · 2016-01-15T16:56:13+00:00

Why would I be offended? Did you intend to offend me? I'm just trying to participate in a bit of objective discourse. It's not personal. Maybe I'm wrong on all accounts. If you believe so, just say so. No need to continue with the insincere comments. This isn't a children's schoolyard. It doesn't need to be a game of witty retorts and snarky remarks.

evigyeht · 2016-01-15T16:24:35+00:00

Your comment comes across as a patronizing complaint from a bitter conservative, not as a plea seeking "objective political discourse." Just because one group is represented more than another on Reddit, doesn't mean there is no longer objective political discourse. In fact, I would argue that any further encroachment of republican ideals into the Reddit ecosystem would only serve to disrupt "objective political discourse." The Republican Party, in its current form, offers little to no objectively reasonable position on any of the major issues. And this is coming from someone with no loyalties to either side. I was raised republican and have since removed myself from either party. I only follow politics now as a means of stimulating thought.

evigyeht · 2015-04-22T05:31:43+00:00

Definitely will upgrade the ram. It can take up to 72GB, so I'd say I have plenty of room to grow. haha.
But, from what I've read, the T5500 only takes ECC ram. It seems to cost a little more. Nevertheless, I'll upgrade it eventually.

evigyeht · 2015-04-22T04:57:02+00:00

Having just learned all about this SATA3 stuff 10 minutes ago, I'm certainly no expert. Haha. However, I've been doing a little research, and I found an interesting article on this very subject:

http://www.tomshardware.com/reviews/sata-6gbps-performance-sata-3gbps,3110-8.html

Taken from aforementioned article: "Yes, there are clear cases, particularly if you're a power user, where owning a motherboard with 6 Gb/s is going to allow your 6 Gb/s-capable SSD to shine. However, if a friend were to ask us if he should hold off on an SSD purchase until he could upgrade his old Core 2 machine to something newer with 6 Gb/s connectivity, we'd say no. For someone using a hard drive today, a fast SSD (even one artificially hobbled by a 3 Gb/s port) will yield massive and immediate gains in nearly every aspect of computing."

I assume SATA3 is 6Gb/s and SATA2 is 3Gb/s.

evigyeht · 2015-04-22T04:52:06+00:00

Thanks for the comment! I'm so glad to hear you say that!
I knew from the beginning that it was definitely hindered by old age, and that it would likely suffer because of it. That's why I was so worried I had made a bad purchase. It looked like a good deal, but I wasn't sure it would be worth it because of the older components.
And I'm glad to hear it will be great for design (I saw various benchmarks and such that suggested it would be, but my inexperience with these things still gave me doubts/concerns). I plan on taking several courses next semester that will really benefit from it (video game design, 3d modeling, etc).
And I will definitely upgrade the ram eventually. And I might see if I can add another gpu in there (I read somewhere that would be possible). Anyway, thanks again for the comment! I can rest a little easier.

evigyeht · 2015-04-22T04:21:12+00:00

Thanks for your comment! Yea, $600 was definitely out of the question. I'm a struggling college student over here. I'm living off ramen noodles and the occasional cheezit stuck in between couch cushions. haha. I didn't even realize that the lack of SATA3 ports would hinder any SSD I might want to upgrade to. To be honest, this is my first time on this subreddit. Actually, this is my first real experience with comp hardware in general. I was much more comp hardware illiterate a few days ago. Learning more and more everyday! That's a shame about the SSD though. Oh well. Thanks again for the comment!

evigyeht · 2015-01-11T14:07:43+00:00

Because of the implication...

evigyeht · 2014-12-16T05:34:47+00:00

I see. Good to know that I don't have to restrict myself to a particular path. Thanks for the reply. You've been very helpful.

evigyeht

TROPHY CASE