151 Trading Strategies Zura Kakushadze • Juan Andrés Serur 151 Trading Strategies Zura Kakushadze Juan Andrés Serur Quantigic Solutions LLC Universidad del CEMA Stamford, CT, USA Buenos Aires, Argentina

ISBN 978-3-030-02791-9 ISBN 978-3-030-02792-6 (eBook) https://doi.org/10.1007/978-3-030-02792-6

Library of Congress Control Number: 2018958724

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Disclaimer: The address used by the corresponding author is for no purpose other than to indicate his profes- sional affiliation as is customary in publications. In particular, the contents of this book are not intended as an investment, legal, tax or any other such advice, and in no way represent views of Quantigic® Solutions LLC, the website www.quantigic.com or any of their other affiliates.

This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland ZK: To my mother Mila and my children Mirabelle and Maximilien JAS: To my parents, Claudio and Andrea, and my brother Emiliano Contents

1 Introduction and Summary 1 References 3

2 Options 5 2.1 Generalities 5 2.2 Strategy: 7 2.3 Strategy: Covered Put 7 2.4 Strategy: 8 2.5 Strategy: Protective Call 8 2.6 Strategy: Bull Call Spread 8 2.7 Strategy: Bull Put Spread 9 2.8 Strategy: Bear Call Spread 9 2.9 Strategy: Bear Put Spread 10 2.10 Strategy: Long Synthetic Forward 10 2.11 Strategy: Short Synthetic Forward 10 2.12 Strategy: Long Combo 11 2.13 Strategy: Short Combo 11 2.14 Strategy: Bull Call Ladder 12 2.15 Strategy: Bull Put Ladder 12 2.16 Strategy: Bear Call Ladder 13 2.17 Strategy: Bear Put Ladder 13 2.18 Strategy: Calendar Call Spread 14 2.19 Strategy: Calendar Put Spread 14 2.20 Strategy: Diagonal Call Spread 15

vii viii Contents

2.21 Strategy: Diagonal Put Spread 16 2.22 Strategy: Long 16 2.23 Strategy: Long 17 2.24 Strategy: Long Guts 17 2.25 Strategy: Short Straddle 18 2.26 Strategy: Short Strangle 18 2.27 Strategy: Short Guts 18 2.28 Strategy: Long Call Synthetic Straddle 19 2.29 Strategy: Long Put Synthetic Straddle 19 2.30 Strategy: Short Call Synthetic Straddle 20 2.31 Strategy: Short Put Synthetic Straddle 20 2.32 Strategy: Covered Short Straddle 20 2.33 Strategy: Covered Short Strangle 21 2.34 Strategy: Strap 21 2.35 Strategy: Strip 22 2.36 Strategy: Call Ratio 22 2.37 Strategy: Put Ratio Backspread 22 2.38 Strategy: Ratio Call Spread 23 2.39 Strategy: Ratio Put Spread 23 2.40 Strategy: Long Call Butterfly24 Strategy: Modified Call Butterfly24 2.41 Strategy: Long Put Butterfly25 Strategy: Modified Put Butterfly25 2.42 Strategy: Short Call Butterfly25 2.43 Strategy: Short Put Butterfly26 2.44 Strategy: “Long” Iron Butterfly26 2.45 Strategy: “Short” Iron Butterfly27 2.46 Strategy: Long Call Condor 27 2.47 Strategy: Long Put Condor 28 2.48 Strategy: Short Call Condor 28 2.49 Strategy: Short Put Condor 28 2.50 Strategy: Long Iron Condor 29 2.51 Strategy: Short Iron Condor 29 2.52 Strategy: Long Box 30 2.53 Strategy: 30 2.54 Strategy: Bullish Short Seagull Spread 31 2.55 Strategy: Bearish Long Seagull Spread 31 2.56 Strategy: Bearish Short Seagull Spread 32 2.57 Strategy: Bullish Long Seagull Spread 32 References 33 Contents ix

3 Stocks 41 3.1 Strategy: Price-Momentum 41 3.2 Strategy: Earnings-Momentum 43 3.3 Strategy: Value 44 3.4 Strategy: Low- Anomaly 44 3.5 Strategy: 45 3.6 Strategy: Multifactor Portfolio 45 3.7 Strategy: Residual Momentum 46 3.8 Strategy: Pairs Trading 48 3.9 Strategy: Mean-Reversion—Single Cluster 49 Strategy: Mean-Reversion—Multiple Clusters 50 3.10 Mean-Reversion—Weighted Regression 52 3.11 Strategy: Single Moving Average 53 3.12 Strategy: Two Moving Averages 54 3.13 Strategy: Three Moving Averages 54 3.14 Strategy: Support and Resistance 55 3.15 Strategy: Channel 55 3.16 Strategy: Event-Driven—M&A 56 3.17 Strategy: Machine Learning—Single-Stock KNN 57 3.18 Strategy: Statistical Arbitrage—Optimization 59 Dollar-Neutrality 61 3.19 Strategy: Market-Making 63 3.20 Strategy: Alpha Combos 64 3.21 A Few Comments 66 References 67

4 Exchange-Traded Funds (ETFs) 87 4.1 Strategy: Sector Momentum Rotation 87 Strategy: Sector Momentum Rotation with MA filter 88 Strategy: Dual-Momentum Sector Rotation 88 4.2 Strategy: Alpha Rotation 89 4.3 Strategy: R-squared 89 4.4 Strategy: Mean-reversion 90 4.5 Strategy: Leveraged ETFs (LETFs) 91 4.6 Strategy: Multi-asset Trend Following 91 References 92

5 99 5.1 Generalities 99 Zero-Coupon Bonds 99 x Contents

Bonds with Coupons 99 Floating Rate Bonds 100 Swaps 101 Duration and Convexity 102 5.2 Strategy: Bullets 103 5.3 Strategy: Barbells 103 5.4 Strategy: Ladders 104 5.5 Strategy: Bond Immunization 105 5.6 Strategy: Dollar-Duration-Neutral Butterfly 106 5.7 Strategy: Fifty-Fifty Butterfly 107 5.8 Strategy: Regression-Weighted Butterfly 107 Strategy: Maturity-Weighted Butterfly 108 5.9 Strategy: Low-Risk Factor 108 5.10 Strategy: Value Factor 108 5.11 Strategy: Carry Factor 109 5.12 Strategy: Rolling Down the Yield Curve 110 5.13 Strategy: Yield Curve Spread (Flatteners and Steepeners) 110 5.14 Strategy: CDS Basis Arbitrage 111 5.15 Strategy: -Spread Arbitrage 111 References 112

6 Indexes 121 6.1 Generalities 121 6.2 Strategy: Cash-and-carry Arbitrage 121 6.3 Strategy: Dispersion Trading in Equity Indexes 122 Strategy: Dispersion Trading: Subset Portfolio 123 6.4 Strategy: Intraday Arbitrage Between Index ETFs 125 6.5 Strategy: Index Volatility Targeting with Risk-Free Asset 125 References 126

7 Volatility 131 7.1 Generalities 131 7.2 Strategy: VIX Futures Basis Trading 131 7.3 Strategy: Volatility Carry with Two ETNs 133 Strategy: Hedging Short VXX with VIX Futures 133 7.4 Strategy: Volatility Risk Premium 134 Strategy: Volatility Risk Premium with Gamma Hedging 135 7.5 Strategy: Volatility Skew—Long 135 7.6 Strategy: Volatility Trading with Variance Swaps 136 References 137 Contents xi

8 Foreign Exchange (FX) 143 8.1 Strategy: Moving Averages with HP Filter 143 8.2 Strategy: Carry Trade 144 Strategy: High-minus-low Carry 145 8.3 Strategy: Dollar Carry Trade 146 8.4 Strategy: Momentum and Carry Combo 147 8.5 Strategy: FX Triangular Arbitrage 147 References 148

9 Commodities 155 9.1 Strategy: Roll Yields 155 9.2 Strategy: Trading Based on Hedging Pressure 156 9.3 Strategy: Portfolio Diversification with Commodities 156 9.4 Strategy: Value 157 9.5 Strategy: Skewness Premium 157 9.6 Strategy: Trading with Pricing Models 158 References 159

10 Futures 165 10.1 Strategy: Hedging Risk with Futures 165 Strategy: Cross-Hedging 165 Strategy: Interest Rate Risk Hedging 166 10.2 Strategy: 167 10.3 Strategy: Contrarian Trading (Mean-Reversion) 168 Strategy: Contrarian Trading—Market Activity 168 10.4 Strategy: Trend Following (Momentum) 169 References 171

11 Structured Assets 181 11.1 Generalities: Collateralized Debt Obligations (CDOs) 181 11.2 Strategy: Carry, Equity Tranche—Index Hedging 183 11.3 Strategy: Carry, Senior/Mezzanine—Index Hedging 183 11.4 Strategy: Carry—Tranche Hedging 184 11.5 Strategy: Carry—CDS Hedging 184 11.6 Strategy: CDOs—Curve Trades 184 11.7 Strategy: Mortgage-Backed Security (MBS) Trading 185 References 186

12 Convertibles 193 12.1 Strategy: Convertible Arbitrage 193 xii Contents

12.2 Strategy: Convertible -Adjusted Spread 194 References 195

13 Tax Arbitrage 199 13.1 Strategy: Tax Arbitrage 199 13.2 Strategy: Cross-Border Tax Arbitrage 199 Strategy: Cross-Border Tax Arbitrage with Options 201 References 201

14 Miscellaneous Assets 205 14.1 Strategy: Inflation Hedging—Inflation Swaps 205 14.2 Strategy: TIPS-Treasury Arbitrage 206 14.3 Strategy: Weather Risk—Demand Hedging 207 14.4 Strategy: Energy—Spark Spread 209 References 210

15 Distressed Assets 219 15.1 Strategy: Buying and Holding Distressed Debt 219 15.2 Strategy: Active Distressed Investing 220 Strategy: Planning a Reorganization 220 Strategy: Buying Outstanding Debt 220 Strategy: Loan-to-own 220 15.3 Strategy: Distress Risk Puzzle 220 Strategy: Distress Risk Puzzle—Risk Management 221 References 222

16 Real Estate 229 16.1 Generalities 229 16.2 Strategy: Mixed-Asset Diversification with Real Estate 230 16.3 Strategy: Intra-asset Diversification Within Real Estate 230 Strategy: Property Type Diversification 230 Strategy: Economic Diversification 231 Strategy: Property Type and Geographic Diversification 231 16.4 Strategy: Real Estate Momentum—Regional Approach 231 16.5 Strategy: Inflation Hedging with Real Estate 232 16.6 Strategy: Fix-and-flip 232 References 233 Contents xiii

17 Cash 241 17.1 Generalities 241 17.2 Strategy: Money Laundering—The Dark Side of Cash 241 17.3 Strategy: Liquidity Management 242 17.4 Strategy: Repurchase Agreement (REPO) 242 17.5 Strategy: Pawnbroking 243 17.6 Strategy: Loan Sharking 243 References 243

18 Cryptocurrencies 249 18.1 Generalities 249 18.2 Strategy: Artificial Neural Network (ANN) 250 18.3 Strategy: Sentiment Analysis—Naïve Bayes Bernoulli 254 References 256

19 Global Macro 263 19.1 Generalities 263 19.2 Strategy: Fundamental Macro Momentum 263 19.3 Strategy: Global Macro Inflation Hedge 264 19.4 Strategy: Global Fixed-Income Strategy 265 19.5 Strategy: Trading on Economic Announcements 265 References 265

20 Infrastructure 269 References 270

Appendix A: R Source Code for Backtesting 275

Appendix B: Disclaimers 285

Glossary 287

Bibliography 351

Explanatory Comments for Index 459

Index 461 Acronyms

ABS Asset-Backed Security ADDV Average Daily Dollar Volume ANN Artificial Neural Network ATM At-The-Money B/P Book-to-Price BA Banker’s Acceptance BICS Bloomberg Industry Classification System bps Basis point BTC Bitcoin Btu British thermal unit CA Commodity allocation percentage CBOE Chicago Board Options Exchange CD Certificate of Deposit CDD Cooling-Degree-Days CDO Collateralized Debt Obligation CDS CFTC U.S. Commodity Futures Trading Commission CI Core Inflation CIRP Covered Interest Rate Parity CME Chicago Mercantile Exchange COT Commitments of Traders CPI Consumer Price Index CPS Cents-Per-Share CTA Commodity Trading Advisor DJIA Dow Jones Industrial Average EMA Exponential Moving Average EMSD Exponential Moving Standard Deviation

xv xvi Acronyms

ETF Exchange-Traded Fund ETH Ethereum ETN Exchange-Traded Note EUR Euro FOMC Federal Open Market Committee FX Foreign exchange GDP Gross Domestic Product GICS Global Industry Classification Standard HDD Heating-Degree-Days HFT High Frequency Trading HI Headline Inflation HMD Healthy-Minus-Distressed HML High Minus Low HP Hedging pressure; Hodrick-Prescott IBS Internal Bar Strength ITM In-The-Money JPY Japanese Yen LETF Leveraged (inverse) ETF LIBOR London Interbank Offer Rate M&A Mergers and Acquisitions MA Moving Average ML Machine Learning MBS Mortgage-Backed Security MBtu 1000 Btu MKT Market (excess) return MMBtu 1,000,000 Btu MOM Carhart’s momentum factor MSA Metropolitan Statistical Area MTM Mark-To-Market Mwh Megawatt hour NYSE New York Stock Exchange OAS Option Adjusted Spread OTM Out-of-the-Money P&L Profit(s) and Loss(es) P2P Peer-to-Peer PCA Principal Component Analysis REIT Real Estate Investment Trust ReLU Rectified linear unit REPO/repo Repurchase agreement RMSE Root Mean Square Error RSI Relative Strength Index S&P Standard and Poor’s SIC Standard Industrial Classification Acronyms xvii

SMA Simple Moving Average SMB Small Minus Big SGD Stochastic Gradient Descent SS Sum of Squares StatArb Statistical Arbitrage STRIPS Separate Trading of Registered Interest and Principal of Securities SUE Standardized Unexpected Earnings SVM Support Vector Machine TTM Time-To-Maturity TIPS Treasury Inflation-Protected Securities UIRP Uncovered Interest Rate Parity USD U.S. Dollar VAR Vector Autoregressive Model VWAP Volume-Weighted Average Price YoY Year-on-Year Some Math Notations

iff If and only if max (min) Maximum (minimum) floorðxÞ The largest integer less than or equal x ceilingðxÞ The smallest integer greater than or equal x ðxÞ þ maxðx; 0Þ signðxÞ Sign of x,defined as: þ 1 if x [ 0; À1 if x\0; 0 if x ¼ 0 jxj Absolute value of x if x is a real number rankðxiÞ Rank of xi when N values xi (i ¼ 1; ...; N) are sorted in the ascending order expðxÞ or ex Natural exponent of x PlnðxÞ Natural log of x N Sum of N values x (i ¼ 1; ...; N) Q i¼1 xi i N Product of N values x (i ¼ 1; ...; N) i¼1 xi i AjB¼b (or Ajb) The value of A when some quantity B it implicitly depends on (usually evident from the context) takes value b f ðxÞ!min ðmaxÞ Minimizing (maximizing) f ðxÞ w.r.t. x (where x can, e.g., be an N-vector xi, i ¼ 1; ...; N) argmaxz f ðzÞ The value of z for which f ðzÞ is maximized @f =@x The first partial of the function f (which may depend on variables other than x) w.r.t. x @2f =@x2 The second partial derivative of the function f (which may depend on variables other than x) w.r.t. x G : A 7! BGis a map from set A to set B A  B Set A is a subset of set B

xix xx Some Math Notations fij f ðiÞ¼ag The set of values of i such that the condition f ðiÞ¼a is satisfied minði : f ðiÞ [ aÞ The minimum value of i such that the condition f ðiÞ [ a is satisfied i 2 Jiis an element of set J jJj the number of elements of J if J is a finite set dAB (or dA;BÞ 1ifA ¼ B; otherwise, 0 (Kronecker delta) diagðxiÞ Diagonal N Â N matrix with xi (i ¼ 1; ...; N) on its diagonal AT Transpose of matrix A AÀ1 Inverse of matrix A EtðAÞ Expected value of A at time t dXðtÞ An infinitesimal increment of a continuous process XðtÞ dt An infinitesimal increment of time t PðAjBÞ Conditional probability of A occurring assuming B is true