The complete presentation slides can be found below.
About The Presentations
This session has project presentations by two of our esteemed EPAT alumni. First on “Pair Trading In the Brazilian Stock Market” by Dr Luiz Guedes, Brazil; and second on “Backtest of Short Straddles on SPX Index” by Siddharth Bhatia, UAE.
Project 1: Pairs Trading In the Brazilian Stock Market
The complete project: Statistical Arbitrage - Pair Trading in the Brazilian Stock Market
This project models a Statistical Arbitrage pair trading strategy to Brazil’s B3 (former Bovespa) stock market exchange. We run our strategy on two distinct time intervals. From 1-Jan-2009 to 31-Dec-2014 and from 1-Jan-2018 to 30-Apr-2021. As we only had current sector distribution available, the results for the former period clearly suffered from survivorship bias.
Stock sector classification was downloaded directly from Brazil’s B3 stock market exchange. From all sectors, we considered only the ones with five or more stocks, namely: oil, metal, steel, paper, transp_material, machines, rail_roads, highways, storage, services, agriculture, meat, food, construction, fabric, clothes_shoes, education, car_rental, retail, hospitals, drugstores, it, telecom, electricity, water, banking, financial_services, insurance and real_estate.
Results were very encouraging, though did not consider transaction fees or slippage costs. All calculations were done based on daily close prices.
Project 2: Backtest of Short Straddles on SPX Index
There are numerous studies that talk about mechanically selling option straddles and/or strangles on stock indices like the SPX, NIFTY, BANKNIFTY etc. It’s deemed to be profitable in the long run due to a persistent market risk premium called ‘variance risk premium’.
This exists because of an overpricing of implied volatility above the actual realized volatility of the index. Market participants overpay for options due to fear/uncertainty hence index options are usually overpriced. During normal market regimes, options with a longer expiry are priced at higher vols than near term expiries.
This is a simple strategy of mechanically selling 45-60 day straddles every week on the SPY ETF and delta hedging once a day. For the avoidance of doubt, a straddle is an option position where one sells the At The Money Call and Put option together for a net credit into the account.
It works when the underlying exhibits lower volatility than initially priced by the options sold. In simpler terms, it works when the underlying doesn’t move around too far and too much from the chosen ATM strike at the initiation.
The profit is roughly the difference between Implied Volatility at initiation and Realized Volatility at cessation, multiplied by the straddle’s vega exposure.
Dr Luiz Guedes (Head of Quantitative Analysis at Occam Brasil)
Dr Luiz Guedes has over 30 years of experience in his career in software development, specifically in the payment card industry. In addition, he is a faculty member at the Instituto Militar de Engenharia – IME, where he teaches Compilers and Programming Languages.
As a software developer and innovator, Dr Guedes has extensively used the Innovative Problem Solving approach to write software for constrained systems and secure electronic transactions, particularly on the development of programming and execution environments, cryptographic algorithms and security communication protocols.
In July 2021, one month after concluding QuantInsti's EPAT programme, he started a new position as Head of Quantitative Analysis at Occam Brasil, where he has just been invited to become a Partner.
Dr Guedes holds a doctor’s degree in computer science from the Pontifícia Universidade Católica do Rio de Janeiro – PUC/RIO, a master’s degree in computer systems and a computer engineer degree, both from IME. Additionally, he acquired an MBA in business from the Fundação Getúlio Vargas – FGV.
Siddharth Bhatia (Executive Director, Third Group FZ LLC, UAE)
Siddharth has been working since 2006 initially in Mumbai and currently in Dubai, with specific trading experience since 2011. Starting off as a trader for a local UAE prop firm active in US and EU bond futures, he has experience in scalping and spread trading futures.
He then moved on to trading at a prestigious family office and managed a volatility trading book active in options on global indices and futures. He then worked for a wealth management firm and oversaw pricing and trading structured products and various protected/ tail risk strategies for the firm’s clients. Here he also looked after portfolio management of a complex book containing structured products and funds.
Starting off on his own in 2018, he founded a proprietary trading and investment research firm called Third Group. Third Group is active in volatility trading and applies advanced quantitative analysis to develop and deploy trading strategies.
Siddharth is a CFA charter-holder attaining charter status in 2012. He is a QuantInsti's EPAT programme alumnus having passed out of batch 50 in 2021. He holds a keen interest in algorithmic trading, mainly in exploring all types of machine learning and Artificial intelligence to gain an edge in the markets.
This event was conducted on:
Tuesday, April 12, 2022
9:30 AM ET | 7:00 PM IST | 9:30 PM SGT