Latest news with #AndreyMarkov
Yahoo
09-08-2025
- Business
- Yahoo
The Saturday Spread: Using the Neglected Methodology That Wall Street Refuses to Teach
I'm going to be completely honest with you. I've always found options the way they're traditionally taught to be utterly confusing — and dare I say irrational. So, I've never really bothered. I know the basic Greeks and even then, I'm a little shaky. So, it raises the obvious question: if I'm not intimately familiar with the Greeks (and I'm not because I have to look them up to know what others are talking about), why do I write so much about options? The answer: my methodology, which is a discrete-event analysis based on the work of Russian mathematician Andrey Markov, seeks to overcome the epistemological flaws of traditional western methodologies. More News from Barchart Are Intel Options Traders Expecting the Chip Stock to Collapse This August? This Unusually Active Wayfair Put Option Explains a Lot About the Current Markets ConocoPhillips Produces Lower FCF and Investors are Bored - But is COP Stock Too Cheap? Tired of missing midday reversals? The FREE Barchart Brief newsletter keeps you in the know. Sign up now! I'm about to drop a truth bomb. It doesn't matter how cheap implied volatility screeners indicate your debit-based strategy is or how much premium your credit-based strategy will give; if your target asset has a probabilistically low chance of success, then your entire trade carries an unacceptably high risk profile. So, the question isn't how cheap your options are. In my opinion, this is a useless statistic without appropriate context. Instead, traders should ask how likely a successful outcome is — and that's where the 'Russians,' rather than the Greeks, provide additional clarity. My system comprises of two Russian terms: Troitsa, which refers to the Holy Trinity of null hypothesis, alternative hypothesis and expected payoff and Proverka, an inspection or audit of the aforementioned predictive signal's empirical viability. From these two concepts, we can utilize the principles of applied game theory to help guide our strategies. Even better, discrete-event analysis is very much compatible with the core features of Barchart Premier. In the below screenshot, I have circled the metrics (aside from the expiration date) that I utilize daily: Contrary to popular misconception, you don't really need a boatload of data to be an effective options trader. This is especially the case when you're buying call spreads: you're either going to break into the predefined profitability zone or you will not. In that case, knowing the Greeks likely won't help you. It all comes down to probabilities, which we'll discuss next. Eli Lilly (LLY) Pharmaceutical giant Eli Lilly (LLY) has been in the news recently thanks to its massive drop. According to a CNBC headline, the volatility in LLY stock is tied to the underlying company's obesity pill showing modest late-stage trial results. I know this is going to sound sacrilegious but for trading purposes, I don't really care. I'm going to work off the reasonable presupposition that the market has already priced this and other developments into the security. What we're concerned with, then, is the sentiment voting record. In the past 10 weeks, the market voted to buy LLY stock six times and sell four times. During this period, LLY incurred a downward trajectory. For brevity, we can label this sequence as 6-4-D. Since January 2019, the 6-4-D sequence has materialized 38 times on a rolling basis. It's an unusual quantitative signal as the balance of accumulative sessions outweighs distributive, yet the security declined. This sets the stage for a potential reversal. As a baseline, the chance that a long position in LLY stock will rise on any given week is 60%, an extremely strong upward bias. This is effectively our null hypothesis, the probabilistic performance expectation assuming no mispricing. However, our alternative hypothesis is that, because of the 6-4-D sequence, the chance of upside is actually 68.42%. Assuming the positive pathway, the median expected return in the following week is 2.47%. If the bulls maintain control for the next three weeks, LLY stock could reach close to $655 based on past analogs. To be upfront, running a one-tailed binomial test on the 6-4-D reveals a p-value of 0.1864. This means that there's an 18.64% chance that the implications of the signal could materialize randomly as opposed to intentionally. Still, with the null hypothesis landing at 60%, I like my odds. As an intriguing idea, take a look at the 640/650 bull call spread expiring Sep. 19. Equinor (EQNR) Next up is Norwegian multinational energy company, Equinor (EQNR). I'm not terribly familiar with this enterprise. Okay, I lied — I don't know anything about it. What did attract me, though, was the volatility. EQNR stock has lost about 3% of value in the past five sessions. In the trailing month, the security dropped just over 7%. It could be a potential discount so long as we're reading the probabilities correctly. In the past 10 weeks, the market voted to buy EQNR stock four times and sell six times. During this period, EQNR enjoyed an upward trajectory. For brevity, we'll label this sequence as 4-6-U. This is another unusual sequence as the balance of distributive sessions outweighs accumulative, yet the security has moved higher. Since January 2019, this sequence has materialized 18 times. Notably, in 61.11% of cases, the flashing of the 4-6-U leads to upside in the following week, with a median return of 2.5%. Should the bulls maintain control for the next two weeks, the expected median performance is an additional 3.82%. With EQNR stock closing at $24.50 on Friday, it could be on pace to reach over $26. What makes Equinor intriguing is that normally, the security suffers from a negative bias. In this case, the null hypothesis is only 48.7%. However, with the 4-6-U, the odds improve dramatically in our favor. Still, one should be cognizant of the signal's p-value, which stands at a relatively lofty 0.2069. Still, if you want to take a stab here, check out the 24/26 bull call spread expiring Sept. 19. Transocean (RIG) An American drilling company, Transocean (RIG) is the world's largest offshore drilling contractor based on revenue. Given that RIG stock trades hands for a little over three bucks, it's easily the riskiest idea on this list. Moreover, on a year-to-date basis, RIG lost more than 17%. In the past 52 weeks, it's down more than 40%. It's wildly volatile but that's also where the opportunity could be. In the past 10 weeks, the market voted to buy RIG stock six times and sell four times. During this period, RIG enjoyed an upward bias. Following the earlier logic, we'll label this sequence as 6-4-U. On a rolling basis since January 2019, this pattern has materialized 35 times. As you might imagine, what makes RIG stock particularly risky is its negative bias. On any given week, the chance that a long position will be profitable is only 48.12%. That's not good. However, with the 6-4-U sequence, the odds improve to 57.14%. True, that's not exactly earth-shattering. However, the median expected performance assuming the positive pathway is 6.69%. Further, if the bulls can hold on for the next five weeks, speculators may anticipate an additional 3.08% of performance. Therefore, the upside target for RIG stock would be around $3.41. As such, I'm intrigued by the 3.00/3.50 bull call spread expiring Sep. 19. With a little luck, RIG stock could potentially hit the short strike price. Otherwise, the breakeven point for this trade is $3.22, which is a realistic target. On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on
Yahoo
05-07-2025
- Business
- Yahoo
The Saturday Spread: Using Markov Chains to Help Extract Profits From DPZ, AKAM and DOCU
While the use of Markov chains — a statistical framework to decipher the probability of one event transitioning to another — in finance is not a novel concept, it's not deployed effectively. In my research, I have come across two papers analyzing Markovian principles in the stock market: 'Stock market analysis with a Markovian approach' by the KTH Royal Institute of Technology and 'Forecasting Stock Prices using Markov Chains: Evidence from the Iraqi Stock Exchange' by the University of Sumer. Conceptually, both papers attempt to decipher the utility of Markov chains to predict future market trajectories, which should yield compelling results. After all, the concept originated from Russian mathematician Andrey Markov, one of the most brilliant scientific minds and thought leaders. Unfortunately, the researchers from the aforementioned academic institutions extracted only negligible to marginal performance metrics relative to a coin toss — so, what the heck is going on here? Meta Platforms Stock Looks Cheap - Short OTM Puts for a 2% One-Month Yield Costco's Unusual Options Activity Provides Income Investors With Good Opportunity Get exclusive insights with the FREE Barchart Brief newsletter. Subscribe now for quick, incisive midday market analysis you won't find anywhere else. Fundamentally, the problem centers on the researchers' deployment of a 'literal' Markov chain — one time unit in the past to determine one time unit in the future. To be fair, KTH ran a study featuring two time units in the past but the same problem applies — the analysis would only capture an isolated price action without consideration of the underlying context or sentiment regime. In short, the academic papers' input is Gaussian in nature; therefore, we shouldn't be surprised if the output is also Gaussian. In order to generate a true Markovian framework, the input must also be Markovian. To achieve a proper framework, it's vital to apply the spirit of the law rather than the letter of the law. My solution is to discretize the last 10 weeks of price action and segregate the profiles into distinct, discrete behavioral states. This way, we're not just capturing isolated price action but sustained behaviors — behaviors that can better predict outcomes based on underlying situational dynamics. Using modified Markov chains optimized for the stock market, below are three statistically compelling ideas to consider this week. While shares of Domino's Pizza (DPZ) are up nearly 8% so far this year, they're down nearly 3% in the trailing month. In the past two months, the price action of DPZ stock can be converted as a '3-7-D' sequence: three up weeks, seven down weeks, with a negative trajectory across the 10-week period. Naturally, this conversion process compresses DPZ's price dynamism into a simple binary code. The benefit, though, is that the price action can be distinguished as belonging to one of several distinct, contingent demand profiles. Subsequently, these profiles serve as the backbone of past analogs, from which probabilistic analyses can be extracted. Regarding DPZ stock, whenever the 3-7-D sequence flashes, the price action for the following week (which corresponds with the business week beginning July 7) results in upside 61.54% of the time, with a median return of 2.93%. Should the bulls maintain control of the market for a second week, investors may anticipate an additional 1.69% of performance. Using data from Barchart Premier, we can mathematically determine intriguing options strategies based on risk-reward ratios. In my opinion, the potential reversal signal of the 3-7-D sequence shines a spotlight on the 460/470 bull call spread expiring July 18. Interested speculators can learn more about the capped-risk, capped-reward structure of bull spreads here. Plenty of finance gurus hawk the trite adage 'buy low, sell high.' Yeah, well, is anyone going to explain when to buy low? That's the beauty of using Markov chains — when applied appropriately, they can provide an empirical guideline to augment your decision-making process. Let's use Akamai Technologies (AKAM) as an example. Since the start of the year, AKAM stock has dropped nearly 17%. With a Markovian framework, I don't really care why it fell; only that it did and specifically how it did. By observing the past analogs of market behaviors, we can determine the probability of how the security may react in the future. In the past 10 weeks, AKAM stock printed a 4-6-D sequence. Since January 2019, this sequence has materialized 34 times. Further, in 61.76% of cases, the following week's price action results in upside, with a median return of 2.65%. If the bulls maintain control of the market for a second week, there may be an additional 0.89% to 1% of performance tacked on. For a wildly aggressive but still rational trade, speculators may consider the 81/82 bull spread expiring July 18. Another high-risk, high-reward idea is DocuSign (DOCU), a global provider of cloud-based software. As you can tell if you pull up its chart, DOCU stock isn't having a great time this year, down more than 12% since the January opener. Again, I don't really care why the stock fell but the way that it did. Honestly, providing an opinion of DocuSign would be like summarizing yesterday's newspaper. By the time you actually read the story, the narrative could be two days old. I aim to provide an empirically grounded Markovian analysis, not post-hoc rationalizations that dominate the financial publication ecosystem. Getting back to DOCU stock, the security printed a 6-4-D sequence, a relatively rare pattern. Since January 2019, the sequence has materialized 17 times. In 58.82% of cases, the following week's price action results in upside, with a median return of 3.57%. Should the bulls maintain control of the market for a three-week period, traders may anticipate another 2.24% of tacked-on performance. If you're feeling bold and want to throw into double coverage for a chance of a big score, you may consider the 81/83 bull spread expiring July 25. On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on
