Facts and Probabilities tomorrow

Monday, January 30, 2012
  1. In 252 trading days in 2011, NYSE stock VXX CLOSED DOWN 140 days and CLOSED UP 112 days.

  2. Probability of VXX closing up/down any day is 44/56.

  3. When VXX CLOSES UP, probability of next day closing UP is 50/50.

  4. When VXX CLOSES UP, probability of next day opening UP is 49/51.  

  5. When VXX CLOSES UP and OPENS UP, probability of closing up is only 25/75.

    Note Feb 9th: "Gambler's Fallacy" suggests that our 25/75 may be wrong and that the correct probability is 50/50 (see 3), not 25/75.

    We believe our 25/75 is correct because VXX magnitudes and directions are not random events like flipping a coin, especially when consecutive, related VXX events occur in non-random manner.

    Ask any race car driver what's the most important factor determining how he will come out of a turn. He'll probably tell you its how he entered the turn and not a statistical probability of how many times he has gotten through turn okay.

    We would like to be corrected if we are mistaken, please.

  6. When VXX CLOSES DOWN, probability of next day closing UP is 41/59.

  7. When VXX CLOSES DOWN, probability of next day opening UP is 42/58.

  8. When VXX CLOSES DOWN and OPENS UP, probability of closing up is only 17/83. 

  9. When VXX OPENS UP, probability of VXX closing UP is 67/33.

  10. When VXX OPENS DOWN, probability of VXX closing UP is 26/74.
Comparing 9 and 10 in the table below shows that, when VXX opens up, %VXX gain will be about 4x and average price 2x more than when it opens down. 
10 open down
9 open   up


     (-)      (+)
     (-)      (+)
Probability
0.74 0.26
0.33 0.67
%VXX gain-249.25-337.69
88.44
269.95 -71.78
341.73
days139103
36
 113
37
76
average -1.79 -3.28 2.46 2.39 -1.94 4.50
StDevP3.39 2.31 2.18 4.96 1.39 4.69

These 9 and 10 statistics are impossible to day trade on a day that opens up because %VXX is calculated based on previous day VXX close. They are, however, a good indication how %VXX will close on a day that opens up or down. 

A possible strategy for trading these 9 statistics on a day-to-day basis -- Buy on close if up, sell losers on next day open if open is down. 

Comparing some other buying strategies:
  • Buyer 1 buys and sells VXX every day in 2011 on the close and would gain about 20%.
  • Buyer 2 buys every day on the open if open is up, sells the same day on the close with about half the trades of Buyer 1 and would gain only about 10%.
  • Buyer 3 buys on every open, sells the same day on every close, would be the real winner -- about a 40% gain. 
Summarizing:
  • Buyer 1 --  buy / sell all on close --  20% gain
  • Buyer 2 --  buy all on open if up / sell all on close --  10% gain
  • Buyer 3 --  buy all on open / sell all on close -- 40% gain
We are unable to explain cause(s) of these differences. Maybe you can.