Method of Systematic Trend-Following

• US 20080288386A1
• Filed: 10/20/2006
• Published: 11/20/2008
• Est. Priority Date: 10/21/2005
• Status: Abandoned Application

• Current Assignee: Aspect Capital Ltd.
• Original Assignee: Aspect Capital Ltd.
• Inventors: Ferris, Gavin Robert
• Application Number:
  US12/090,918
• Publication Number:
  US 20080288386A1
• Time in Patent Office: Days
• US Class Current: 705/35
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

This invention relates to alternative, synthesisable trend-following strategy, based on a rolling, delta-spliced lookback straddle. This operates like a conventional lookback straddle, except that the time to expiry, rather than monotonically running down to zero, is reset where possible to that of a ‘younger’ straddle, provided that the delta of the two straddles does not differ by more than a specified amount. It is more computationally efficient than prior art approaches; further, it does not lead to positions being prematurely liquidated.

Claims

1. A method of systematic, computer-implemented trend-following of an underlying financial instrument, in which an algorithm synthetically creates an option by using the delta of the underlying financial instrument, i.e. the partial derivative of the option price with respect to the underlying instrument.

2. The method of claim 1 in which the synthetically created option is a lookback straddle.

3. The method of claim 2 in which if the lookback straddle has a delta that falls within a predefined range, it is substituted with a younger straddle that has a sufficiently similar delta, to prevent premature expiry of a position in the underlying instrument.

4. The method of claim 3 in which the predefined range is approximately + or −

1.

5. The method of claim 3 in which a nominal duration of the straddle is set a priori.

6. The method of claim 3 in which the nominal duration of the straddle is instead set by the most reliable implied volatility option duration for the underlying.

7. The method of claim 3 in which multiple windows (with offsets to each other, and possibly, different nominal lengths) are weighted by a user-defined multiple and then combined to create a final target position delta.

8. The method of claim 5 in which small random offsets (‘

dither’

) are applied to the nominal duration to help prevent market predation.

9. The method of claim 3 in which the user may set the ranges of ‘

eligible delta’

when substitution/splicing may take place, and also the percentage ‘

closeness of match’

in the deltas for matching to take place.

10. The method of claim 9 in which the percentage may be different for splicing towards and away from the zero delta point.

11. The method of claim 3 in which the ‘

youngest’

possible straddle that matches (assuming the current straddle is eligible) will be selected where there are multiple of similar ‘

closeness’

.

12. The method of claim 3 in which the ‘

time to run’

of a straddle is algorithmically factored into that straddle'"'"'s ‘

splice utility’

through user-parameterized factors.

13. The method of claim 3 in which the user may set the minimum and maximum time window that is searched, when looking for a delta match.

14. The method of claim 3 in which a user-parameterised hysteresis is employed to prevent splicing occurring at too-frequent an interval.

15. The method of claim 3 in which the use of quantized delta ‘

bands’

(e.g., −

Infinity to −

1, −

0.99 to −

0.8, −

0.79 to −

0.6 etc.) is recognized and utilized by the splicer (i.e., quantize and then look for the appropriate splice, not vice versa).

16. The method of claim 3 in which a non-lognormal price process is assumed, and in which the delta of the lookback straddle is computed appropriately (perhaps using numerical differencing, rather than using an analytical form).

17. The method of claim 1 in which the algorithm is applied to trading individual equities, commodity futures, indices, and foreign exchange instruments and combinations of such instruments, without limitation.

18. A method of performance benchmarking for trend-following funds, the method including the steps of claim 1.

19. A method of creating an investable index at low cost on a single instrument or set of such instruments, the method including the steps of claim 1.

20. A performance attribution analysis system, the system deploying a method that includes the steps of claim 1.

21. A method of trading financial instruments, the method including the steps of claim 1.

22. A method of lowering the computational overhead involved in a computer implemented system that implements trend-following trading of an underlying financial instrument, the method including the step of an algorithm synthetically creating an option by using the delta of the underlying financial instrument, i.e. the partial derivative of the option price with respect to the underlying, as defined in claim 1.