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Strategies & Market Trends : Synthetic Derivatives

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From: CapitalistHogg™	9/27/2006 3:16:00 PM
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A message to new readers: The original intent of this public forum was to locate stocks that had shown a consistent pattern of gapping 25% or more and developing a strategy to capture profit and limit losses. The original acronym was BTM which stood for Bias Timeframe and Magnitude. After a few months of observation it became clear to me that these gapping stocks were related to a future event that was causing this "anomaly" in my algorithm siliconinvestor.com. I like to name my strategies so I changed the acronym to BETM with the E meaning Event and the B from Bias to Binary. What is the BETM system primary purpose? BETM's primary purpose is to locate event driven companies due for a short term price shock within a given timeframe. Let me make it clear that this is all it does. It does not dictate what strategy is best, it does not execute the set up, it does not determine fair prices for stocks or options. It just says look at this company because a future unknown event within a given timeframe could have an immediate positive/negative impact on market cap. From there I use qualitative information to research the company in order to understand what emotional issue (Event) is causing the "anomaly" in my model. One of four things always happens when a BETM event goes off: 1) Option premiums immediately plummet to their intrinsic value upon the event. This is a guarantee as long as the event has been properly identified. I have been wrong on the event only once. Note: Sometimes I post ruminations with proper qualification ie. "I think this is the event". 2) Stock and Option volume goes up to top 10% for the year. Depending on what event is being played, ie. FDA approval for a biotech companies main drug, it can be the top volume for the companies entire history. These are HUGE events when identified appropriately. Other events such as quarterly results have very high volume but usually not the top volume on the year. 3) Stock price may pop 10% up to 100% in value OR be chopped in half. There are always some exceptions to the rule but as a guideline if a company has only a couple of drugs in its pipeline and they don't clear an important hurdle they will almost always be cut in half or more overnight! 4) CAVEATS: Rule one and two ALWAYS happen as long as the qualitative event is correctly identified. There have been times when options premiums plummet and stock and option volume go through the roof but the stock price doesn't go anywhere. After proper identification of a BETM event the main thrust of this board should be how to set up boundaries in stock and option prices. In other words what happen if the news is good, bad or ugly? And what are the most likely scenarios given both the option OI/skew and any qualitative information regarding the event itself? A near perfect arbitrage is still the main goal of this board, if we put our heads together, I strongly believe it can be figured out. Now lets get to work!!

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