Wednesday, 30 June 2010


The Raven had a very good day, and pretty much all of his net short on the close. He does have to however admonish himself for not sticking to some risk limits and targets, although his decision to overide them was profitable, it was perhaps not the wisest decision, hopefully he'll learn from it.

It is rather interesting to watch the way that $BP traded today, it looks to the Raven as if it traded with a negative beta today, however thats just his optics, rather than a proper analysis, but it would confirm his suspicion that the short interest is now rather significant and with weaker players who'll get squeezed sooner or later.

The Raven noted a comment yesterday from MarketFolly that $MDT had seen some insider buying, having a look at the stock its rather 'boring' but at a not too unreasonable valuation, on a BREVE valuation its got ~25% upside. It also passes his proprietary earnings manipulation test rather well. The residual charts look quite interesting to the Raven as well;

His current thinking is to divide his maximum position size into 5 clips, and add them progressively as we approach where the residual low is, putting one clip on tommorrow morning, another clip with the residual down a further 3.5%, then 3clips at the low, leaving a soft stop 5% below the residual level low. Getting to that point would be a loss of 7%+5% on the first clip, 3.5%+5% on the next clip and 5% on the remaining three, so a total loss of 35.5% on a risk unit, therefore for each 1% of total portfolio loss he is prepared to accept he should be willing to risk 2.8% of his portfolio as per unit position size, giving a maximum position size of 14%.

He'd also like to give a little explanantion of his thinking as to how many % of the total portfolio he would be prepared to lose; as a very rough and ready back of the envelope calculation to highlight the process. He expects to win with this strategy 80% of the time, winning 21% and losing 35%, giving him a net of ~10%. Now the Kelly Criterion would imply that one should bet the "expectation"/"odds" as a percentage of your bank roll; for $1 of risk, one would make a return of $1.86 (using american odds ie. including your stake in the return), your expectation would be $1.29 so that would imply betting ~ 70% of your capital, which is WAY too high. Suffice to say though that he is comfortable that risking 2% of his capital in this trade is below the KC limit, and within his other portfolio limits.

It could be quite quiet tomorrow so the Raven thinks it might be a good time for him to do some deep research on the name, perhaps it'll be an even bigger trade.

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