Macro/Micro Wave StrategyJay A. Leavitt, PhD

Combine Successful

Time Tested Concepts

with

Emerging Trading Ideas

SPY, SPDR S&P 500 Index ETF

TLT, iShares 20+ Year Treasury Bond ETF

What to Trade

Entry Criteria

Exit Criteria

SPX Hull Timer

Bull Trade Stocks in Rising Markets [concept]

SPY ActiveBull Put Spread 2 Strikes Wide

Short Strike 75% POS

Bear Trade Bonds in Falling Markets [concept]

TLT ActiveBull Put Spread 2 Strikes Wide

Short Strike 75% POS

POSProbability of a Successful Trade

Bull Trade Stocks in Rising Markets [concept]

SPY ActiveBull Put Spread 2 Strikes Wide

Short Strike 75% POS

BearTrade Bonds in Falling Markets [concept]

TLT ActiveBull Put Spread 2 Strikes Wide

Short Strike 75% POS

Hull Micro Wave

Hull Bull [Green] Hull Bear [Red]

Hull[25]

Bull Profit Exit >= Credit/2

Loss Exit <= Risk/4

Bear Loss Exit <= Risk/8

Exit with any Profit

Entry Not Allowed

Limit of 25% of Equity at Risk per TradeBull Loss Exit = Equity/16

Bear Loss Exit = Equity/32

The SPX Hull Timer keeps trades on the right side of the market

Bear Micro Waves keep you out of the market when it’s against you

Stops

When the SPX Hull Timer changes it is a Stop

When the Micro Waves turn bearish it is NOT a Stop

The 75% POS of the short strike puts the odds in your favor

The exit at 50% of credit improves these odds and raises the daily return/trade

When the Micro Wave is bearish the per trade exit is only 3.125% of equity

1st 14 days of Micro WaveTake advantage of trough when likelihood of winning trade highest

Move spread 2 strike closer to ATM unless IV Rank >= 50

Waves 30 days or longerReduce risk when likelihood higher for wave to crest

Move spread 1 strike further from ATM

Other refinementsAfter a losing trade skip 1 bar

During a Bear Wave close trade with any profit

Average Days in Trade

9.23

Average Days in Losing Trade

8.39

Percent of Winning Trades

82.31%

Maximum Draw Down

-14.46%

Maximum Quarterly Draw Down

-9.03%

Compound Rate of Return

31.38%

Percent of Equity Available for Other Trades

75.00%

Wave reversals lasting 3 or fewer days

Two typesBull Bear Bull

3 occurrences

These are of no consequence

Bear Bull Bear

8 occurrences

3 were losses

One resulted in the largest Draw Down

The Macro/Micro Wave Strategy, from before the 2008 crash through the 1st quarter 2014, greatly out performed all mutual funds as measured by draw down and annualized rate of return. Even the Warren Buffett stocks [BRK.A] weren’t a challenge. Its draw down was over 3½ times worse and annualizd rate of return insignificant in comparison.

Risk associated with this type of option strategy, OTM Bull Put Spreads, is alwayssmaller than trading the underlying equity. The Probability of Success for trading an underlying equity is always smaller than the option’s.

The Macro/Micro Wave Strategy is highly intuitive:

buy stocks in rising markets and bonds during falling,

buy low and sell high,

by placing only a portion of equity at risk keeps the balance available for opportunities.

The Macro/Micro Wave Strategy is permitted in IRA accounts.

Jay A. Leavitt, PhD

leavitt@buffalo.edu