Can someone explain exactly what is going on in this compression trade?

[Algo_Design_Kid]

http://www.zerohedge.com/article/de...n-fluff-compromise-breaks-es-risk-correlation


I understand in this example you would be shorting ES, but what the hell are you exactly buying?

As I understand it you are buying some sort of ETF to mimic these instruments. I was wondering if you could go long a certain future(s) contracts instead of utilizing ETF's?

Thanks

 

[Kevin Schmit]

Quote from Algo_Design_Kid:

I understand in this example you wo...reads themselves. The usual suspects, mostly.

 

[Martinghoul]

It's not a trade... You can't buy the other side, since it's a regression-weighed basket of a whole bunch of stuff (not sure what, although someone in the comments has an idea). So it's a signal that ES might be overvalued, but that's about it. Moreover, as many such regression-derived signals, it's likely got all sorts of issues, so you should always take it with a big pinch of salt.

P.S.: these might be the ingredients of the "secret sauce", apparently: AUDJPY, EURJPY, Gold, Oil, 10Y UST yield, 2s10s30s UST fly level, DXY and 2Y UST-DBR.

 

[Algo_Design_Kid]

Quote from Martinghoul:

It's not a trade... You can't buy the other side, since it's a regression-weighed basket of a whole bunch of stuff (not sure what, although someone in the comments has an idea). So it's a signal that ES might be overvalued, but that's about it. Moreover, as many such regression-derived signals, it's likely got all sorts of issues, so you should always take it with a big pinch of salt.

P.S.: these might be the ingredients of the "secret sauce", apparently: AUDJPY, EURJPY, Gold, Oil, 10Y UST yield, 2s10s30s UST fly level, DXY and 2Y UST-DBR.

Yeah. I saw those listed in the comments as well, but it just seems like by the time you pay commissions and slippage on all this bullshit it is going to be worthless.

Figured it couldn't be that easy.

 

[Martinghoul]

Quote from Algo_Design_Kid:
Yeah. I saw those listed in the comments as well, but it just seems like by the time you pay commissions and slippage on all this bullshit it is going to be worthless.

Figured it couldn't be that easy.

Yep, as Kevin says, there's also other suspect stuff going on... On balance, I would have to agree that this is just more ZH nonsense.

 

[Soon2Bgreat]

Quote from Kevin Schmit:

I know I have a webpage bookmarked on the calculation of the RISK basket, but I can't seem to find it right now.

Isn't it Capital Context or something like that?