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Jaffray Woodriff received several lessons from the place where he was born and raised. This trader from Virginia spent his childhood on the farm. Observer from an early age, he noticed that the people around him were in a hurry to be Friday night and sad to start their week on Monday. He didn't want to experience these emotional states at all.
“I really wanted to find a way to make Mondays as interesting as Fridays.”
Jaffray Woodriff therefore embarked on a performance race that followed him until the creation of his Hedge Funds. This quest for performance began during the harvest in his uncle's domain. The remuneration was by the kilo. He had to go fast and harvest as much as possible. He outperformed so much that his uncle fired local employees and employed immigrants. But they were better than Woodriff. Very quickly, he realized that he had to be the best. Later, when his hedge funds were created, he set the management fees at 0%, which is very rare, and 30% performance fees. No performance, no costs for customers!
Jaffray's trading career begins with successive partnerships that never succeed because Jaffray wants to keep control of the project. As a result, he decided to create his own structure: "Woodriff Trading." In August 1994, he started trading with $50K from several friends and family members. After several years of loss, 2016 was a great year: +180%! But the time spent on the administrative management of his fund prevented him from focusing exclusively on trading. He then decided to find a job as a proprietary trader in New York. It was at Société Générale that he found a job for 2 years in proprietary trading. During this time, he perfected a trading system he had developed right out of the University of Virginia. When this program started to work well, he made the decision to live off it without managing other people's money as before but by managing his own money, $300K at that time.
Finally, after 2 years, Jaffray gave in to the temptation to create a real hedge fund and QIM (Quantitative Investment Management) was created in 2003. At the beginning, QIM trades in futures and equities on a total of $5 million in assets. The average annual compound return between 2003 and 2011 was 12.5% with a standard deviation of 10.5%. Apart from these good performances for clients, Jaffray Woodriff's own account on Futures posted an average annual compound return of 118% with a standard deviation of 81%. Today, QIM manages $3 billion.
Ready to go against the direction of others and the market, Jaffray prides himself on following his instincts. One of his first trades attests to this. One day in 1987, he wanted to buy a stock that a friend recommended to him. Everyone bought and so the price took off. The share price had doubled. So Jaffray abstained. But during a trip, when he got off the plane, he noticed in the newspaper that the same stock had dropped from $40 to $14.50. He hastened to call his broker to buy this stock. It even surprised the lady who was on the phone. Later, the stock appreciated again, giving Jaffray its first gain in the equity market.
“I can't stand to be part of a herd and just accept consensus. I want to evaluate everything by myself.”
Nevertheless, Jaffray prefers to trade OEX options. These options are used by traders to hedge a position or speculate on the performance of the largest 100 stocks in the US equity market. OEX options therefore give the right but not the obligation to buy or sell the S&P100 index at a specific price or date. OEXs are traded on the Chicago Board Options Exchange (CBOE). To trade this type of options, Woodriff uses 2 indicators: the put/call ratio and the ARMS index.
The Put/Call ratio (PCR) is an indicator that measures the volume of trades on options. It is used as a barometer of general market sentiment and therefore of investor behavior. It is published daily and also weekly by the Chicago Board Options Exchange (CBOE). It is calculated by dividing the Put volume by the Call volume.
PCR = number of put options / number of call options
In other words, how many put options are executed when 1 call option is operated? If the PCR value is greater than 1, it means that the volume of put options is greater than the volume of call options. Example: PCR = 6 put options / 3 call options = 2. When 1 call option is purchased, 2 put options are traded. Investors therefore expect the market to decline.
On the other hand, if the PCR value is less than 1, it means that the call volume is higher than the put volume. Example: PCR = 9/15 = 0.6. When 9 put options are purchased, 15 call options are purchased at the same time. Thanks to this, we can see that investors are confident and therefore have a long position. Be careful with the reading of the graphs because the PCR is a contrary indicator. The following graph shows that there is a decorrelation between the evolution of the S&P500 and the PCR.
As soon as the S&P500 increases, the PCR decreases, which means that the number of put options becomes smaller compared to call options. The more bearish the trend on the PCR, the more bullish the trend on the S&P500. Jaffray uses PCR a lot as a contrary indicator on options.
The Monday trader also looks at another key indicator: the ARMS index, also known as TRIN for Trading Index. It is used to assess the general market sentiment. It is also a contrary indicator because it decreases when prices rise and vice versa. The ARMS indicator predicts price changes on a daily basis. In fact, it generates overbought and oversold levels that indicate when the index to which it is attached will change direction.
To calculate the TRINs, 2 ratios are required. The first necessary ratio is to divide the number of shares increasing during the (daily) session by the number of shares decreasing during the session. The second ratio is the sum of the rising share volumes divided by the sum of the falling share volumes. To obtain the ARMS index, simply divide the first ratio by the second ratio.
When the index is equal to 1 or close to 1, it means that the market is neutral. The higher the TRIN index is above 1, the more bearish the market. If pushed to excess, the results of this index may indicate impending shifts. If the index reaches 2, then the market has already dropped sharply and may bode well for another rise. Conversely, an index below 0.3 may indicate that the market has been overbought and therefore that the market may be on a downward trend. Traders like Jaffray Woodriff look carefully at this indicator to find these kinds of turning points.
Finally, Jaffray Woodriff is concerned about his Risk Management, by limiting the number of trades he makes during crises. The higher the volatility, the more the number of contracts he processes declines. According to him, the worst mistakes made by novices are the too many trades and following the tips or the media.
Gifted Trader's advice: "(1) Look where others don't look. (2) Adjust the sizes of your positions to general risk to target a given volatility. (3) Be very careful with transaction costs."
*Source :
Hedge Funds market wizards, Jack Schwager
http://www.investopedia.com/terms/p/putcallratio.asp/
http://www.c-ville.com/power-players-ones-making-biggest-impact/
http://www.indexindicators.com/charts/sp500-vs-put-call-ratio-equity-1d-sma-params-6m-red-x
https://www.andlil.com/definition-du-trin-arms-index-126615.html
