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Risk Premium Harvesting with QuantPedia Composite Seasonality Index

· 2 min read

The anomaly​

Calendar effects/anomalies are well-known to investors.

QuantPedia's Composite Seasonality Index (QCSI) combines several, seasonal patterns such as the Turn of the Month, FOMC Meeting Effects, and Option-Expiration Week. It has been shown that using the composite calendar in a long-only setup outperforms the market. 

tip

Euan Sinclair also describes an Options Trading Strategy for FOMC events in his famous Positional Options Trading book. It's worthwhile to read!

MesoSim implementation​

MesoSim Quantpedia Seasonality Index Overview

In a recent in-depth study, we investigated applying QCSI to Risk Premia Harvesting.

As the QCSI provides a bullish signal, we sell Puts at 10 Delta when the signal fires. We implement Stop-Loss trigger by comparing the selected contract's price with the underlying: the position is closed when the contract becomes In The Money (ITM).

These key market dates are provided via this Google Spreadsheet. 

The backtest results can be viewed here. 

Tearsheets​

Quantpedia Seasonality Index Tearsheet 1
Quantpedia Seasonality Index Tearsheet 2
Quantpedia Seasonality Index Tearsheet 3

Results​

Sharpe ratio for the 11 year test period is a notable 1.85.

The time in market is reduced to 40%.

To get all the implementation details, please read the full study on SSRN.