Weekly Alpha Review - Apr. 4, 2025
My Journal
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[On Entropic model] “The signal catches up to the SPX” is what I like to say.
Traders holding the S&P500 lost 509 points on the index over the week. I closed out first round of April mopex puts for ~89% gain on Monday’s gap down. I took a new IBIT (BTC) position based on a relative momentum strategy versus the QQQ’s which is now outperforming by 9.3%. Luckily I avoided buying SPX this week as a result of the warnings from the entropic model and other metrics.
Highlights
Mon. Mar. 31 commentary:
“SPX: I'm not worried about us approaching the box of interest ~5400. I'm more worried that others are now ALSO looking at the same box I drew which means we either get front run or we slam through it.”
Spoiler: we got front run first AND then we slammed through it later in the week. Two for the price of one!
“Index can still go down from here but the VIX spike really juices up option premiums so I want to take advantage of that”
This was one big reason I sold the April mopex puts.
End of day: “Taking small hedge on Apr 11 5600-5500 SPXp (~35) spread. Just in case the model sees something I don't...Literally nobody is putting on this trade, everyone is buying calls it seems so keep in mind.”
Below is the box I referred to above.
Result
Gap down and red → green day. Closed prior April Mopex hedges for 89% gain in morning. Took new IBIT long position.
Probably the most important picture this week is below. There was a very large drop in entropy on Monday (i.e., upcoming warning). It also coincided with the gap down on Monday. Despite the market ripping back the rest of the day one of our members pointed that “It [entropy] did not recover”. Strange, I thought. It was a strange enough signal that I picked up additional hedges using April 5600-5500 put spread just in case the model “saw” something I couldn’t (spoiler, it did). In hindsight, I discounted this drop as just coinciding with the gap down but this is a leading indicator, not a coinciding indicator - the warning wasn’t for Monday, it was for sometime in the near future. This was my mistake in interpretation I believe so I want to make that clear - reading tea leaves is not always easy with markets that move this fast.
Tues. Apr. 1 commentary:
“Only change from before close is the magnitude of the 'recovery' is less. I don't think one can make a call into tomorrow really. My read is it hasn't recovered enough to be comfortable for me so still holding this small put spread.”
Result
SPX basically flat this day. No positions change.
Luckily with fresh eyes I started to see that the model output was indeed a warning for the near term. No other action today.
Weds. Apr. 2 commentary:
“Entropy stabilizing this morning. My thought is we could just end up relatively flat over the next few days as market digests news. With the spike in VIX, I think I may just close the put spread this morning as it's quite short dated.”
Result:
SPX ended relatively flat. Closed April 5600-5500 put spread on VIX spike (whoops).
Nothing happened until of course the Tariff announcement. I did not feel comfortable making a call on direction so I stayed flat essentially prior to the announcement. Recall the warning in entropy from Monday? I think I was focused on zooming in for daily moves that I missed the forest for the trees. That tsunami warning was about to be triggered in SPX (again with the advantage of hindsight, of course).
By end of day Wednesday, there was a flood of option trades near and after close which showed another sell signal. By then it was too late to position again, however.
We come to the most important picture of the week. And here is where my question from Monday was never answered until AFTER Wednesday close. “Where is the sell”? See below.
Thrs. Apr. 3 commentary:
“Reminder previous drawdowns have taken 9-26 weeks to resolve. That is a long time. We are in no rush….We are now in week 7 of this drawdown. There is no rush. This might be the most important thing to keep in mind today.”
Result:
SPX gapped down and sold 274 handles. No trades.
We did NOT buy the dip like I suspect much of retail did. Today was a sitting on hands day.
Fri. Apr. 4 commentary:
“That is an INCREDIBLY large drop in entropy and does warn for serious selling potentially in coming sessions. The muddy part is that we realized some of this unexpected gap down already today (i.e., SPX has reacted partly today).”
“Given the unusual drop in entropy I have reset the clock to where we could expect the next low point…4900 is likely optimistic and more likely 4700-4800 but statistically it's another -4%”
“We have strong suspicion we head down hard, the question is now at what price, what instrument and maybe what time frame (if using options)”
Remember I said it was likely a 3-4 sigma move event today?…We are nearly -2B in negative gamma. That is enormous…Few events in last 15 years are near this level. So price bounce is likely as dealer hedging adjusts.”
Result:
SPX gapped down and sold off 319 handles. I bought more IBIT and August IBIT calls.
Here is what the model is showing so far. It’s concerning.
What is interesting is that despite a large move today, GEX moved down LESS than expected. That is interesting because it shows me dealer hedging is slowing actually. That in itself is an anomaly and has shown me bounces before. Either that or we see divergence again around these highly negative gamma levels. That is where I can see more edge (for upside anyways). See below for context of where gamma is relative to major market events in the past 15 years.
In other news my IBIT vs QQQ trade is now outperforming by +9.3% as the relative momentum strategy is working, for now. However, if I see too many eyes on BTC as a ‘safe haven’ or that is has ‘decoupled from equity markets’, I will cut it - that is a bad sign.
Summary:
So, let’s review the good and bad decisions this week. It was a good test of how difficult it is to ‘interpret tea leaves’.
Good:
Realized a profit of ~89% on the full size April puts.
Avoided buying more SPX this week. Haven’t bought in weeks.
IBIT vs QQQ trade outperforming by +9.3% since putting it on.
Bad:
Misinterpreted/discounted the output from model, resulting in closing second round of hedges too early.
Learnings:
Zoom out and look for the forest, not the trees. In other words, look for tsunamis, not daily waves - remember the primary advantage of the model, finding upcoming pullbacks.
Disclaimer
This Substack serves as a personal journal for my own reference and is not intended as financial or investment advice. The content is purely informational and reflects my personal observations, not recommendations.
I am not a registered financial advisor, and nothing here should be considered professional guidance. Investing, especially in securities and options, involves substantial risk, and past performance does not guarantee future results.
By reading this Substack, you acknowledge that all trading decisions are solely your responsibility, and I am not liable for any financial outcomes resulting from your actions.