Weekly Alpha Review - May 23, 2025

My Journal

machinaquanta.com ← analytics website for subscribers.

“The signal catches up to the SPX” - Machina Quanta

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I wanted to offer a discount if you would like a lower cost subscription for annual members. Substack may have glitches where it doesn’t offer this to existing members (or you have to be logged out?) but I will honour this discount so your price can never go up (at checkout you should see ~17% off). If you don’t see the discount message me please.

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I am on a quest to find a new character to describe the entropic model. This way you know what to do when you see the character - and it’s faster than me typing and explaining and rationalizing the shorts. Bender (from Futurama) was good but Ralph gets the point across better I think. :)

Review of Hedging Activity

Below are the updates to hedging. Note, the first round of S&P500 puts (added May 13/14) did not yield a pullback so I lost some time value and delta on those. I felt it was prudent to try than miss a potential 3% drop opportunity. Luckily, the second attempt of rolling up SPY puts, adding QQQ puts and adding MES futures shorts did pay out in the end as below (depending on strike chosen and initial price). The strike isn’t as important as just being right on direction and time. The model helps us determine direction; timing is a bit trickier though.

-EOM QQQ puts went $3.0 -> $8.5 (180%)
-June SPY puts went $4.5 -> $10 (120%)
-EOM SPY puts went $1.5 -> $6 (300%)

-MES short ~150 pts

Entropic Model

Below is a summary of this week’s model behaviour and corresponding S&P500 Index changes. You can see the index reacted to the model ‘signal’ one day later (usually it’s 0-3 days later). As you know, the thing I look for is when entropy points down and the index goes up (or is flat) to create that divergence or ‘rubber band effect’ - especially towards the close is my preferred time. The question now is what does the drop on Friday mean as both entropy and the index decreased. Well, it depends how entropy behaves the next few days in relation to the index.

Source: machinaquanta.com

GEX

GEX showed me the anomaly I was hoping for, hence my conviction for shorting was stronger after seeing this as I had market makers working on my side at that point. Now we are approaching a bouncy area I’d argue. Also of note, decreasing GEX also means decreasing liquidity where volatility increases (both up and down) so we can expect price to go lower and/or higher than expected.

Source: https://squeezemetrics.com/monitor/dix

Important: when the entropic model and GEX are both outputting similar anomalies in their respective manner, you will notice I go heavier on shorts/hedges. Why? Because together they are usually high probability chances of pullback. So, if you want to avoid false shorts you can wait until you see these anomalies both form (but note GEX is delayed and not predictive). However, there are some smaller cases where entropy will show the sell but GEX did not capture it in time (Mar. 26, 2025 comes to mind). So, just consider sizing of hedges given that.

Seasonality