The Lawrence Chan Blog

Under normal circumstances, a good ISP would have given you 99% uptime with your internet access. However, during exceptional situations like the extreme cold weather we experienced from the end of year 2013 to the beginning of year 2014, there is not much your ISP can do if their equipment fails in the rough conditions.

For traders, sometimes we need that stable internet connection because of open positions and other emergency access. We cannot afford to not having internet access. Thus it is a good idea to be prepared.

Here are several tips to make sure you get internet access when you needed it most.

Have Your Own Router

ISPs often like to offer all-in-one device that acts as both the internet modem and the router for your local network of computers, printers and other network devices. This may sound like a good idea but it is not. It is never a good solution. Let me explain why.

Your connection to the internet thru the modem provided by the ISP is a device controlled by the ISP. They often reset the device remotely and make changes to the device remotely without telling you. At times, if your ISP’s network is messed up you may be forced to unplug the modem completely to power cycle the device. All these actions taken on the modem would disrupt your local network because resetting the modem will reset the whole thing which include the router part that maintains your local network traffic.

If you need to print a document, transfer files between your computer and your laptop, stream a video from your network hard drive but your all-in-one modem / router is down, you will not be able to do any one of these tasks.

To protect yourself from your ISP, having your own router will take care of this issue. Nowadays, it is not difficult anymore to maintain your own router. You can find online instructions everywhere on how to put your ISP’s modem into bridge mode and disable the gateway/router function. It is something that can be done in minutes.

As a bonus, when you decide to switch ISP or that you are forced to replace the internet modem, your network configuration stays with your own router and you no longer need to reconfigure everything from scratch.

Sounds good? The next step is to figure out what kind of router you are going to get.

Dual Internet Services

To be able to access to the internet when your ISP fails, one solution is to have a backup internet service.

I am not talking about having top of the line combinations of fibre optic, DSL and cable internet services all the time. All you need is a reasonable secondary internet access that will allow you to carry out a few simple tasks like closing out your open positions and cancelling all the open orders. Thus the backup plan can be a cheap one.

If you like this idea of having dual internet connections, you are not alone. Many businesses depending on their internet connection are doing that now to ensure a better chance of non-stop internet access. What you need with dual internet connection is a dual wan router. As the name suggests, it has 2 separate ports supporting 2 internet connections at the same time while acting as a router for your local network.

List of Dual Wan Routers at Amazon

Cell Network Backup

In some situations, one may not be able to get dual internet services setup due to the location. It may also be undesirable if you cannot get a good deal for the secondary internet connection. In this case, it is a good idea to invest in a good Android cell phone with a reasonable data plan.

Android cell phones have this useful ability to tether its internet access with your computer, making it possible to get your computer connected to the internet through its USB port. Thus, if you need just one computer at the time your internet connection is disrupted, you can plug your Android cell phone into your computer and enable tethering. This will allow your computer to go back online quickly.

When your need is beyond just a single computer connection, you may want to consider a router with USB tethering support. Some newer routers are capable of sharing the Android USB connection among your computers. This means your Android cell phone can be turned into a temporary internet modem for your whole network if you choose to.

It is difficult to shop for a router with USB tethering support because the manufacturers do not really put emphasis on the feature in general. From what I gather, Asus and D-Link both have a few models of routers that support USB tethering. Mofi Network is a small company that produces a Linux router in a box which support USB tethering too.

Mofi Network Routers at Amazon

Summary

It is a good idea to have a plan for the emergency situations where losing your internet connection matters. It does not take much to prepare for the situation. All you need are the right equipment and services. When the unlucky situation strikes, the little extra effort you put in will pay off.

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First set of custom market breadth data for Dow Jones Industrial Average, Nasdaq 100 and S&P 500 is now available from Historical Data Bank.

Once we make sure the new auto upload mechanism is working smoothly, I will expand the set to include more custom market breadth data.

A related update to the website will be ready soon. I plan to provide daily snapshot of these breadth data in both table and chart formats. The related bullish / bearish biases will be updated every trading day automatically so that I no longer need to write it out manually just once a month. Anyone interested in tracking these market breadth themselves will be able to do so once the daily update is ready.

Switching to use a separate file server for the historical data bank turns out to be a great decision. It is so much better in terms of speed (for both upload and download) and usage experience. All the hard work to make the switch now pays off!

Links below:

Historical Data Bank

Market Breadth Primer

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30-minute S&P 500 charts presented without comment.

Year 2000 Jan chart.

Year 2014 so far.

Coincidence?

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I was informed earlier today our historical data bank has been a success (good news!) and that causes overload on our web servers several times (damn!).

I have decided to move on to use special file servers to host our data. This transition will take at least several days to complete. Please understand that it is necessary because going forward as we expand into providing daily updates of our customized breadth data for indices and forex pairs it will be too late to correct the delivery mechanism.

This should not affect my plan to introduce the first batch of custom breadth data this weekend.

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Majority of option traders who understand options tend to focus on the mathematics of VIX while the chart traders who trade S&P 500 Index futures tend to focus on the chart patterns and confirmation signals from VIX.

Who is right?

Who understand VIX better?

Here is a short piece on the VIX Phenomenon that no one in the financial blog sphere ever talked about. Maybe learning something about VIX from a completely different perspective all together can help us answer the questions above.

CBOE Volatility Index

VIX is the symbol for CBOE Volatility Index. I am not going to waste time here discussing what it is. You can find out more about the index at wikipedia. Links are provided below for further reading.

The one single most important key about the VIX value itself is that it is an annualized rate of the expected variance of the S&P 500 based on the nearest traded strikes of the SPX options.

Thus the value of VIX cannot be directly translated into the expected volatility until you plug the value into a formula to get the estimated standard deviation of the period you are interested in. The calculation method is quite simple. There is an example in wikipedia illustrating the method so I am not going to repeat that here.

Let’s dive in to the heart of the issue.

The VIX Phenomenon

Following is a table of VIX levels with the corresponding implied 30 days percentage change and the translated absolute value at 100 points interval based on S&P 500 price levels. If you do not understand what I mean in the first sentence, it is okay. Let’s look at the table first and I will explain right after.

When VIX is at 13, the 30 days estimated volatility is 3.75% and that translate into 45 S&P points if S&P is trading at 1200. If S&P is trading around 1800, that translates into 67.55 points. These absolute values carry a lot of weight. They are there telling you that if S&P is trading at 1200 with VIX at 13, there is a 65% chance S&P is going to stay within +/- 45 points from 1200. If you trade options, you must know this to formulate your strategy properly.

So many numbers in a huge table. What’s the point?

I have computed the average value of VIX since 1997 at each 100 point interval on the S&P 500. It is the 2nd line from the top of the table. For example, when S&P was trading at 1200 +/- 50 points, the average value of VIX was 20.4 since 1997.

Looking at the numbers themselves it is not easy to draw a connection. So, I have highlighted these average VIX levels in yellow corresponding to the respective S&P price levels. Now, they are very interesting.

The higher volatility readings at 1200 to 1500 was mainly due to the steep decline and spike values in VIX during the last 2 market crashes. But that does not change the fact that there is a general trend of decline in VIX level relative to the increase in S&P 500 price levels.

Why is it the case?

Keep It Simple Stupid

The clue is the near constant range of the absolute values translated from these standard deviations.

From the 1600 to 1800 column, the absolute value is within a constant range at 65 to 75 S&P 500 points.

If the extreme spikes (value greater than 40) are removed from the VIX historical readings, this constant range will be the same for the 1300 to 1500 columns too.

Traders who trade S&P 500 options, be that used for hedging or pure speculation, do not really depend their final trading decisions on their option models. When things boil down to money making, these traders are really looking for the absolute potential in their trades and adjust the risk they are going to take accordingly. After all, profit and losses are measured in S&P points, not the Greeks in the option price models.

In short, options on index are traded off the absolute value of the indices because human do not trade with unlimited capital and fictitious percentage measures. Humans behave the same way no matter S&P trading at 1200 or 1800. This phenomenon also indirectly shows that majority of volatility models failed to capture the essence of human trading behaviour.

Summary

It is now easy to answer the questions I raised in the beginning of this article.

The option traders more talented in math are blinded by their superior math skills and ignored the fundamental principle of any market. That is, traders are bounded by their profit making objectives and risk profiles. Thus, no matter what they think, VIX has the characteristics of a tradable instrument and it shows in its charts.

The traders who are good at chart reading can often pick up the interesting behaviour of VIX like how it loves to hold a particular level for a long period of time. That is excellent detective work but the lack of understanding the nature of VIX makes it difficult to figure out the reasons behind such phenomenon. In turn, the inference from the observations may not be as accurate as one likes it to be.

Both sides have something to learn from each other.

Resources

CBOE Volatility Index (VIX) at Wikipedia

Bankable ETF Strategy: VIX Rotation

Volatility Snap: VIX Based Always In Trading Model

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