2009 Aug 29 - Sat

Tools for Testing Your Internet Connection

Measurement Lab has a series of tools for Testing Your Internet Connection:

• Network Diagnostic Tool: Test your connection speed and receive sophisticated diagnosis of problems limiting speed
• Glasnost: Test whether BitTorrent is being blocked or throttled
• Network Path and Application Diagnosis: Diagnose common problems that impact last-mile broadband networks
• Pathload2: Test your available bandwidth
• Diffprobe: Determine whether an ISP is giving some traffic a lower priority than other traffic
• NANO: Determine whether an ISP is degrading the performance of a certain subset of users, applications, or destinations

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Virtually Wondering the Earth

I saw a video once of how collections of pictures can be data mined to produce composite interactions which are more than the sum of the parts. For example, it is said that there are more than 80,000 images of the Notre Dame Cathedral in the Flickr database. By using Scene Reconstruction and Visualization from Community Photo Collections, one can see more detail than any one of the photographers who took pictures when actually being on site.

That research is only a minor portion of what can be found at Microsoft Research.

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VOIP Security Tools

The Voice over IP Security Alliance has an interesting collection of VoIP Security Tool List which includes things like:

• VoIP Sniffing Tools
• VoIP Scanning and Enumeration Tools
• VoIP Packet Creation and Flooding Tools
• VoIP Fuzzing Tools
• VoIP Signaling Manipulation Tools
• VoIP Media Manipulation Tools
• Miscellaneous Tools
• Tool Tutorials and Presentations

Use at your own risk.

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Options as Indicators

Optionetics has an interesting article called Using Options to Predict Stock Prices. The author, John Jeffery, writes that, in addition to the usual fundamental analysis and technical analysis methods of 'stock direction prediction', options can help indicate trade direction. Three useful indications include:

• Put/Call Ratio
• Implied Volatility
• Option Volumes

Put/Call Ratios: The most popular Put/Call Ratio is the one used for monitoring the sum total of option trades at the CBOE (Chicago Board of Trade). The same technique can be used for individual stocks as well. It is basically the ratio of the number of open call positions relative to the number of open put positions on a given stock at a given expiry. With experience, it can be used as a bullish/bearish indicator of the underlying stock. Street Authority has some further information on the Put/Call Ratio. Schaeffer's Investment Research indicates the general market is strongly bullish. They have a series of stock screeners.

Bullish Stock Screeners
• Stocks with a high put/call ratio
• Stocks with high short interest

Bearish Stock Screeners
• Stocks with a low put/call ratio
• Stocks with low short interest

A reference is made to an article by Pan and Poteshman called The Information of Option Volume for Future Stock Prices where they say that they "performed daily cross sectional analysis on 10 years of CBOE data to reveal that doing nothing more than buying stocks with low put/call ratios and selling stocks with high put/call ratios generated a return of 1% per week." You have to read the full abstract for some caveates though:

We present strong evidence that option trading volume contains information about future stock price movements. Taking advantage of a unique dataset from the Chicago Board Options Exchange, we construct put-call ratios from option volume initiated by buyers to open new positions. On a risk-adjusted basis, stocks with low put-call ratios outperform stocks with high put-call ratios by more than 40 basis points on the next day and more than 1% over the next week. Partitioning our option signals into components that are publicly and non-publicly observable, we find that the economic source of this predictability is non-public information possessed by option traders rather than market inefficiency. We also find greater predictability from option signals for stocks with higher concentrations of informed traders and from option contracts with greater leverage.

One of the authors has another paper entitled Investor Behavior in the Option Market. One of the interesting points from the abstract is the remark "none of the investor groups significantly increased their purchases of puts during the bubble period in order to overcome short sales constraints in the stock market." Taken the other way around, puts are an easy method of getting around short selling restrictions on equities.

In visiting a related author, there is a recent paper called Dynamic Trading with Predictable Returns and Transaction Costs which discusses some portfolio optimization with a mixture of short, medium, and long term mean reversion based trades. This has nothing to do with options, but is an interesting article in itself which I wanted to keep.

Implied Volatility: Implied Volatility is the expected volatility of an option's underlying asset up to the option expiry. This tool can be used for inter-day and intra-day trading calculations. In the article's example, where the underlying is moving sideways, an increasing Implied Volatility could indicate some major move in the underlying. Various other relationships can be established as well.

Option Volumes: When looking at option volumes across the whole series of an underlying's strike prices and expires, look for unusual activity in volume. This means comparing current traded volume with average daily traded volume. It may be possible to see where traders are seeing resistance or support levels, with the interpretation being whether the volume is in puts or calls. If there are no related news, earnings events, or government announcements, then someone may know something.

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