Victor Sperandeo

Victor Sperandeo, known as Trader Vic, is a professional wall street stock trader, speculator and investment advisor. He has written two books on speculation, and co-written a novel about finance.

Sperandeo uses a combination of fundamental and technical analysis. He subscribes to the Austrian School of Economics and the objectivist philosophy of Ayn Rand. He has traded stocks, stock index futures, commodity futures, and options on all these, both for his own account and as an advisor for others, including George Soros.

Career

Sperandeo began his career in 1968 as a broker at Filer Schmidt & Company selling options over-the-counter. The operation there, like most options firms of the time, was "making the middle", ie. taking client orders, matching them to sellers, and making the difference for the firm. Clients got a "nothing done" if a seller at a good price couldn't be found.

In 1971, Sperandeo and some partners started Ragnar Options Corporation. The firm offered a new policy of what they called "reasonable firm quotes". After quoting a price, if there were no sellers then they took the trade on their own account. In six months with that policy Ragnar became the highest volume OTC options dealer, and in 1973 the firm was able to buy several seats on the new Chicago Board Options Exchange when options became fungible.

Ever since starting to watch the tape at Filer, Sperandeo had been virtually a day trader. By 1986 he reached a pace of 30 trades a day in S&P futures and developed high blood pressure. For his health he switched to intermediate trend trading and made just 5 trades for the whole of 1987. But 1991, after the first gulf war, was very slow on the intermediate trend and he went back to day trading for a while.

Presently Sperandeo is CEO of Alpha Financial Technologies, a Dallas firm designing financial strategies in stocks and commodities for institutions. They developed the Diversified Trends Indicator (DTI), branded and promoted by Standard & Poor's.

Options

Options have always been one of Sperandeo's favourite trading vehicles. At Ragnar (above) in 1973 he disagreed with the purely mathematical approach of the then new Black-Scholes options pricing model and instead worked from supply and demand considerations and a view of market trend. His objection to the mathematics alone was that it didn't incorporate market psychology, which he believed drove options prices more than time premium.

For near expiry and just out-of-the-money options, Sperandeo regards option premium as the price of a kind of right to pure leverage for a period of time. Such options give exposure to large amounts of assets for modest outlays. Assuming a worthwhile trade is indicated by market analysis, then the risk-reward ratio for a short-term option may be as much as 100 to 1. A typical ratio, the kind he targets, would be more like 5 to 1, and taken only on small trades.

Market Analysis

Sperandeo's approach to markets is a combination of economic fundamentals and technical analysis. He advises against trading solely on just one of the two.

His economic analysis may differ from conventional wisdom, and he views government intervention as often wrong-headed or actively harmful, but that doesn't mean such conventional fundamentals cannot be traded. He quotes George Soros, "The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited."

In technical analysis Spreandeo follows various standard technical indicators and methods. The following are methods of his own creation.

Trend

The idea of a trend is so intuitive as to never get a formal definition in technical analysis, even not in the classic "Technical Analysis of Stock Trends" by Edwards and MacGee. Sperandeo makes the following definition,

* An uptrend is a sequence of rallies to successively higher highs, punctuated by pullbacks, with each pullback low ending above the previous pullback low.

and conversely for a downtrend,

* A downtrend is a sequence of declines to successively lower lows, punctuated by rallies, with each rally high ending below the previous rally high.

From the definition of a trend, a trend line can be given a precise definition.

* An uptrend line is drawn under prices, joining the lowest low to the highest pullback low which does not pass the line through prices in between. The line is then extended past the date of the highest high.

The condition that the line must not pass through prices between the points it joins means that it's not necessarily the most recent low which is joined, but might be only a prior one. When the line is extended to the right, it might then pass through prices, that's a possible indication of a trend change. A downtrend line is defined similarly,

* A downtrend line is drawn above prices, joining the highest high to the lowest rally high which does not pass the line through prices in between. The line is then extended past the date of the lowest low.

1-2-3 Rule

Sperandeo identifies a change of an uptrend as

: 1. Trend line (defined above) broken.: 2. Prices no longer making new highs.: 3. Prices fall below a previous minor rally low

Or conversely for a downtrend

: 1. Trend line (defined above) broken.: 2. Prices no longer making new lows.: 3. Prices rise above a previous minor rally high.

Either of 1 or 2 is a probable trend change. Two of the three conditions is an increased probability of a change. All three is the definition of a trend change.

2B Rule

Point 2 above is essentially a failure of prices to carry past a previous rally (or previous selloff). Sometimes prices go just past then immediately reverse. Such a case is Sperandeo's rule 2B,

* 2B. If prices rise just above the previous rally high but then immediately fall back down.

Or for a downtrend change,

* 2B. If prices fall just below the previous low but then immediately rise back up.

Sperandeo regards 2B as a powerful pattern, and in assessing the probability of a trend change he weighs it higher than any other single criterion. The advantage of a 2B is that it lets the trader get almost the exact top (or bottom) of a move (with a stop-loss at the failed high or low). Even if it worked only 1 in 3 times the reward side is excellent due to getting in early.

Four day rule

The four day rule is Sperandeo's favourite pattern for a change in intermediate trend. The rule is

* In an intermediate trending move, a reversal in the form of 4 days against the trend is highly likely to be a trend change.

This rule is based on his examination of trend changes in the Dow Jones Industrial Average from 1926 to 1985. He defines a variant as the "four-day corollary",

* In an intermediate trending move, a sequence of 4 days with the trend followed by 1 against is highly likely to be a trend change.

This rule is looking for a climax over a series of days, instead of a single high-volume climax day.

Bibliography

* "Trader Vic – Methods of a Wall Street Master", John Wiley & Sons, 1993, ISBN 0-471-30497-2.

* "Trader Vic II : Principles of Professional Speculation", John Wiley & Sons, 1994, ISBN 0-471-53577-X.

* "Cra$hmaker: A Federal Affaire", Victor Sperandeo & Alvaro Almeida, 2000, two volumes, ISBN 0-9671759-0-9. A novel about an engineered crash of the Federal Reserve system.

References

* "Trader Vic II", cited above.

External links

* [http://aftllc.com/ Alpha Financial Technologies web site]
* [http://www2.standardandpoors.com/servlet/Satellite?pagename=sp/sp_product/ProductBodyTemplate&c=sp_product&cid=1069079164618&b=10&r=1&l=EN Standard & Poors Diversified Trend Indicator web page]
* [http://www.crashmaker.com/ Cra$hmaker book web site]

Further reading

cite book
last = Schwager
first = Jack D.
authorlink = Jack D. Schwager
title = The New Market Wizards
publisher = Wiley; New Ed edition
date = 1995
location = 16 pages
id = ISBN 0-471-13236-5