Overnight Risk Premium in Equity and Commodity Markets

Over the last 20 years equity markets and ETFs did a significant part of their total performance over night. This article will examine the relationship of in-session moves vs. the out-of-session moves of ETFs and commodities.

The overnight risk premium

As an investor you can expect to get paid for taking risk. If someone sell its stock to you he gets the risk free return for holding cash,  but you will have to finance the risk of the stock moving against you. This risk is quite low when the market is open and liquid, as you could always sell the stock in case of an adverse movement. But when markets are closed you have to bear a higher risk as you will be bound to your position until the markets opens on the following day.

According to this theory the market returns over night should be positive, to compensate you for the higher risk of holding a position you can’t liquidate immediately. Let’s see if there is some truth in this theory and how big the overnight risk premium might be.

Test code and data

To test the theory I took daily market data from Refinitiv and used the Tradesignal code below to sum up the percent values of daily and overnight moves.

Tradesignal overnight performance test code

Tradesignal overnight performance test code

ETFs overnight risk premium

The chart below shows the outcome of the calculation for the QQQ ETF.  As it can be seen, the good performance over the last years has happened mostly when markets where closed. Even during the financial crisis the overnight returns have mostly been positive.

QQQ overnight risk premium

QQQ overnight risk premium


Having a look at the distribution of returns you see quite a different behaviour on e.g. a rolling sum of 10 day or night moves. The daily open to close returns show a higher tendency for big moves than the overnight move. So from a risk perspective the day session bears more risk than the night session.

QQQ overnight returns distribution

QQQ overnight returns distribution


QQQ is not the only ETF showing this excess overnight performance. The overview below gives you the data. The numbers show the sum of percent moves since 2001. (starting at 100)

SPY ETFs overnight performance analysis

SPY ETFs overnight performance analysis

A look at commodities

With futures and commodities this overnight effect is not as prolonged as with equities. Sometimes it even is non existent at all.

The chart below shows the overnight and daytime performance of the German Bund future. Beside the phase from 2015 to 2017 the overnight movement did not add to the total performance.

Bund Future FGBL overnight risk premium

Bund Future FGBL overnight risk premium


The december future on emission certificates (chart below) shows no significant overnight movement at all.

CFI2 Emissions overnight performance

CFI2 Emissions overnight performance

German power, yearly contract, shows a strong negative overnight performance.

F1BY overnight performance

F1BY overnight performance

Implications for trading

As the overnight move has got a significant impact on the total performance of equity markets, it will also have implications on the design of a trading strategy. A first implication of this overnight effect might be that you should not be short over night in equity markets, and you might not want to open your long position at the beginning of the day.  But keep in mind, if everyone knows the trick, this overnight movement will have implications for the first and last hour of trading. This will be a topic for another article…


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VIX futures are usually in contango, meaning that the next month future is quoting at a higher price than the current month VIX future. But this spread in not constant, and at the end of the expiry cycle an interesting VIX future spread trading idea comes to my mind…

End of cycle VIX futures spread trading

Having a look at the chart below you hopefully see the spread trading idea by yourself: Continue reading

How to detect unwanted curve fitting during backtest

Whenever you develop an algorithmic trading strategy, unwanted curve fitting is one of the most dangerous hazards. It will lead to substantial losses in real time trading. This article will show you some ways to detect if the performance of your algorithmic trading strategy is based on curve fitting.

Curve fitting – what is it?

Every algorithmic trading strategy will have some parameters. There is no way around it. You will have to decide what length your indicators have, you will have to specify a specific amount for your stop loss or profit target. Beside the actual rules of your strategy the chosen parameters will usually significantly influence the back-test performance of your strategy. And with any parameter you add the danger of curve fitting rises significantly. Continue reading

The Probability of Normality

When selling implied volatility you want the market to stay within the  expected range. But what is the historic probability that markets behave as expected? And what other analysis could be done to enhance your chances and find the periods when it is wise to sell an at the money straddle? This article will try to give some answers to this question.

The normal distribution cone

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Daily Extremes – Significance of time

Analyzing at which time daily market extremes are established shows the significance of the first and last hours of market action. See how different markets show different behavior and see what can be learned from this analysis.

Probability of Extremes

A day of trading usually starts with a lot of fantasies for the future, then we try to survive the day and end it with a lot of hope for tomorrow. This psychological pattern can also be shown when analyzing intraday market data. A high level of fantasies usually leads to a strong market movement, and thus market extremes can often be seen near the beginning or the end of the trading session. Continue reading

Factor investing in portfolio management

Factor investing has been around in portfolio management for some years. Based on algorithmic rules it became the big thing in trading and the ETF industry. But is there still some money to be made? Is small beta still smart or just beta? This article will give you a Tradesignal framework to test the factor investing ideas by your own.

Factor investing

Buy and hold has been a profitable approach in investing. But customers ask for more. So technical analysis came around and held up the promise that market timing is possible. As the returns did not match this promise, algorithmic trading was invented. Clearly defined rules made it possible to backtest any given strategy, and if done properly, the returns equal the ones promised during the backtest. But this requires a lot of intellectual power and relies on cheap execution, so these returns are usually not available to the public. Continue reading

Dollar Cost Averaging Investment Strategy – success based on luck?

This article is about the dollar cost averaging investment strategy and the influence of luck in it.

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To invest parts of your income into financial markets has been a profitable approach, especially in times when bond yields are low. One approach to do so is the dollar cost averaging investment strategy. Continue reading

Historic Bear Markets & Crashes (business as usual)

Since S&P500 has lost 20% from its top in 2018 and everybody is talking about bear markets. See what has happened in history.

We all have been spoiled by artificially low volatility over the last years.

Now people blame the gone-wild president or algorithmic trading for the market correction, but let us have a look into history to see how common market corrections have been over the last century. Continue reading

Bullish? Buy stock or sell put option?

So you are bullish on a specific stock, but you also have realised that timing is major problem? So what would be the best strategy to implement your bullish opinion but avoid the problems of any timing strategy?

Selling a put option might be the answer.

Bullish probability

For discussing this question let’s use the current Apple chart as an example. The question is, if you are bullish on apple, should you buy 100 Apple stocks right away or should you sell an at-the-money put option. To find the pros and cons of these two possibilities let’s have a look at some charts. Continue reading

Market crash or market correction?

Over the last days and weeks some traders have been worried if the currently ongoing correction in the markets will evolve into a crash, or if it is just a normal correction.

Crash or correction

The main difference between a correction and a crash is the panic level. But it is not the absolute level of .VIX, the CBOE implied volatility meter. It is the difference between realized and implied volatility that defines a crash which defines real panic. Continue reading

IV Percentile – when to sell volatility

Volatility trading: when to buy and when to sell volatility

You got to know when to hold ’em,
Know when to fold ’em,
Know when to walk away,
And know when to run.
(Kenny Rogers)

When to sell implied volatility

Volatility is a nicely reverting time series. If it is high chances are good that it will come down again. The only problem is to find out when volatility is high, and when it is low. Unfortunately there are no absolute levels, you can’t say that 50% implied volatility is high, as this specific stock might have an implied volatility of 80% most of the time. So you can only compare the current volatility level to historic levels and so define if volatility is currently high or low. Continue reading

Bet on Bollinger

Ever since John Bollinger introduced his Bollinger Bands in the early 1980s the bands have been a favourite indicator to all technical trades. This article is about the prediction capabilities of Bollinger bands.It researches the Bollinger breakout probability.

How good are the chances to be outside or inside of the bands in the future? How do these probabilities relate to the current position the market has got relative to today’s Bollinger band? What impact has overall volatility on these statistics? These questions will be answered below.

Bollinger Bands Breakout Probability

By definition of the indicator most of of the times the market will trade inside the Bollinger band. But this is only of minor interest to me. As a trader I am more interested on what will happen in a few days from now. Where will the future market be? Shall I bet on a breakout or sell a straddle?

So I did some tests on the forward prediction qualities of the Bollinger band indicator.

For all tests I used the 20 day, 2 standard deviations setting, which is the standard setting for most charting packages. Then I analysed the positioning of the market in 20 days form now to see if Bollinger bands can be of any help with these questions. Continue reading

Scanning for Support and Resistance Probabilities

I have been in search for a signal I could use for a short vertical spread or naked short option strategy. So my main concern has been to find a level, which will most probably not be penetrated over the next few bars.

This is what I came up with.

Algorithmic RSI Support and Resistance Levels

We are all familiar with oscillators like the RSI indicator. It gives an idea if the market is oversold or overbought. Continue reading

Backtesting Market Volatility

If you want to trade volatility, you can place a bet on the option market. Just buy an at the money put and call, and at expiry day you will either win or lose, depending on the actual market move since you bought the straddle and the price you paid for the straddle. To put it simple, if the market moves more than you paid for the two options you will win, otherwise you will lose. This article is about a back test of volatility.

The fair price for volatility

When I look at the S&P500 I could buy or short a straddle with 16 business days until expiry right now for around 70$. That’s the implied volatility.

When I look at the standard deviation of 16 day returns, using the last 30 days to calculate it, it shows me a volatility of around 30$. That’s historical volatility.

When I use my own fair bet KVOL Volatility, it gives me a volatility of about 50$

Now I got three measures for volatility, but which one is the best prediction for future market volatility? And how big will the error (=wins and losses) be if we place this bet over and over again?

Backtesting volatility

Placing an perpetual bet on future volatility using the payback profile of a short straddle will give me an idea on how good historical volatility and Kahler’s volatility was able to predict future volatility. In a perfect world this virtual test strategy should be zero sum game; if not, future volatility is either over or underestimated by these 2 indicators. Continue reading

Demystifying the 200 day average

The 200 day average is considered as a key indicator in everyday technical analysis. It tells us if markets are bullish or bearish. But can this claim be proved statistically, or is it just an urban legend handed down from one generation of technical analysts to the next? Let’s find out and demystify the 200 day moving average.

The 200 day moving average

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Seasonal trouble ahead

If a bitchy prime minister and a crazy president weren’t enough, for the upcoming months the seasonal chart is also indicating further price setbacks.

Seasonality of DAX

Analyzing the average monthly performance of the German DAX index a distinct pattern of seasonality can be observed. On average June has been down 0.6%, but the big trouble is yet to come.

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