Although factor models or smart beta strategies have been used extensively among funds & investors , the unexplored possible combinations of available factors are limitless. In our lab , we use 15 – 20 fundamentals & technical factors to feed an SVM(linear model) in order to extract possible trades for US market stocks. Some of these factors, like stock option volatilities, commodities futures & spot prices, some technical factors exhibit high predictive ability. For example we have strong buy signals for US steel producers and these signals have been there since November 2017 and are not related to president Trump’s tariffs. One such case is for Cleveland-Cliffs(CLF) , a US steel producer. Current price is 7.45 & according to our model we see its price reaching and even surpassing the 10 level within the next 6 months. We would open an options position buying the October call with strike price of 8 and call price of 1.09. For credit we would sell the October put with strike price of 7 and put price of 0.95. The position is a synthetic call (turbo charged long position) with high delta & obviously very risky. There is plenty of time(>6 months) for the increasing steel demand to lift up CLF price.
