Graduation Year
2020
Date of Submission
12-2019
Document Type
Campus Only Senior Thesis
Degree Name
Bachelor of Arts
Department
Economics
Reader 1
Professor Murat Binay
Terms of Use & License Information
Rights Information
2019 Konnor W Kwok
Abstract
The aim of this study is to analyze the validity of the “Heat Seeker” trading algorithm developed by Jon and Pete Najarian. In order to evaluate the validity of this algorithm, I conducted and event study to analyze abnormal returns. This study is based on firms designated by the Najarian brother’s algorithm for having unusual option activity versus a control group of comparable firms that did not exhibit unusual option activity in the same time period. In order to emulate this strategy, I analyze abnormal returns generated by both the experimental and control group. In the regression analysis, abnormal returns are benchmarked using the Fama-French 3 Factor Risk Model. The results of this study indicate that the “Heat Seeker” algorithm’s designated firm choices yield abnormal returns of 2.362% which are significant at the 1% level, while the control group generated insignificant 0.6168% abnormal returns at the end of the 10 day event window. To analyze whether the gains were temporary, the study was also conducted at the 20 and 30 day event windows. Abnormal returns decreased for unusual option activity firms to 1.96% while still remaining statistically significant. At the 30 day event window these returns again decreased to 1.74% but again remained significant. The control group also continued to decrease while remaining insignificant over the 20 and 30 days. These results indicate this there is a profitable trading strategy, the most profitable time period is at the 10 day event window.
Recommended Citation
Kwok, Konnor, "“Heat Seeking” The Truth: An Analysis of the “Heat Seeker” Trading Algorithm" (2020). CMC Senior Theses. 2322.
https://scholarship.claremont.edu/cmc_theses/2322
This thesis is restricted to the Claremont Colleges current faculty, students, and staff.