Disclaimer: I am not an investment advisor. When I describe my own trading activities, it is not intended as advice or solicitation of any kind.

29 November 2010

CS|MACO last week

Last week, SPY closed below its 25-day moving average on Tuesday, so I closed the CS|MACO long SPY position Wednesday morning.  Wednesday, SPY rocketed higher, closing back above the 25-day; but the AAII.com survey also came out Wednesday after the close, and individual investors have gotten bullish enough again to make the CS component bearish.  Bearish plus Bullish = Flat, so CS|MACO is once again on the sidelines.

CS saved money that MACO would have lost, since SPY has closed lower than Wednesday the succeeding two trading days.  These periods of consolidation, where SPY hovers around even for a while, can get expensive.  I'm glad I have those individual investors to fade.

Speaking of fading individual investors, the topic of conversation over coffee at the office this morning was privatization of Social Security so as to give individuals the ability to manage their own retirement investments.  The general consensus is that this would be a great thing... for us professionals.  Investing well is hard: like any other probability-based activity, looking backwards in time at what you should have done makes it look very easy.  But actually doing the right things traveling into the future takes a great deal of effort, discipline, time, and -- dare I say it -- luck.
I'm trying to stay away from the political quagmires around dinking around with Social Security.  Whether I'm for it or against it doesn't change my premise here, which is that individuals managing their own money, in the aggregate, will severely underperform just about any index you care to use.  Despite my "morons" tag I throw in whenever I talk about individual investors, it isn't because they're dumb.  It's just that they have other things on their mind than investing.  The folks taking the other side of their trades (i.e. fading them), on the other hand, are professionals.  They spend all day every day thinking about markets, and most of them have vast resources at their beck and call for maximizing their return.

The reason investment banks such as Goldman Sachs have done so well and generated such staggering amounts of wealth is because they're playing against amateurs: you.  So the next time you get the urge -- if you ever get the urge -- to argue for the privatization of Social Security, think about who is more likely to profit in a trade between you and Goldman Sachs.  If you answer, "Me! I am! I'm above average!" then I applaud your confidence.  But please don't be insulted if you find me on the other side of some of your trades.

22 November 2010

Collar Trade for the Month

This weekend was expiry for November 2010 options, and the collar trade was short Nov 53-calls.  Since QQQQ closed on Friday at 52.47, those calls expired worthless.  I sold new Dec 54-calls this afternoon for 38c/share.  With QQQQ trading at 52.70 when I placed the trade, this just barely violated my "at least 2.5% out of the money" rule.  But the next strike up (55) would have been 4.4% out of the money and barely worth the commissions, so I felt it was close enough.

Not really anything else to say there... it's a pretty mechanical trade, and there was nothing all that complicated to consider this month.

19 November 2010

Trading Diary for Nov 19

On Tuesday, I closed a losing CiG trade at the open based on a view that the S&P Futures (ESZ0) were going to sell-off throughout the day.  It turned out I was right, and by the end of the day CiG had given a new Buy signal.  Following this signal with real money might have been psychologically difficult, since all Tuesday long the market was acting like the sky was falling; but that's the essence of a buy-the-dips strategy, and with paperMoney the buy decision was an easy one.

I closed that second long ESZ0 position on a standard CiG exit signal yesterday afternoon for a $900 profit.  I ended up with a $500 profit per $5500 in margin for the whole trade starting on Friday, which ends up being an overall above-average winning signal.  If I had gritted my teeth and held on instead of getting out Tuesday morning and getting back in Tuesday afternoon, the trade would be down $87.  Going with one's gut usually doesn't work this well, so I'm not sure whether to be proud of myself or not.  But I'm glad it worked out this time.

Yesterday's market was a perfect inverse of Tuesday's: everything was coming up roses, and nothing could ever stop the stock market's inevitable return to massive wealth-generating territory.  You know you're a contrarian if you read that last sentence and a little voice in your head screams "SELL"; in this case that was exactly the right thing to do.  At 9:05 CST, ESZ0 was back down to 1188.00, right back where it was when I dumped it on Tuesday.

I wonder if I'll get another buy signal today...

On Wednesday, results from a new Independent Investor Survey were released and posted on aaii.com.  Not surprisingly, the rapidly falling S&P markets over the past week soured the backward-looking investors' outlook for the future; the bullish percentage dropped all the way to 40%, a massive 17.6% drop from the previous week.  This was enough to move CS from "initiate sell" to "no initiate, no exit".  Meanwhile, the bullish MACO signal had evaporated on Tuesday when SPY closed below its 25-day moving average.  So that meant the trade went from being locked flat due to opposing Sell!/Buy! signals to being flat due to apathetic meh/meh signals ("meh" is an official trading term I just made up that means "no clear view either way").

Yesterday, however, SPY shot up past its 25-day again and closed above it; this gives a clear new "Buy!" signal from MACO, and CS won't change its opinion until next Wednesday.  I should have bought SPY on the open today, but quite frankly I forgot all about it.  This calls for another official trading term to be thought up: I'll call this "psychological slippage".  In this case, however, I saved myself a little money since SPY was about 50c cheaper than yesterday's close when I realized my mistake and opened the position.  I'll take it.

16 November 2010

Big News for Boring Trades

It's been a busy few days.  The CiG trade finally fired a signal on Friday, but I was in Colorado all weekend so I didn't have time to write it up.  Then I came home with a head-cold just in time to support a major roll-out at the office that went pretty wrong.  By the time I got home last night all I wanted to do was sleep.  So now here we are.  Excuses excuses.
Saving Money While Asleep
First the CiG trade on Friday.  You may recall I decided to run it on S&P futures as well as treasury note futures, because I feared that treasury notes would bore me to death.  On Friday, it signaled a buy-on-close on the S&P, so I did.  Things were looking good Monday morning, but not good enough to reach the target exit signal.  By this morning, the whole world was fleeing from risk again and the stock market opened significantly lower.  Since there are no clearly-defined stop rules, I decided to sell the position for a loss shortly after the stock market opened.  I felt that what we were seeing was not a momentary blip but in fact a setup for a selling day.  I was right: I sold the position at 1188 at 9:00.  At the 3:00 close, ES was down to 1176.

Because CiG tries to buy on dips, though, it had another buy signal come out on ES today.  Pleased at my ability to dodge at least some of the sell-off today, I decided to get back in with a new long position at the close.  So I'm still long from Friday, but I took a 12-point ($550/contract) hiatus.  That's almost a winning trade all by itself.  Not a bad money-saving siesta.

No joy in treasury note futures yet.  Yawn.

Insert Spy Pun Here
CS|MACO, another boring trade, is finally starting to see some life.  It has been locked flat while SPY has rallied over the last 3 months, due to the bearish signal coming out of the contrarian investor sentiment component and the bullish signal coming out of the moving-average-crossover component.  One of those two opposing forces was removed today when SPY closed below its 25-day moving average, breaking the SPY>25MA>200MA relationship that has been in place since October 4.  That's not a sell signal yet, though, because the terms of the trade state that I won't enter a position on the removal of a signal.  I need the CS component to affirm its bearishness tomorrow after the close before I can short this puppy.

A Boring Iron Condor is a Good Iron Condor
Unfortunately, this one is starting to get a little exciting.  When I opened the position I groused about my poor judgment a little bit regarding the low price I was paid to initiate.  Sure enough, the VIX almost immediately rallied while RUT flagged, causing my delta to increase as I rode the curve down toward my put spread.  Delta of +16 this morning, so time to adjust already.

It seems ridiculously early to be thinking about exit orders, but I could buy back my call spreads for only 60c already; so I put in some limit orders to buy back at 20c.  That doesn't help my delta, but it does lock in a profit on half the trade - and with some careful adjustment the other half might not cost too much.

As for the put spreads, I looked at the mouse-ear like I used last month and decided it was overkill: RUT was 710 or so when I was adjusting, and my put spreads are 660/650s.  A mouse-ear would throw my delta so horribly negative that I would have to buy back most if not all of my call spreads to contain it.  Plus it was crazy-expensive, at $21.

The next thing I looked at was simply reducing the call spread position.  That would certainly help the delta and the feel of the position, but I felt the cost was a little high.  A variant of this is to roll the call spread down a few strikes, also increasing the position a bit to finance the roll.  This increases risk, and I wasn't happy with the outcome or my perception of the risk-reward trade-off.

I also looked at Wolfinger's Kite Spread, which involves a naked long OTM put and a credit put spread even farther OTM with 3-4x the size on it for financing.  That had some real potential, but it really hurt the theta.  Ultimately I decided I could achieve my delta goals and flatten the value graph best by putting on some 630/640 debit put spreads.  I bought just enough (at 1.90) to get the delta under +5.  By the close, the delta was back up to +5 again, but that's within my parameters.

Boring News for Big Trades
I'm still not holding GLD calls, and I'm glad.  I'm looking for bargains in some of the mining companies right now, but I haven't had time to look very hard yet.  Earnings season is upon us, and if I can capture a couple of positive earnings surprises before the event-driven IV goes through the roof, I'll be a happy camper.

08 November 2010

January Iron Condor

As I planned on Friday, this morning I closed the rest of my December RUT iron condor position for a total profit of 86c per original contract.  I opened the December position on 6 October, so that means I had just about an 8% return on initial margin over the past month.  By normal investing standards, that's an amazing return, but let's put this in context: the same strategy lost 7% on its November position and just under 2% on its October position.  To a normal buy & hold investor, this is pretty frightening levels of risk; to a professional in the futures industry that plays poker and trades options on the side, 8% in a month is bordering on boring.  All a matter of perspective.

On 15 October, I made a pretty big delta adjustment by buying a 760 call.  The original call spread was 770/780, so this is what is known as a "mouse-ear" adjustment.  This is one of the most expensive adjustments that can be made, but also one of the most effective.  I feel like given the market action during that time I should have taken a less extreme approach, but after the prior two losing months I was a little gun-shy.  Despite leaving some profit on the table by solving a minor problem with a big hammer, my confidence definitely benefited from a nice smooth month of price action resulting in a near-target profit.

I also opened a January 2011 position (650/660/810/820) this morning, although with implied volatility as low as it is I don't feel that great about the price I managed to get for it: only a 2.90 credit.  This is a little on the low side, and that reflects the low VIX environment that we're in.  I probably should have waited until VIX popped back up some, but this puts me into unfamiliar territory: I know that a good price during this time-frame is about 3.50, but I'm not quite sure what a good price is a week or more from now.  Rather than sail into unfamiliar waters, I chose to limit my profits over the next month or so.  I'm not sure that was a great decision, but I will persevere.

This is why we paper-trade.

By the way, if anyone tells you how easy it is to make money with Iron Condors, don't believe them - and definitely don't give them any money to manage.  It is a very difficult strategy that takes a lot of creativity and experience to manage effectively.  I'm certainly not an expert, and it might be tempting to discount my assertions of how difficult it is; but clearing companies' databases are littered with busted accounts that jumped into the trade without an appreciation for its subtlety and dangers.  I am determined to learn this trade and how to profit with it, and to succeed where so many others have failed.

Speaking of boring trades, CS|MACO is still dead-locked flat as CS is screaming short and MACO is screaming long.  Remember I said a trending market is not CS|MACO's friend? Yeah.  The other boring one is the trade I wrote up in Collaboration is Good, which apparently I haven't named - let's call it CiG.  No trades in 10-year note futures there, either, so I think I'll start running it in S&P and Eurodollar futures also.  I ran back through the chart for the last couple of weeks, and it wouldn't have traded anyway, so I haven't missed anything.

07 November 2010

Ranty McRant, volume 1

It's 7am on a Sunday, I've been up for 2.5 hours, and I'm feeling ranty.  The bintgoddess is very familiar with this situation, and I think (I hope) she finds it adorable; but this is the first time I've allowed my rantifications an outlet into the blog, so it feels a little special somehow.  This will be a little less researched than my other entries, and a little more free-association.  You've been warned.

Today's topic: hardware vendors and their sycophantic adoration of Microsoft Windows.  Yes, I realize I'm a Microsoft shareholder, and you'd think that it would make the most sense for me to support the obligatory installation of Windows on every machine created, since doing so would increase my shareholder value.  But let's face it, they don't need me.

My birthday is coming up, and that seems like a good excuse to replace my aging and case-cracked Toshiba Satellite laptop.  It's a ponderous beast, weighing in at about 75lbs and boasting a clock speed of about 15Mhz.  It's so old that it sports stickers that say, "Designed for Windows XP (Windows Vista Capable)", and "Intel Celeron M inside".  That's really something to be proud of, right there.  Sometimes the power cord gets tangled and I have to unplug it to untangle it.  Depending on how many seconds it takes me to do this, the laptop might stay on, or it might go into what I call Dirt-Hibernation mode.  In this mode, it thinks it's hibernating, but it never comes out (making it more like a dirt-nap).  It's a fun and useful piece of technology, especially for testing the effectiveness of rage management techniques.

I've been considering replacing the (no exaggeration this time) 40GB 5400rpm laptop hard drive with a 100-160GB SSD, figuring that doing so would still give me benefits when I eventually replace the thing.  But SSDs aren't that cheap, either, and I hate the thought of buying more hard drive storage... didn't I just wipe 21 HDs so I could dispose of them? I think I did.  What I really want is a sexy new laptop, something lighter, faster, more powerful, with a holographic screen that projects out to a 40" 3D image that hangs in space and lets me interact with it via telepathy.  Failing that, maybe one of those HP Envy notebooks.

So after doing about an hour of research, I flopsied over to the HP Store to configure a notebook just to see what I could expect to pay for the closest (albeit very distant) approximation to awesomeness.  Hoofah, this thing is pricey:

  • Long string of i5-Qwhatever-the-hell processor - god, Intel, SERIOUSLY?
  • ATI Mobility graphics - my only choice
  • 6GB of memory - upgraded from 4GB
  • 500GB 7200 HD, because this was the cheapest option and SSD was both $525 (omg) and whiteboxed (so it sucks)
  • No office software at all
  • Cheapest battery available
  • Several lines of "options" which were the only "options" available, including the screen, the DVD drive, the webcam, the wireless card, and (yes seriously) the keyboard.
  • Microsoft Windows 7 Home Premium - cheapest option
  • Adobe Suck-It We Own You Shop 8 Premiere

Total price: $1300.

Now, I'm a Linux guy.  I run Ubuntu 64-bit on my desktop machine, and the current doorstop-I-mean-laptop has just had its Ubuntu replaced with Mint this morning.  At the office I run a real-time variant of Red Hat Enterprise, and the file server in the house is running FreeNAS (based on FreeBSD).  Why the HELL would I want Windows 7 on my new laptop?  Is it because I like ad-ware like Norton Trial Edition popping up every few minutes to tell me that since I chose the most vulnerable operating system on the planet, I should pay an expensive subscription to protect it?  Is it because I like bloat-ware like Microsoft Office that lets me do really complicated things like write text for the low-low cost of almost 500 dollars, and several GB of hard drive space, and several hundred MB of memory?  Or is it because I want to respond to the daily Adobe pop-ups telling me I need to upgrade Flash, Streak, and Fondle, because this computer belongs to Adobe, after all?

No thank you.

I build my own desktop PCs so that I can put exactly what I want INTO the machine, and exactly what I want ONTO the machine.  When I boot it up, it does what I tell it.  I'm not naive enough to think that it does ONLY what I tell it - even Ubuntu has marketing-related goals that are not completely in line with my own.  But the "partnering" level is low enough that I view it as an acceptable trade-off.

Let me get this clear in everyone's heads: Linux is like over-the-air PBS.  It's mostly ad-free, although it has a few "brought to you by"s.  It costs nothing to enjoy, but it's considered good form to donate time/money/experience to help others enjoy it too.  And it gives a different, somewhat less accessible, experience from Windows; but for some people that experience is far better than Windows'.  On the other hand, Windows is like Cable.  It costs money, it has lots of options that all cost more money, it has a LOT more commercials than PBS, and the cable goes out a lot more than the transmitting tower fails.  You can find the same level of programming on cable/Windows as on PBS/Linux, but you have to look harder through the gunk.  It's extremely accessible - you can surf for hours without asking yourself a single thought-provoking question - but some people actually like thought-provoking questions.  I don't know any people like that, but I hear they exist.  They probably vote Green Party or something.

Anyway, I prefer Linux, and this is what I install into my home-built desktop machines (unless the bintgoddess requests otherwise, obviously).  But a laptop is tougher to build.  To make it all work together seamlessly, to keep it light, and to keep it from overheating, a lot more engineering goes into it from the hardware integrators.  I can't go buy a bunch of laptop parts from NewEgg and end up with my perfect laptop, so that means I have to go to the car dealership - er, I mean, computer retail channels.  There, I assume the position and start sucking down the "partnering", the "up-sells", and the "value-adds", just like everyone else.  Ugh.

My first action with this laptop would be to wipe the hard drive of all the crap-ware, and to install a nice clean Linux variant (probably Mint, since that's what I'm playing with at the moment).  Of course that means if I ever need service, I'll need to reinstall the Redmond Mothership because, obviously, anyone using Linux must be crazy.  But let's face it - the probability of being able to get laptop hardware serviced WITHOUT losing the contents of the hard drive is about 0.00004% (this is an actual statistical figure based on 15 zillion studies, not an exaggeration).  And barring actual hardware failure, there's very little that an HP-authorized service technician can do (other than screw up my computer) that I can't do just as well.  On second thought, I can screw up the computer about as well as him, too.  You're not skiing hard enough if you don't fall, and you're not really using the computer if it successfully boots every time.

But on a $1300 laptop, WHY am I being forced to get Windows?  I know it isn't free - Microsoft is charging HP a super-low OEM price, and HP is wrapping a profit-generating higher price into the price of my laptop.  Accepting a laptop with this operating system on it feels to me like taking out a $100 bill and setting it on fire.  I don't like that feeling when I'm in a casino, so I play poker, and I don't like it when I'm configuring computer hardware. 

Let's be really clear here: I am being charged money for something that I actively do not want.  I do not want it so actively that I am willing to spend my own time and effort to remove the offending product, assuming risk of loss (via supportability) in the process.  What kind of reasonable consumer would enter into a transaction like this?  What kind of reasonable retailer would EXPECT a consumer to enter into a transaction like this?

Wasn't there a big lawsuit recently about hardware vendors being required to give rebates to consumers that chose not to have Windows pre-installed?

My coffee is running out and my rant is running down.  Let me close with the chat transcript from my Live Chat support session.  It's not that exciting, but I feel like I need to have something other than my own prose in here to liven things up.

11/07/2010 04:56:09AM Session Started with Agent (Rachel P.)
11/07/2010 04:56:09AM Mark: "Configuring an Envy 14 notebook"
11/07/2010 04:56:15AM Agent (Rachel P.): "Thank you for contacting the HP Home and Home Office Store Chat. My name is Rachel."
11/07/2010 04:56:20AM Mark: "Hi Rachel."
11/07/2010 04:56:37AM Agent (Rachel P.): "I'm sorry. Can you please elaborate on your question so that I may better assist you?"
11/07/2010 04:56:38AM Mark: "I'm planning to replace Windows with Linux on this machine. Is there any way I can avoid buying Windows?"
11/07/2010 04:57:32AM Agent (Rachel P.): "I understand that you want to take out the Windows 7 from the configuration on the HP Envy 14 notebook, right?"
11/07/2010 04:57:41AM Mark: "right"
11/07/2010 04:57:49AM Mark: "I intend to install Linux."
11/07/2010 04:58:02AM Agent (Rachel P.): "I am sorry, Mark, but there is no option for you to take out the OS."
11/07/2010 04:58:23AM Mark: "OK, thanks. I will look at other companys' notebook options, then."
11/07/2010 04:58:46AM Agent (Rachel P.): "Do you have any other questions that I can help you with? I want to make sure that I have completely addressed your concern today and are satisfied with my service."
11/07/2010 04:59:10AM Mark: "Well since I am no longer buying an HP notebook, I can't imagine what you could help me further with."
11/07/2010 04:59:20AM Agent (Rachel P.): "Since you don't need any further assistance, would it be okay if I close this chat?"
11/07/2010 04:59:26AM Mark: "yes, have a nice day"
11/07/2010 04:59:28AM Agent (Rachel P.): "Thank you once again for using HP Home & Home Office Store Chat. Please sign up for our award-winning e-newsletter which features the latest products and promotions for our store. Visit our website at: www.hpshopping.com/newsletter"
11/07/2010 04:59:29AM Session Ended

05 November 2010

Iron Condor: December Adjustments

The upside protection I added to the December iron condor on October 15 has proven to be a profitable adjustment.  As the market wandered higher, I was able to bleed off theta while keeping the position pretty close to delta-neutral.  I've had some low-ball exiting orders working for a while, since getting out is still in front of me, and yesterday one of those orders filled, closing out a portion of my 620/610 put spread and locking in a nice profit on that portion. 

My work schedule yesterday was weird, so I didn't actually notice the fill until this morning before the open.  When I came in this morning, I discovered that between the closing of part of the put spread and the traveling of the market down the curve toward my call spread, my overall position was -20 delta.  That's a lot more delta-negative than I want it to be, so I started looking at ways to adjust it again.

My original plan was to bring the delta back to nearly 0 without turning the theta negative or increasing the overall risk, since after all I have only a little more than a month before expiry, and increasing position at this stage would be kind of dumb.  But the more analysis I do, it seems the best choice is to just close the position entirely.  From where the market closed today, net liquidation value on the position is about 82c per contract.  That's pretty close to the 1.00/contract level that I said made me "thrilled", so that's just fine.

I had already started working orders to adjust the delta before the close, and when I do that I always make the position-decreasing orders more aggressive than the position-increasing orders.  Today was a good example of why I do this, since only one of my orders filled and I didn't have a chance to adjust my other orders to make sure they filled on the close.  As it turns out, that's just as well, since I think I want to cancel my position-increasing orders anyway.

My original plan was to roll the 770/780 call spreads up to 790/800, also decreasing the position.  This costs a fair amount of cash, but it also brings my delta up to +4 again, and makes theta a very healthy +9.  But what am I really gaining by opening that 790/800 position?  My thinking was that I needed to partially finance the 770/780 call spreads, but if I can make 82% of my "thrilled" level just by closing the position, there's no financing I need to do.

So here's my current position, which reflects the partial closing the 770/780 call spreads, but nothing else.  Delta is all out of whack the other way, at +17, and theta is right at 0.  I've got orders working to close the rest a little behind the market.  Once it's open on Monday, I'll adjust everything around to be just about at the market, and put this December iron condor to rest.

Then I'll start looking at opening a new January position.

In other news, I was at the FIA Futures and Options Expo on Wednesday and chatted a bit with the people at the Think or Swim booth about why they're so mean about screen shots.  I actually talked to a young lady who works with Scott Garland, and she indicated that everyone there is nervous about overstepping their bounds with TD Ameritrade, the recent purchasers of Think or Swim.  So far TDA has more less left them alone, but the concern is that they'll get a lot more involved in the day-to-day business instead of just treating ToS like a profit center.

I understand their perspective, but I'm still a little steamed that I can't accurately depict my current position value here because of their concerns about intellectual property.

01 November 2010

Happy 1974

I've been conducting a fun little project over the past 6 months.  I went and looked around at all the bands I knew about or had a few songs or an album or two from, especially the older heavy metal stuff, and built a list of all the years on which they released albums (thank you Wikipedia!).  Then I started at the first year I had, 1968, and bought all the albums I lacked from that year.  Each month, I move forward another year.

I've really enjoyed the Black Sabbath and ZZ Top, but Deep Purple and The Who are starting to get on my nerves.  This month is 1974, so I bought the following:

Deep Purple: Burn
Deep Purple: Stormbringer
(seriously? two in one year? how high could that quality possibly be?)
Judas Priest: Rocka Rolla

OK, full disclosure, I skipped the Deep Purple.  I played samples on Amazon and decided I'd rather have the $20 than the albums.  They have a few songs I really like, but there's a pretty big percentage that makes me want to break a window with my body.  That raises the total cost of those $10 albums quite a bit.

Rocka Rolla is Judas Priest's first album, and the first JP album I've ever owned.  I know later on in their career Rob Halford's voice is going to drive me crazy, but right now it's interesting to hear them in their debut form.  I like to hear the original recordings of huge bands before they were huge, and compare the sound to what they evolved into.