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.

31 August 2011

We Won

There's a little spike in internet traffic caused by an article by a Gizmodo intern about how she found herself on a date with John Finkel, the 2000 world champion of Magic: The Gathering. Finkel was once called by Magic head designer Mark Rosewater: "the most naturally gifted player the game has ever seen." In general, the online community is furious at how shallow and geek-unfriendly this intern appears, and I have to admit I found myself agreeing to a great extent. Some of the bile-spitting critiques of this article are fantastic, but do yourself a favor and read the original first. Then Google Alyssa Bereznak, the troll who originally posted it, and you'll find an array of enraged people suggesting that maybe being a world champion at something is more notable than what that activity is.

How many of us can say "I am the best in the world" at ... anything? It seems to me that it is a big mistake to fail to appreciate someone who has the dedication, drive, and talent to become a world champion of something. That combination of qualities is rare, and champions can often reach unusually high skill levels in other activities as well.

What if he pursued the activity of making you happy with the same drive and determination?

And to those of us who have been the John Finkels of this story, I say: Stop apologizing. If you're good at something, take pride in it. Anyone who belittles your accomplishments because they aren't interested in doing it themselves probably doesn't deserve to date you. And anyone who judges a world champ based on their own prejudices about others who pursue the same activity? They don't even deserve to know you.

This is a lesson I myself am only learning now, in my 40s. I am a software developer, and in my own humble opinion I'm a pretty damn good one. I won't try to convince you of that, because that's not the point - just take as given that I'm a talented developer. The problem is that for the longest time I avoided identifying myself as a programmer in social situations. My excuses were that no one would understand what that meant, or I was escaping the natural "can you fix my computer" follow-up. But truthfully, I was afraid of being judged, categorized, and discarded before the new acquaintance got to know me.

This may have made sense in High School, in the 80s (yes, the 1980s; yes, there were computers to program back then; no, they didn't need to be hand-cranked), but as one of the blogs above put it, "the first geek wave is in our mid-40s now. WE OWN EVERYTHING. ... WE WON."

I have recently made a personal resolution to stop being ashamed of my own strengths. When asked what I do for a living, I will no longer vaguely mumble that "I'm in computers." I will no longer immediately change the subject. I will certainly not categorize myself by saying, "oh, I'm a software guy," like I'm apologizing for something. Instead, I will enthusiastically explain (briefly) that I write trading systems for a futures trading firm. If that doesn't interest my conversational partner, then neither of us have spent much time on the topic, and we can move on. But I might discover that they have a common interest, and we can enjoy discussing things that we both find very fascinating. And if my life puts someone off or makes them think less of me as a nerd or a geek, they can pound sand.

Join me.

05 August 2011

Another Flurry of Trades

Remember a couple of days ago I said I thought the stock market was overpriced and due for a correction?  Well I certainly didn't expect it so suddenly.  Since my blog post on 2-August, the S&P has shaved off 6% of its value, dipping as low as 1163.25 (futures) on an intraday basis.  This intraday low represents a -13% peak-to-trough return in the past month. Meanwhile gold rallied hard (at first), making me very glad I hadn't taken my entire call position off.  I had another flurry of trades the last couple of days, most of them defensive.

S&P 500 (proxied by SPY) since 1-Jan-2011

Yesterday, my GLD calls were close to triple the price I paid a few days prior.  I was working a 400% profit order on 25% of them to secure a profit and let me continue to ride the train as long as I could.  As they hit their high, rumors emerged that big London-based hedge funds were getting margin calls on their gold positions.  Our company's market analyst mumbled the announcement about the rumors (a frequent problem lately), and NeighborTrader and I thought he said that the CME was raising its margin requirements on gold futures.  Either way, gold immediately went into a hard sell-off, and I was reminded of what happened to silver when the CME raised its margin requirement a few months ago.  Now gold today is a very different market than silver then, but that wouldn't stop a mini-panic from pushing gold down and keeping it there until my calls expired worthless.  To control the cost of this possible outcome, I sold enough calls to guarantee a profit, getting a trade price only 4c below the high.  Immediately afterward, the calls sold off and are now trading 33% lower.  Whew!  I still hold a little less than half my initial position at about double my purchase price, and if I let it expire worthless I will still make 6% profit - enough to cover commissions.

Gold (proxied by GLD) since 1-Jan-2011

The day after SPY opened below its 200-day moving average, causing CS|MACO to close its long SPY position, the AAII released its weekly investor sentiment survey.  Over 10% of investors stopped being bullish this week, which was enough to get a Buy signal out of the CS component.  Buy + Flat = Buy, so yesterday I bought SPY back at 124.30, which seemed great at the time (it was 3.50/share lower than where I sold it), but isn't looking so wonderful now that SPY is trading at 120.

I was working target exit orders on both of my SPY put positions, which I mentioned in the previous post; I never dreamed both of them would fill yesterday, but then yesterday was an unusual day.  Despite making a combined 56% on those puts, by the end of the day I was kicking myself for not holding the second batch until the market stabilized.  I left a significant amount of money on the table: the position I sold for $7/share is now worth $10.50/share, and the one I sold for $6/share is now worth $8.25/share.  Sigh.  NeighborTrader pointed out that I can't always sell the high, and I suppose he's right.

Yesterday crude oil dropped by $5.50/barrel, or -6% *on the day*.  If you need any confirmation that the global economy is slowing into a new recession, this is it.  Demand for crude waxes and wanes based on industrial activity, and the capital markets are exceptionally good at predicting and magnifying changes in demand.  When crude sells off hard over several days, it's a very bearish economic signal.  On 26-July, crude oil futures hit a high of 100.62/barrel.  Today's low in crude was 82.87: -18% in less than 2 weeks, a very bearish signal indeed.  I had an order working to buy USO at $35, which was filled yesterday during the craziness.  I'll buy more when I think we're near the nadir of the recession.

Oil (proxied by USO) since 1-Jan-2011

After the massive sell-off yesterday, I came in this morning expecting:
  1. a better than expected monthly payrolls number
  2. a big number-driven rally in the stock market
  3. a post-number sell-off to yesterday's close price or lower by the end of the day.

In fact I was so sure about this that I bought Nasdaq futures at about 7:15, 15 minutes before the number.

What happened was:
  1. a better than expected payrolls number (+117k/9.1% vs expected +85k/9.2%)
  2. a big number-driven rally (S&P rallied about 19 points, Dow rallied about 280)
  3. the craziest roller coaster of a day I've seen since the Flash Crash; S&P has had a 60-point range, Dow has had a range of about 460 points.  It closed 3 points below yesterday's close.

I sold back my futures immediately after the number for a $430/contract profit.  It's nice to be right every once in a while, and it's even nicer to be able to make a little money doing it.

The final trade of the day today was that Xilinx (XLNX) sold off enough to hit my target exit on the put position I've had there for a while.  At last glance, I sold the high price of the day in that option market.  That doesn't really make up for the SPY puts, but it's a start.

03 August 2011

Happy 1981

July was 1981 in the Year a Month project, but I was so busy listening to Daemon and FreedomTM on the way back and forth to work that I decided to let it slip to August.

Accept: Breaker - I had heard of Accept, and certainly heard their 80s hit Balls to the Wall, but didn't really know much about them.  Then MJ posted a comment on June's blog entry suggesting I take a look at them.  I did, and I like what I hear so far.  The vocals are a little on the screechy side, but I'll take screechy heavy metal vocals over the growly nonsense that seems to have infested the genre lately.  I really like the guitar work, which sounds a little like a cross between Judas Priest and a 1980s version of Godsmack (or maybe I should say that Godsmack's guitars sound a little like Accept).

Black Sabbath: Mob Rules - This is my 10th Sabbath album, and the second album with Dio at the microphone. He also wrote all the lyrics, and like the other members of the band, participated in the writing of the music.  The graveyard sound of their first album is completely replaced by an almost groove-metal feel.  I like them both, and I'm impressed that this band can change so much and yet sound so good.

Iron Maiden: Killers - I'm continuing to really dig Iron Maiden.  This their second album seems a little faster than their first, but otherwise pretty similar.  MJ says when Bruce Dickinson joins next year, "they become a whole new band."  I'm sure he meant that as a compliment, which makes me excited to hear the changes next month.

Judas Priest: Point of Entry - Judas Priest's 1980 album, British Steel, is a tough act to follow, but yet they managed to pull it off this year.  The guitars are slightly more distorted, and Halford's voice is slightly rougher, and the result is a tougher, more methodical style that really works.

Ozzy Osbourne: Diary of a Madman - Listening to Ozzy belt out these songs, you would never guess he'd been kicked out of Black Sabbath for his drug problems.  This album really takes me back, because I remember all the controversy surrounding the "bat incident" during the concert tour to promote this album.  For you Ozzy purists out there, never fear: I was careful to get the "Legacy" version, which puts the original bass and drum tracks back in where they belong.

ZZ Top: El Loco - ZZ Top continues to be right on my too-bluesy threshold, but they never fail to entertain anyway.  This one has Tube Snake Boogie on it - need I say more?

I decided to retire Rainbow this month.  Down to Earth was the first album after Ronnie James Dio's departure, and it retained a lot of the same Dio sound that I enjoyed in the first 3 albums.  But I listened to some samples of Difficult to Cure and decided that Rainbow's style had diverged too far from my tastes.

I also decided to finally give up on The Who.  I took a multi-year break from them after slogging through The Who By Numbers, and chose 1981 (Face Dances) as the year I would revisit the band and see how things sounded.  No dice.  The Who, for me, remains a band of singles and greatest hits albums.

02 August 2011

A Bunch of Trades

This morning, the SPY opened below its 200-day moving average after flirting with it on an intraday basis for the past three sessions.  This signalled "Exit" in the MACO component of CS|MACO, and so I closed the long SPY position at the open for a price of 127.80.  I changed the entry criteria a few months ago after doing some backtesting, and under the updated rules, CS|MACO would have bought SPY back in September 2010 for around 112.  Unfortunately, in real life I can't go back in time, so the SPY position only yielded about $1/share due to its much more recent entry.

The CiG trade has seen me in and out of S&P Futures several times this last month as the stock market went through its daily gyrations.  The trades have mostly been profitable, but it has been a challenge to risk-manage the positions when the stock market has opened up and closed lower, or vice-versa.  This debt deal nonsense going on, coupled with the worrisome economic numbers coming out lately, has the market on edge.  CiG is long S&P and underwater right now, and not far from its stop-loss on the current position.  As a counter-trend-fade trade, CiG is always destined to get hurt when the long term trend reverses instead of simply correcting.  Times like this one are built into the profit expectation, which makes them easier to take.  I am actually using a small number of SPY calls as a proxy for S&P Futures this time around, because CiG called for a long position on Friday amidst swirling rumors about debt ceiling activities over the weekend.  Since stop-loss orders don't work on Saturday, I felt something with a defined maximum loss was a good idea.  I spent the same in premium as I would have lost with a stopped-out position, which lets me keep the trade on no matter what the market action... in exchange for lower profits, if I ever see any.

Speaking of on-edge markets, I bought some deep out-of-the-money calls on GLD during the height (so far) of the debt ceiling circus.  My reasoning was that if the talks really broke down and no deal was formed, then the country's debt rating would be immediately downgraded, the stock market would crash, the economy would head straight into recession again, and the Fed would pledge QE3 to try to policy our way out of this gigantic mess we created for ourselves.  Panic + money printing = inflation expectations + falling dollar, and Gold would climb a wall of worry.  Having some leverage on the only thing likely to rally in that environment would help control the bleeding in my portfolio.  This was (almost) a Black Swan trade, and now that the clowns in Washington are getting back into their tiny car, I'm working to exit the position, starting with getting out of about 25% of the contracts at a 20% profit today. Considering what else would have happened if this position made a lot of money, I'm pretty glad it didn't come to pass.  But with lowered profit expectations, I still should be able to deleverage for a nice profit on the trade.

Despite my taking my finger off the big red button, I still don't have high hopes for the economy. I think the stock market is terribly overvalued (when don't I?), and we are so close to slipping into another deep and painful recession right now that I feel like I need to protect myself against a big market sell-off.  Back in May I bought some puts on SPY, and then took a lot of heat on them.  I was OK with this, as I was more interested in catching a big long-term sell-off throughout the summer than in a small short-term correction in the late spring.  We have now closed below the 2011 lows (125.28 on March 16), so the puts are starting to fulfill their roles as portfolio hedges.

In the midst of all the other excitement going on the last month or two, I sort of forgot about the Iron Condor.  Luckily for me, I placed some target-profit exiting orders before I forgot about the position.  While I ignored the trade the Russell oscillated up and down, taking out my exit orders and then returning to nearly unchanged before I went and looked at it today.  So I discovered a half-sized, well-centered, and very profitable Iron Condor position when I finally bothered to look at it.  Since it had already depreciated past my target for the trade and most of the way toward maximum return, I went ahead and closed it out the rest of the way, opening an Oct 860/870/690/680 IC while I was at it.  This "forget it and get lucky" approach is not a good one, but it happened to work this time.

One trade that didn't work out as I'd hoped was Office Max (OMX), which reported earnings this morning before the stock market open.  Historically, the stock has done very poorly on earnings announcements, and they were only expected to break even in the latest quarter.  Between that and the general skittishness in the market, I felt puts on Office Max were a low-risk play with a high probability of an overnight profit.  This is similar to how I like to play Research in Motion (RIMM) around earnings.  Office Max beat expectations with a 7c/share profit, however, and OMX quickly rallied 18% on the open.  I took the loss on the puts and moved on.

Quick Position Run-Down
  • I have a Wal-Mart bond as well as a couple of Illinois muni bonds to control my portfolio volatility.
  • I have a long position in a commodity ETF (DJP), which is primarily energy, metals, and agriculture - this is a "China needs stuff" long-term investment.
  • I still have a sizable position in GLD call options, as well as long-term holdings of GLD and GDX - to take advantage of this record-setting gold bull market and to partially protect against a market apocalypse.
  • I have an investment-grade corporate bond ETF (LQD), which is designed to capture the strength of companies relative to people, without being directly correlated to the stock market.
  • I have puts on SPY at both the 129 and 126 strike level; not a huge number, but enough to turn my trading screen green on ugly days like today.
  • I have recently started accumulating exposure to oil via USO.  I've been watching crude-oil futures every day at work for months, and I feel like buying USO on big crude dips is a good idea.  I bought my first batch when oil dropped below $95/barrel, and I'll buy some more during the next recession.  Maybe a lot more, since this is also a long-term "China needs stuff" investment.
  • I have puts on Xilinx (XLNX), and I'm working an order to close the position for a 125% profit.  This position has hung around longer than I would have liked, but it is finally starting to work itself out.  It started out as an earnings season pessimism trade and turned into a general bearish trending position.
  • I am long the Canadian Dollar ETF (FXC), which I bought at par.  This is another US Dollar hedge, and I don't have a specific plan for when to close this position.
  • I'm still long Microsoft (MSFT) from a long time ago.  I keep looking for opportunities to write covered calls or something against this position, but the collectable premium is so bad that I can't justify the risk of losing the stock at ex-div, even though the yield is only 2%.  I really need to unload the stock soon, though, as its membership in the DJIA guarantees a rough couple of years when the recession hits.  Mental note: get on this one.
  • I have a small position in inflation-protected treasury bonds (TIP), as another hedge against inflation getting away from Uncle Ben.
  • I also have a small position in Verizon (VZ).  I took half of it off a few months ago, and have been working a target exit ever since.  Meanwhile, the dividend yield on the stock is 5.5%, which is easy to procrastinate getting rid of.