Dipped in Gold

With all the Arch Linux posts lately, loyal readers may be tempted to think I have given up the aggressive-investing game. Not true. I recently completed my trade of the year with those out-of-the-money GLD calls I wrote about back in August. I bought them for 25c a share, and sold them for various prices, a few as high as $8. All told, those calls netted something on the order of 800% return on premium paid.

As I exited the last of those calls, GLD was in the midst of its toughest correction in the past few years. I bought my first shares of GLD in 2009, but even looking back as far as 2006, I don't see a correction as violent or as deep as the one we just completed. Gold bulls were hit with a triple whammy: a technical double-top formation around the end of August was followed by the Fed failing to signal much more in the way of monetary stimulus. As the investment world started its usual flight to quality in the face of disappointing developments, the CME responded to the increasing volatility in gold futures by raising the margin requirements. Everyone in the trading community still remembers how margin increases sparked the recent Silver panic, and so it is no surprise that GLD gapped-down two days in a row in the last week of September. It shed 8% of its value in two trading days, which is a pretty dizzying fall for a physical commodity unaffected by droughts and floods like gold.

The gold haters came out in droves, claiming this was the "popping of the bubble", and giving target prices of $700/oz (about $70/share in GLD terms). I stepped away from leverage on GLD, which I had planned to do during the fall, anyway, since September-October has historically been a bad season for gold (I have no idea why, it's not like there's a harvest or something). I gritted my teeth and held onto my outright shares of GLD, the straight-up gold ETF, and GDX, the ETF comprised of gold-mining companies. And I bought a few more shares of GLD on the way down, but far too soon (169). I admit I started worrying that the bubble was popping, too, but those fears are past.

Does the chart above look like a bubble to you? I have added a 100-day simple moving average to the price of GLD over the past 3 years. Notice the double-top, with a high of 185, and the two days of down-gapping shortly afterward. But also notice that GLD stopped its free-fall at the 100-day trendline, and resumed the trend. That's not a bubble-pop, that's the start of the mania phase.

Here's another chart you might recognize, this time of the NASDAQ from 1996 through 2002. See how there are corrections back to the trendline throughout the 1990s? Some of them undoubtedly looked like The End at the time, but those corrections ended up looking like little squiggles in comparison to the mania phase starting in late 1999, and of course the multi-year sell-off afterward.

So I'm looking to buy dips in gold again, since I think we'll start another leg up in this market sometime around year-end. I've already bought some shares in GDXJ, an ETF comprised of smaller-cap mining companies, and some calls in GDX, expiring in January. Both are already priced higher than where I bought them, but I can't take credit for that -- it was just an effect of the risk-on-risk-off hokey-pokey the markets have been dancing since 2008. At the moment, we're putting a foot in, so all risky assets are going up. Later, we'll take it out, and they'll all fall again.

Why mining companies instead of gold itself? I mostly prefer to trade the metal on its own, so as to slightly reduce the vast number of variables acting on my investment, but we are entering Q3 earnings-reporting season. There will be a lot of bad news coming out of the tech industry (Google's blow-out notwithstanding), and a lot of good news coming out of the mining industry, as gold miners realize higher and higher prices for the more or less constant rate of supply they are pulling out of the ground. Also, mining companies have lagged behind gold prices during this bull market. If they close the gap, I'd like to be there to profit from it. And finally, dividends. Gold doesn't pay a dividend, but miners do. Consequently, I might look to buy a few outright shares of individual mining companies so as not to dilute my dividends through the GDX ETF.

I have some trades unrelated to gold in progress, too, but that's another post.

CS|MACO... Finally!

Mea Culpa

First, I need to relate a painful but valuable lesson I learned last week.  In my previous post, I said that the CiG trade had fired a Buy signal on S&P Futures.  As a fade strategy, the CiG trade frequently signals trades that I view as bat-shit crazy.  It takes some teeth-gritting and reminding myself that this is fake money in order for me to be able to enter the trade sometimes.  Last Wednesday was one of those times.

I dutifully entered the trade, but I put a $500/contract stop-loss order in, instead of the $1000 that the script calls for.  I congratulated myself a couple of hours later when my stop-loss was hit, closing me out for a $500 loss, on saving the other $500 dollars.  Well... go look at a chart for S&P Futures.  My max unrealized loss that evening would have been about $700, and over the next two days we had a sizable rally.  By the time the exit signal arrived, the trade as designed would have been up over $2000/contract, a big return.  Instead, I was sitting on the sidelines with a $500 loss.  My "judgement", in this case, cost me a total of $2500/contract.  Ouch.

So why did I go against the trade as back-tested by NeighborTrader?  My rationale at the time was that this was a fundamental market move, and we were in uncharted territory that couldn't possibly be handled by back-testing.  OK, fair enough, and that's what judgement is for.  But I took the wrong action based on that judgement: instead of tightening my stop, which cut my max loss by 50% but increased my probability of experiencing that loss by far more than 100%, I should have opted not to place the trade at all.  If my comfort level with the risk is insufficient to execute the trade as designed, I should avoid the trade entirely - not cripple it and damn it to fail.

My conclusion was invalid, even if my assertion (these unprecedented times are likely to cause the trade not to work) was valid.  But what about my assertion?  If we want to look at unprecedented times, let's look at May 7, 2010, the day after the "Flash Crash" (I hate this term, by the way).  CiG would have similarly fired a Buy signal at the end of the day that day, and the exit signal would have come two trading days later, for a profit of over $2200/contract.  And here's the thing: NT back-tested this trade before May 7, 2010.  That's out-of-sample data, and thus can't be discarded as sample bias in his back-testing.

So my assertion -- unprecedented times invalidates the trade signal -- was invalid, and my conclusion on how to act on it -- tighten the stop -- was invalid as well.  Look, I'm not perfect, but if I had gotten either thing right, I'd feel a lot better about it.  Anyway, $2500 lesson learned: either follow the trade, or don't do the trade - don't adjust the trade on the fly based on my gut.

Oh, and you may recall me mentioning that "by rights, I should be short Ten Year Futures, too". That trade, if entered, would have made another $1250/contract over the course of three trading days.  Sigh.

CS|MACO

Last Wednesday night, not long after my stop-out, AAII's sentiment survey for March 17 was posted, and those inversely prophetic investors had some pretty negative things to say about the market.  Bullishness dropped all the way to 28.5%, just below the CS Buy signal level of 31.5.  With SPY trading between its 25SMA and its 200SMA, the MACO component was giving a hearty "meh" signal.  Buy + don't-care = Buy.  So I bought a unit of SPY the next morning... at 128.  SPY is still in MACO's "meh" territory, but up 1.66/share from my buy price; AAII publishes another weekly survey overnight tonight.  If my individual investor peers recognize the cessation of the downtrend last week and get more bullish ("bullisher"?), I might find myself selling SPY on the open tomorrow morning.  But they'll have to get a lot "bullisher" - 41.5% or more - for me to take my profits and go home.  We'll see.

General Thoughts

As regular readers of this blog know, I run multiple trades in my paperMoney account at ThinkOrSwim.  Besides the ones mentioned above, I also have a bullish NDX option vertical spread on to simulate a collar, a bearish SPX option vertical spread, an Iron Condor in RUT (Russell 2000) and naked-long SPY puts.  I'm also looking for a dip in gold to buy back some GLD calls, after having exited my March calls before expiration.  The problem that I am starting to run into is that I have too many trades on the stock market - and many of them are nearly perfectly inversely correlated.  The worst offenders are the bearish SPX and bullish NDX spreads.  CiG and CS|MACO only hold positions once in a while - but the option spreads are there all month long, every month.

This false diversification doesn't benefit me at all - if they were real trades I would be spinning my wheels spending commission on an expectation of about 0 profit.  In a paperMoney account, this isn't so bad, because I can use the excuse that I am looking for profitable trades: the unprofitable ones will never "go pro" into a real money account.  But this is kind of a hollow argument, because any of these trades can be profitable or unprofitable, depending on the market conditions.

This issue bears more consideration.

And a Micro Rant

"They", whoever they are, changed the Nasdaq-100 ETF's symbol from QQQQ to QQQ last night.  WTF???  Didn't they just change it from QQQ to QQQQ a few years ago?  Make up your minds!

Keep Your Head Back

Let's lead this one with a chart, courtesy of BigCharts.com.  I'm using SPY here as a proxy for the S&P 500... mostly because I couldn't figure out how to hide the volume, and the index's volume is empty and boring.  The shape is the same, so it doesn't matter.  It looks a lot like the first 60 seconds on an awesome roller coaster.

Let's put this in perspective.  This is a 6-month chart, so it goes back through mid-September.  SPY was somewhere around 112 back then, and it closed at 126.xx today.  That's a 12.5% return over 6 months, or 25% annualized.  Wow, what a great stock market!  OK, yes, from the high of 134.xx one month ago on February 18, SPY is down 6%, or 72% annualized -- but of course if you really think it's going to continue at this pace for 11 more months, I have some swampland to sell you.  But let's look at the last month, shall we?

• Major unrest in the Middle East, including full-scale revolt in many of our oil suppliers, has caused Crude Oil futures to shoot up above $100/bbl (only $98/bbl today - what a bargain): well into production-drag territory;
• Japan suffered the worst earthquake in... what? forever? a long freaking time, anyway, and its nuclear plants are about to unleash a glowing hell on the Pacific Rim;
• The festering pimples in the European economy are starting to look like they're about to pop one after another: Ireland, Portugal, Greece, etc;
• The Federal Reserve's credibility is finally starting to be questioned, and major indications have started surfacing that inflation will be a bigger problem than people have been assuming;
• And Charlie Sheen, OMG.

Watching the activity in the market on Feb 23, I started worrying that we were about to see another Flash-Crash-type event.  The spreads were widening and the markets were looking really jittery.  I bought some puts on SPY, expiring in April.  I still have them, and I see no reason to sell them just yet.  I also have a bullish option spread that simulates a collar in NDX.  It's pretty deep underwater (duh), but this is a continuation of the collar trade I've been running for a long time, and I won't be changing it now.

Besides the stock market, what have been the other financial effects over the last month or so?  And just for fun, I'll talk about my activities where appropriate.

• The Canadian Dollar roared up and then slunk back, since the Fed-bashing started early on, but the flight-to-quality has taken over the last few days.
• I bought FXC (the Canadian Dollar ETF) today.
• The Ten Year Note, in a strong downtrend at the end of the year and trading sideways-to-down through mid-February, suddenly pointed its nose at the sky as of the end of last week and turned on the after-burners.
• By rights, the CiG trade should be short the ten-year note futures, but I opted for buying S&P futures instead, reasoning that the return on S&P should be more extreme than on Ten Years.  I was right.  I bought S&P on the close, and was just stopped out for my max loss a moment ago.
• Crude Oil futures traded as high as $107/bbl on March 7, and are back down to $97/bbl now in a pretty (but meaningless) isosceles triangle pattern on the chart.  Daily ranges expanded big-time, as the market tried to constantly adjust to unfolding events in the Middle East.  It's back down now mostly on Dollar strength, I think, but 97 is still far above the 85 it started from in February.
• Agriculture futures (corn, wheat, soybeans) all have the same triangle pattern as Crude Oil, without the big gap-up at the beginning.  Again, USD strength as everyone runs like hell into something "safe".
• I hold DJP, which is a commodity ETF which holds 33% energy, 30% agriculture, and 31% metals.  This is a long-term play against the USD that I put on back in January.  I have no interest in selling it at this point -- I only wish I'd bought a long time ago.
• Gold has traded pretty sideways recently, victim of the risk-on/risk-off tug-of-war that's been going on since Charlie Sheen started distracting us from trivial Middle Eastern matters.
• I've had big gold positions on for a long time, and just today I sold some calls that are due to expire on Friday, taking a small loss.  When the nuclear crisis in Japan finally settles down, I'll buy some more, because the dollar will suddenly seem like a bad idea again.

Oh, I also had a bullish option spread on SPX that I liquidated today for just about max-loss.  Option spreads are great because they let you define your max profit-loss range and sleep well knowing that you will neither make nor lose more than that range.  I had been fighting the uptrend in the stock market for 6 months, and finally capitulated with this option spread.  I told myself when I suffered a loss I would reverse direction and start doing bearish spreads instead.  That's tomorrow's trade.

Predestined for Failure

Old Business
As I have noted recently, I am running about two to three days behind posting my trading activity.  There are a number of excuses for this, of course, and none of them all that valid.  I have also lagged behind in reading the blogs of others, and this morning I read an excellent post from one of my favorite options bloggers, Mark Wolfinger.  Unfortunately for my Iron Condor trade, I read it 11 days late. 

In this post he discusses the correct strike-pricing for protective debit spread adjustments.  He states several times that one should never buy farther OTM options than the iron condor itself, and that's exactly what I did.  Over the next few months, I need to reflect on this and tweak my adjustment strategy.  I'm hoping using this advice will help flatten out my returns, because I'm experiencing somewhat more volatility and stress than I would like, given the low income potential of this trade.

The AAII Sentiment Survey for 12/15/2010 still shows some very bullish investors out there, although slightly fewer than last week: 50% are bullish, down from 53% on 12/8/2010.  As expected, this results in a continued no-position for CS|MACO, which doesn't participate in trends that are fueled by investor mania.

New Business
I bought some Research in Motion (RIMM) puts this morning at the last minute.  I generally like to buy these a week or two before the earnings release, but I wasn't paying close attention and missed out.  RIMM has always been one of my favorite shorts during earnings season, and I personally think that they have no future without a major retooling of their business.  Nobody talks about "Crackberry" anymore, now it's Android this and Android that, with the occasional fan-boy crowing about iPhone coming to Verizon (still).  I was expecting RIMM to admit a further reduction in its market share, disappoint on earnings numbers, and guide lower for next quarter.  But that didn't happen, and when I left the office in disgust, RIMM was up 5%.  So tomorrow I'll unload the put for a 50% loss and move on.

Another put position I entered today was Kinder Morgan Energy Partners (KMP).  KMP owns and manages energy transportation and storage facilities in North America.  It has a positive correlation to natural gas prices, but not a dramatically high one because its income is fee-based.  Thus KMP's income fluctuates more with demand for natural gas than with natural gas itself.  KMP has a big dividend yield: 6.3%  So why short it?  Oh let me count the ways:

1. Jim Cramer loves it, and he usually loves at the top and hates at the bottom.
2. They have a $22B market cap, revenue of $8B, $192M in cash, and $13B in debt.  Debt is more than 50% of the market cap, and nearly 68x higher than cash reserves.  That means they're using debt to finance their dividends.
3. Quarterly earnings have declined 10.8% since this time last year, to $1.25/share.  Dividends are $4.44 per share, so they're also paying more in dividends than they're earning in profits.
4. They need to quadruple their profits in order to cover those dividends, but the highest praise that Cramer can come up with is that high dividend stocks are good in a rising interest rate environment.  Yes, true.  But that doesn't solve KMP's internal fiscal problems.

This stock needs to fall.  I bought some March 2011 puts on it, and I'm working orders to buy some more on a rally.  I don't know when it will fall or how far, but my puts are there to profit when it does.

Last but not least, I bought some calls on GLD (Gold ETF) today, expiring in March.  If the current short-term sell-off continues, I'll buy some more.  I'm looking for a GLD price above 150 by expiry.  That would be a massive return on the call investment.

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.

So Much For That Plan

Gold for Cash
In my last post, just two days ago, I briefly outlined my plan for disposing of my GLD Dec calls.  I said that I wanted to hit a price or time target, and when either thing happened I was out.  Of course the very next day gold prices dropped 3%, and then another 2% today, wiping out 20% of the value of my calls.  I'm not quite sure what's going on, but that was outside my comfort zone, and I dumped the calls today for quite a lot less than I planned.  Now that I'm out, I'll detail my price/time limits a little more.

I bought the then-ATM calls over the summer for $5/share of GLD, believing that gold would appreciate in the fall.  Boy did it, and it wasn't long before I was able to sell less than half of them for about $11/share.  That took my initial investment off the table, and I kept the rest riding.  I saw them reach somewhere around $17/share at their high, and I had a price target of $25/share to get out of the rest.  That was pretty aggressive, but I also had a time limit.

Uncomfortable, as I said on Tuesday, with the many small indications of a coming correction in gold, I wanted out soon.  I think most people are idiots (see the CS part of the CS+MACO trade), and when everyone's bullish, it's time to sell.  Worse, literally the whole world is hanging on QE2-related verbiage expected in the minutes from the FOMC's meeting on November 2 & 3.  That economic release is doomed: QE2 is already fully priced in, and all the Fed can do now is disappoint.  At the very least, all the IV comes out of the options after the announcement because the inflection point will have passed.  I definitely wanted out by Nov 2.

I have assumed for quite some time that I am riding a bubble forming in gold, and I swore that unlike the turn-of-the-century tech bubble, I would neither miss the run-up nor hang on for dear life during the pop.  That's why I have been in and out of leveraged gold positions via calls for the last year or so, and that's why I'll get back in after the mid-bubble correction makes everyone hate gold again.  I'm pretty bummed that I gave up so much of my profits by dumping today, but I still made about 150% on the trade since August, so I have no major complaints.

Speaking of CS+MACO...
Adding to the bearish signals this week, AAII published its survey results yesterday after the close: more people are bullish again.  With the CS portion screaming "sell!" and the MACO portion insisting "buy!", CS+MACO is still flat and will stay there for at least another week.

Assorted Trades

Iron Condor
On Friday, I decided to add a little up-side protection to my December Iron Condor.  I'm trying to act when delta starts getting out of whack, and after a few days of stock market rallies the Dec IC was looking at a delta of about -20.  Sadly I can't be more precise on this because I forgot to jot it down (mental hand-slap).  Anyway, I decided the adjustment that made the most sense was to buy a Dec 760 call.  With my IC strikes at 610/620/770/780, this puts the naked-long call just one strike below my short call.  This adjustment brought my delta up to about +4 as of now, and didn't hurt the theta too much - still nearly 21.  It cost me 9.50, which is a big chunk of change, but I expect it to be the only upside adjustment I'll need to make to this position.

Until I come up with a better solution than Excel, unfortunately I can only display value-at-expiry.  Trust me when I say that current portfolio value is a lot curvier and much more attractive than this.

QQQQ Collar
Also on Friday, my October covered call on QQQQ as part of the collar trade expired in the money and I was assigned on the call.  Pursuant to the rules I set forth in September, I bought QQQQ back this morning at 51.50 and sold calls against it with a strike price of 53 for 56c.  Here are those rules again, since I keep having to search Facebook Notes for the numbers:

1. Monthly calls to be about 3%, and no less than 2.5%, out of the money.
2. 6-month put to be 8% out of the money.
3. No rolling prior to expiry.

Gold Leverage
I am still long-term bullish on gold, and I express that by being long GLD, GDX, and AEM.  I also currently have some Dec calls on GLD that are so profitable that I have sold off enough to cover my original investment and the remainder are worth almost twice what I paid for the whole stack.  Nevertheless, I'm becoming concerned with the borderline irrational expectations for QE2 lately, so I'm ready to take some profits.  I started working a fairly distant sell order on the rest of my GLD calls this morning.  Hopefully it will reach my target price and I'll exit there, but I also have a time limit on this trade; I'll exit when that time limit expires regardless of the price action.

A Little Free Advertising

I think some background might be useful before I jump into trade journal activities.  Most of the trades I will describe on this blog are being done in Think or Swim's paperMoney platform.  A few might be done with real money, and I hope that someday the realMoney/paperMoney ratio will increase.  But I have no intention to specify which ones are real and which ones are fake: my actual personal trading activities in the real market risking real capital are not something I want to put on the internet.  Likewise I don't plan to be very specific about position sizes or prices except where they are necessary to understand what I'm doing.  There also won't be profit/loss numbers.

There are two big reasons for not being very specific about these things.  The primary one is privacy: if I talk about my trading sizes, profit/loss, or which trades are real or fake, I give away personal financial information.  Additionally, though, I don't want anyone mimicking my trades.  If I wanted to be an investment advisor I would go off and get certified, and make a lot of money doing that.  Trades described in this blog are intended to be general ideas open for discussion, and they are certainly not recommendations or advice.  See that little disclaimer right under the title bar?  Yeah.  So if you're looking for stock tips, picks, predictions, or strategies, move along now and don't come back.  If you want to read about my own personal thrills and spills in the marketplace and interact with me about what I learn along the way, welcome.

In any case, assume that all positions are held in my paperMoney account (not real money).

So here's a little commentary about this thing called paperMoney, of which I am a huge fan.  Think or Swim has an interactive trading front-end written in Java.  This is great for me because I made the Windows-to-Linux switch about 18 months ago and I get kind of pissed off when I have to run a VM just to run a piece of software.  ToS's front-end is fully featured, providing charts, stock screening, real-time news feeds, trading grids, account/position management information, etc.  You hook it up to your trading account at thinkorswim.com and you're good to go: any trade you do goes against your buying power in the account and shows up both on your statements and in the front-end.

When you first connect, you choose between realMoney and paperMoney.  I have personally never used ToS's front-end for real-money trading - only paperMoney.  But from what I understand, paperMoney is exactly the same software except for two very important features: 1) trades in paperMoney don't actually make or lose you real money; and 2) market prices seen in the front-end under paperMoney are 20 minutes behind.  I'm sure that ToS does this because of republishing and licensing agreements with the exchanges providing the market data in the first place.  Another minor difference is that you start with $100k in your paperMoney account - I have no idea what you do if you go broke and hopefully I won't find out - so there is no depositing to do.  And execution is occasionally a little strange: ToS fills your limit order based on mid-prices instead of actual price action.  This is the best of a bunch of compromise approaches, in my opinion.  But you do sometimes get kind of a weird fill.  On May 6 (Flash Crash day), I had some limit orders working to exit some positions at ridiculous prices just so that I wouldn't forget about them, and they got filled at even better prices than I had specified.  What should have had a max-$2000 profit based on the option strategy ended up netting me $25k.  If only it was real...

The front-end is really well-tailored to options trading, which is why I selected it in the first place.  One of the screens shows position valuation graphs that can be played around with to examine the effects of underlying changes, delta changes, time, vega, etc etc.  Simulated trades can also be applied to positions from there so that an informed decision can be made before submitting the order.  I spend a lot of time on that screen before making adjustments.

I'm not sure how protective TD Ameritrade (owners of Think or Swim) are about screenshots and whatnot, so I won't post any here.  But check out thinkorswim.com and read all about it, if you haven't ever looked at their platform.  I'm really impressed with the software for having most of what I want in it, and I'm also really impressed at their willingness to let me paper-trade indefinitely without ever depositing any money.  That sort of accommodation shows confidence that their software is so good that I will still want to use it when/if I transition to a real-money option trader.  And that, my friends, is rare.

I sold some December 2010 calls on GLD today, taking my initial investment off the table.  My remaining position is all profit.  I did this today because of the fantastic run-up GLD has had over the past two months; some consolidation is due, and maybe a correction, so it seems like a good idea to reduce my risk and lock in a floor on my return.  Another reason is that the trader that sits next to me at work (we'll call him NeighborTrader, or NT) reported this morning that when he loaded up yahoo.com he noticed that the phrase "gold prices" was at the top of the Trending Now list.  That's a sign of a short-term top if I ever heard one.  It's a good time to hold a call option on my call position.

When NT's Iowa-residing grandfather asks about investing in gold, I'll sell the rest.