Applications: ThinkOrSwim

See Time For a Change for the first in this series, or view the index to see all the posts dealing with Arch Linux. After taking some time off from setting up my new model Arch home (primarily for repairing my real home), I'm continuing with application installation. Before I started, I took a VirtualBox snapshot in case I had to roll back. I called "After Easys", for obvious reasons.

Today, I tackled ThinkOrSwim, which I use for options trading. This isn't in any repositories, so I had to log into my account at TD Ameritrade (ThinkOrSwim's new owner), and go to their download page. It automatically detected I was on Linux, and gave me a handy link to click to download "thinkorswim_installer.sh". Then it was a simple matter of giving that script execute permission and running it, and I was off to the races.

$ chmod u+x thinkorswim_installer.sh
$ ./thinkorswim_installer.sh

But there were a couple of little wrinkles. The default install location is /usr/local/thinkorswim, but a normal user doesn't have write access to that directory. So it's important to change it to be somewhere the user has access to - in this case, I chose /home/mark/thinkorswim. You might think that simply installing it with "sudo" is the right answer, but no. Do that, and it refuses to run for a non-root user. The Java-based installer also fails to create any icons (known as launchers in Linux) in KDE, so it needs some manual assistance.

I remember when I installed ThinkOrSwim on my Gnome-based Ubuntu desktop, it managed to create a launcher on the desktop, so it must be that KDE confuses it somehow. First, I looked around in the /home/mark/thinkorswim directory to see if anything looked helpful. What I was looking for was, at the least, a guess at what the command is to launch it, or at most, a pre-made launcher that just needs to be put somewhere useful.

In the thinkorswim subdirectory, I found a couple of useful files:

• An executable script called "thinkorswim" (go figure) that prepped and ran the Java Virtual Machine (JVM) with the right parameters to launch ThinkOrSwim
• A little textfile called "thinkorswim.desktop" that had some configuration options that looked like they might be for a launcher:

[Desktop Entry]
Type=Application
Name=thinkorswim
Exec=/bin/sh "/home/mark/thinkorswim/thinkorswim"
Icon=/home/mark/thinkorswim/.install4j/thinkorswim.png
Categories=Application;

If I knew KDE a little better, I'm guessing I could just copy this thinkorswim.desktop file somewhere and have it magically show up in the right place in the menus. Since I don't, I'll just use the GUI menu editing utility to put the information in manually. I added a new menu group called Finance, and created a new item under it called Think Or Swim. Then I entered the information from the "desktop" file to the menu editor, as shown below:

After hitting "Save", my new group and icon for Think Or Swim showed up just as I wanted them to.

One down, nine to go!

PasswordSafe for secure password management

Moneydance for personal finance

ThinkOrSwim for option trading DONE!

Minecraft - thought this would be easy, but it crashed on my first attempt

Dropbox for cloud storage

Kontact for e-mail, contacts, and calendar

Choqok for micro-blogging (following and posting to Twitter)

NixNote for notes/personal organization

Bless hex editor

Bacula for automated backups

Next: Okteta and Choqok
Or check out the Index

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!

Some Trades Are More Frightening Than Others

Not Frightening
Over the weekend, the Collar trade was assigned on its QQQQ calls, meaning that my QQQQ position was closed out at 58.  After the events over the weekend, and the markets today, that ended up being a great trade all by itself (QQQQ closed today at 57.03, down 1.70 on the day).

The QQQQ Collar trade has been one of the few that I have been running with real money, and it has been going for about 18 months now.  Over the last 18 months we have had, overall, a pretty significant up-trend to the market; and a limited-profit trade like a collar is going to underperform during strong up-trend periods.  Sure enough, I've made some pretty good money in the collar trade: just under 16% in 18 months.  But if I had just bought QQQQ and held it, I would have had a much better return: close to 39% over the same period.  Despite this drastic underperformance, the trade is a success - it is a super-long-term trade, and in losing years, its losses are much more limited than a simple buy-and-hold.  If it had not underperformed, that would be a signal that something wasn't being hedged correctly.

This trade is not without its problems, however.  First, there is a great deal of subjectivity about what strikes to use for the covered calls and the protective put - I tried to solve this problem by setting some range parameters.  Next, I have been running this trade in an online broker that is geared more toward stock traders than option traders.  As a result, its commissions for options are terrible: $10.75 for a one-way one-lot option trade, vs the $1.50 I negotiated with thinkorswim.  When I'm doing 14 option trades a year, plus the fairly frequent assignment fee of $25 followed immediately by the need to repurchase the QQQQ outright for $7 flat, it gets expensive fast.  Finally, I have noticed that the time value on the about-to-be-front-month options drains significantly over expiry weekend.  But since my online broker is very touchy about naked short options, I have to choose between an expensive fee-to-price ratio rolling trade, or letting the premium disappear over the weekend.

Since the collar essentially closed itself out over the weekend, I decided now would be a good time to transfer its required capital to thinkorswim and run it there.  I may retain the stock/call/put configuration, or I may run an equivalent position of a simple bullish vertical option spread.  If I do that, I lose the calendar component of the 6-month put vs the 6 1-month calls, but I'm not convinced that component is valuable anyway.  In any case, I have some research to do before the money transfer settles.

Frightening
Back to fake money, the CiG trade lit up like a Christmas tree today, thanks to those crazy Libyans.  S&P futures sold off 28 points or about 2%, which signalled a Buy at the close.  I have been bearish S&P for about 6 months (it has gained 300 points during that time) but this is a mechanical trade -- my viewpoint doesn't figure into it.  Have you ever tried to make yourself buy something when you don't believe in it and it has just sold off by 2%? It isn't easy.

The gold futures trade last month wasn't easy, either, but it turned out fine; by the law of single-datapoint-patterns, that means this one should be just fine too.  Nevertheless, NeighborTrader and I did have some vertiginous fun imagining that we were each managing million-dollar accounts and thus had to buy 100 futures knowing that each point would make or lose $5000.  That would make today a $140,000 losing day for that account, had it been long that amount.  I think I'm happier in fake money for now.

I also had a preliminary Sell signal setting up in Ten Year Note futures... we'll see what tomorrow brings on that one.

Somewhere in Between
Rounding out the flurry of activity today, the sudden market downturn made the volatility indexes pop about 4 points.  Everyone has heard of the VIX, which measures implied volatility in options on the S&P 500.  Since my iron condor trade is on Russell (RUT), I use the VIX's cousin: RVX.  Anyway, the 4 point pop in the RVX was just what I needed to get a better price on opening an iron condor position, since it is a negative-vega trade.  I put on the 760/770/900/910 April Iron Condor, for a credit of $3.25/share.  Pretty respectable, considering the low-IV environment we've had the last few weeks.  If the RVX is predictive, however, I'll be in for a roller coaster ride this month.

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.

Well That's a Bummer

The first negative experience with Think or Swim I've had:

Hello - 

I use your trading platform under paperMoney to test out trades, and I find it extremely valuable.  It has taken me far longer than I expected to approach the stage of being able to fund my account and start trading with real funds, but this is not a reflection on your software at all. On the contrary, I have been consistently impressed with its high level of quality and richness of features.

I would like to kindly request your permission to include a screenshot from your Analyze tab on my new blog from time to time.  I am not sure what restrictions I might violate by doing this without permission, so I felt it would be better to ask first.  Here's a link if you want to see what I've said about thinkorswim so far: 

http://riskofruin.markmccracken.net

I am not writing reviews or detailed descriptions of your software (if I were they would be positive!) - rather I feel a value-at-expiration graph would be much clearer than a bunch of prose describing my option research positions.  Without your permission I can muddle through with Excel, but that is a distant second choice.

Thanks in advance,

Mark McCracken

Mark,

Thank you for the reach out and the kudos.  Unfortunately, we must respectfully deny your request to publish our firm’s copyrighted materials.  This ability is strictly reserved for those companies/individuals with which tos has a Marketing Agreement in place.

We wish you the best of luck in your trading and your endeavor.

Sincerely,

Scott Garland

Scott Garland

Compliance Manager

Scott -

How might I go about securing a Marketing Agreement with ToS?

- Mark McCracken

Mark,

With the recent acquisition by TD Ameritrade all Marketing Agreement activity has been frozen at this time. Sorry.

Sincerely,

Scott Garland

Scott Garland

Compliance Manager

Well, Scott Garland and Scott Garland have spoken (twice each).  No screenshots on the blog.  That's going to make it more difficult to illustrate my point, and it means no free marketing for Think or Swim, but I understand that there's no such thing as good publicity, or something like that.

December Iron Condor

In another of my paperMoney trades, I experiment with iron condors.  Today I opened a position on my next month's iron condor, expiring in December, on RUT.  RUT is the Russell 2000 index, and options on it are European-style and cash-settled.  This means they cannot be exercised early (very important for spreading), and in-the-money options at expiry won't cause securities to change hands - just money.  Settlement at expiry is weird, though, so it's best not to take them to expiry in any case.

WTF is an Iron Condor?
An iron condor is a market-neutral option strategy that is short volatility but with limited profit/loss ranges.  It consists of two vertical spreads: a put spread below the current index price, and a call spread above the current index price.  The long options in the spreads are both farther OTM than the short options, so opening an iron condor position generates a credit.  The farther apart the short option strikes are from each other, the lower the risk that the iron condor will lose money, but the less credit it generates on opening.

A picture is worth a thousand words.  Luckily for you, I have both.  Check out this page from Option Trading Tips:  Iron Condor Description.  I'm working on getting permission from ThinkOrSwim to include screen shots from their software.  In the meantime, this is the best I can do, sorry.

Terminology does not agree on how to refer to iron condors that generate a credit when opened.  They consist of two short vertical spreads, but many (including the website above) call that combination a Long Condor.  To me, selling means that I get money; buying means that I give up money.  So throughout this blog I will rightly or wrongly refer to iron condors like they're short: I sell them to open them and I buy them to get out.  So today I sold an iron condor, opening a short position, and I generated cash.  Questions? No? Excellent.

Where To Begin...
Here I have to give Mark Wolfinger props again, because about a year ago I looked at iron condors briefly when a co-worker (not a professional trader, in this case) told me about how he was making a guaranteed 10%/month on them.  This seemed too good to be true, and after analyzing them a little I decided that it was: the probability-weighted return on his capital was far too low for the risk of ruin he was taking.  I dismissed iron condors as hardly better than naked option selling, and was ready to leave it at that.  In the process, however, I ran into Mark Wolfinger's blog Options for Rookies, and I started reading it regularly.  Over the next few months I realized that there was more to iron condor trading than I first assumed.  Guaranteeing 10%/month was indeed too good to be true, as I suspected.  But there was nevertheless a viable trade there for someone willing to put in the time and effort to build experience.  A firm believer that nothing worth doing is easy, I set out to learn.  I'm just getting started on that journey, and though it will never end, I hope that soon I will have made enough progress to begin profiting from it.  I don't know when that will be, but I know it isn't now yet.

I've followed MW's lead in a lot of respects, because I am more of a learn-by-doer than a learn-by-reader.  As I try different approaches and find my own comfort zones and style, I start to diverge from him; this is natural.  But some aspects of his trade are relatively arbitrary from my perspective:  he trades RUT because he feels that its volatility is not-too-high but not-too-small; he trades options with 60+ days to expiry because he feels that is the right mix of risk (gamma) and reward (theta).  Never having traded iron condors on any index, and never gotten burned in either direction in time-to-expiry, I figured 60+ days on RUT was as good a place to start as any.

My Own Trading Style
My current behavior pattern is to start looking for a new iron condor position around the first of the month two months before expiry.  This gives me 60-80 days or so before expiry.  Also like Mark, I look to get out of the condor early if the market is willing to let me buy back pieces of it at good prices.  I don't try to choose a low-risk / low-reward condor that I never have to adjust, but I try to give it enough room to move that I can make adjustment decisions after work for trading on the open the next day.  Taking some of his lessons to heart, I try not to increase my position in the course of adjustments; however, I will do so if I have previously reduced the position via cheap buy-backs.  I try very hard to evaluate what the position is now, instead of whether I'm up or down from my entry point.  This is a lot harder than it sounds, but Mark harps on it so much that it is starting to sink in.

In Theory, There Is No Difference Between Theory and Practice
A perfect situation in my trading style is to find a new iron condor on, say, October 1 for December expiry that I can put on generating 3.50 or so in premium while keeping the two short options a good 15-20 strikes apart.  For this situation to remain perfect, the market needs to move up and down some so I can cheaply (like 20c or so) get out of the two spread legs, but not so much that I feel I need to adjust to protect my position.  The perfect scenario ends about 30 days before expiry when I exit the last position without ever having to adjust.  Net profit when perfect: nearly $3.00 per contract, or about 30% on margin risked.

But In Practice, There Is
In reality, that scenario never happens.  I always have to adjust, I always agonize over how much insurance to buy and when, I seldom pay as little as 20c to buy back my spreads, I frequently enter the position for less than 3.50 credit, and I often find myself still trying to dump some position off with only 2 weeks to go.

I often have two condors on at any given time: one that I'm adjusting and working my way out of, and one that I'm watching eat up theta prior to its first adjustment.  If I end up with over 1.00 per original contract profit, I'm thrilled. Note that because of adjustments, 1.00 per original contract is a lot less than 10% margin profit, because the margin gets bigger and the profits get smaller with insurance.  If my net cash flows are positive at the end of a condor run, I'm satisfied.  If I learn something along the way, it's all worth it.

I'm slowly starting to get a feel for what values of delta make me nervous, and I'm better at choosing adjustments that don't give me a negative theta, since that would negate the whole purpose.  I'm always massively short vega, since that's the nature of an iron condor; and gamma doesn't really affect me too much 60 days out.  It is nevertheless always the shadow in the corner, and I keep an eye on it more and more the closer to expiry I find myself.  Experience has come very slowly, but it is starting to click.  That's a cool feeling.

Current Situation
Right now I have a heavily-adjusted November position on.  It's too complicated to explain without charts, so I won't try.  But despite the drop in volatility the past couple of days as the market rallied, I was able to put on my December iron condor position for my target price of 3.50.  It's a little tighter (short strikes are closer together) than some previous months, but I'm also getting a little more comfortable with adjustments; this lets me generate more premium credit at the start without so much fear.  My new RUT December condor is a 610/620/770/780, meaning that I am long the 610 puts and the 780 calls, and short the 620 puts and 770 calls.  Max profit: the 3.50 credit it generated.  Max loss: 6.50.

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.

So Much Pressure

The first post in my new blog.  The first post in my first blog.  God.

For the last year or so, I have been writing up my investment activities in Notes and posting them on Facebook for my friends and family to read and comment on.  I did this hoping to spark a few lively discussions and free exchanges of ideas, to keep myself honest, and to share some of the knowledge I have gained while working in the futures trading industry for 13 years.  Two out of three isn't bad.

I got some good questions asking about this or that, but very little in the way of idea exchange.  The big success story was in how I approached my trades after committing to explaining them to others first.  OK, "first" didn't always happen, so there was often a fair amount of post-trade rationalizing going on; but there were several times throughout the year when I decided to make a [poor] trade but then abandoned it because I couldn't think of a clear way to explain how it might be successful.  Every saved loss is a win.

Ultimately, though, I found the Facebook Note mechanism unsatisfying.  I started following Mark Wolfinger's excellent blog Options for Rookies, had some very interesting discussions with co-workers about option-spread trading, and began playing around with Think or Swim's trading front-end using a paperMoney account to try out ideas without throwing real money away to do it.  As I spent more and more energy learning about credit spreads and option position management, I started contemplating discussing these topics on Facebook, to my friends and family.  I was certain I would immediately confuse them, and I might as well just write my thoughts in a trading journal and keep it on a shelf.

Although trading journals are very valuable, they don't come up with ideas on their own.  I realize that for the indefinite future I can expect exactly two regular readers of this blog - my wife and my mother - but nevertheless the possibility exists that someone will stumble upon this public journal, read it, learn from it, and respond with ideas of their own.  That would be cool.

I also want the freedom to talk about stuff other than trading.  Under my Notes pattern, I felt like I had specified my topics in advance and changing them would make things too incongruous.  Beyond investing and trading, I hope a regular reader will find interesting commentary from me on poker, software development, life in Chicago, skiing, and many other things that pop into my head.  If not, then at least I'll have recorded my thoughts somewhere and stressed out about my grammar from time to time.  That's important, too.

I chose the name Risk of Ruin because I am a big fan of the concept.  I think it appears everywhere in life: it's why you buy insurance, wear your seatbelt, favor crash-tested cars, and avoid restaurants where your friend got food poisoning once.  It is the single biggest force in a poker tournament, one that must be simultaneously defended against and wielded in order to succeed over the long term; it is the primary deciding factor on how "big" a game to play; it is the bogeyman that good bankroll management practices are designed to avoid.  It controls all trade-sizing decisions more than anything else; it is the entire reason why you should diversify your investments.  It explains why people who have never skied before think we're all crazy; experiencing its touch is also why we love skiing so much.

Risk of ruin, to me, is more than its definition with respect to trading or poker.  It is the flat line on the bottom-right of every net worth graph and EKG display.  It is the poison that must be drunk in order to participate in life's game.  It is the femme fatale flirting with you in front of your wife.  It is the Queen of Spades in a game of Hearts, helping you win or making you lose depending on your skill and a whole lot of chance.  It's Gravity.

OK one more cheesy example because I love it so much.  This will also establish some geek cred.

In the Star Trek TNG episode "Tapestry" (wiki), Captain Picard dies because a minor phaser blast damages his artificial heart.  Q catches him in the afterlife and sends him back in time to avoid the bar brawl in his youth that ended with him getting stabbed in his natural heart and needing the replacement.  Doing so, Q argues, will ensure that Picard survives this present-day minor skirmish.  So Picard goes back and avoids taking the risk of the bar fight.  It turns out that this scene was an inflection point in young Picard's life: after avoiding that risk of death (aka ruin), he finds himself always taking the risk-averse paths, unable to accept that an uncommon life requires uncommon risks.  Popping back to present day, we discover aging Lieutenant Picard is a pathetic little man with little dreams.  After several depressing scenes of mediocrity, the hero within demands a repeat audience with Q.  Eventually, Picard chooses certain death after a hero's life instead of an extended but unsatisfying existence.

In the real world, we don't get to go back in time and approach our actions with the certainty of known outcomes.  This makes it a lot more exciting, don't you think?