Thursday, June 26, 2008

Major Move - Bear With Me

I've making the biggest move of my life. I'm relocating to Winston-Salem, North Carolina after living in and around the San Fernando Valley for nearly 14 years. I originally imagined I'd only remain in the Los Angeles area for a short stint after college but now I've lived here nearly twice the amount of time I originally imagined. Nothing really wrong with that, my future has rarely ended up as dull as I imagined it. :)

I've been working on this move since the beginning of the year but have been quiet about this on the blog while quietly making my preparations. I'll be owning my first home (assuming the funding doesn't blow-up). A professional has inspected the property, my purchase offer has been accepted, and I've initiated the loan process. I'm moving two doors down from some very dear friends. I'm very excited for the relocation, but there's a ton of work to do. I'll tell you much more about it when I'm there. I leave Los Angeles on Monday morning (June 30).

Here's all the news in brief:
I'm moving to North Carolina
I put my dog down last Saturday. She was 14 and we spent the vast majority of the moments of our live over the past 8 years together.
I was down ~9.3% on the 15th of June but am currently up ~1.6% on today's market action.

This is the first time I've been back in the green for the past couple weeks. The emotional stress of the move and the decision to put my dog down played into that a bit, but I've also learned a lot. I was up nearly 20% on June 6, but watched the market take it and more back. I'll share more about what I've learned in the process later. I'm glad to be back to the green. I closed most everything for the week of travel but my double diagonal on RIO is currently in a nice place so I'm keeping it open for now. Today's decline has taken my Iron Condor on DJX uncomfortably close to my short put strike.

Anyway, I've got to get back to packing. Thanks for checking in. I have some drafts written of all the Advanced P.I.T. classes, but I've been rather busy with the move.

Thursday, May 15, 2008

May 15th Progress Update

I'm starting a new regular segment to my blog, don't you special for being here at the inception? Since I started trading my Roth IRA with tos (thinkorswim) on April 15 I thought I'll give you my net liquidation progress on the 15th of each month.

Currently my net liquidation is +12.5% in 1 month.

I've been trading Iron Condors, OTM Credit Verticals, Calendars and Diagonals mostly on index products (SPY, IWM, QQQQ, etc...). I also have a double diagonal on RIO which has been working quite well. As I've shown previously on my SPY position, I favor balancing Delta to my outlook. If I feel that the market will be more likely to go up, I balance my portfolio with positive Deltas to the degree of my conviction that the markets will go up. I'm still learning which strategies are most agreeable to me, but I know I like having a positive Theta (benefit from time decay) and spreading positions across time is an interesting way to have many features working for me. I can get a benefit from increases in volatility, while still having a positive Theta. Options are very interesting, but it can get a little complicated.

For continuity's sake I've decided to throw in a snapshot of that same SPY position I showed you last week. You can see we've moved right up into the middle of my profitability range. The three red dotted lines represent breakeven on 6/21 and the current price. According to thinkorswim's analysis page (which I believe is based on "normal" distribution of price), I have about a 57% chance of keeping some money, a 15% chance of making a over $400, a 19.5% chance of losing over $200 if the markets sell off down to below $136 and a 23% chance of losing less than $100 if we continue on up above $148. Please note, I don't do the calculations, it's one of the many cool features that thinkorswim offers, I'm simply reading them right off the following risk graph:

Tom Sosnoff - Triple Witching Tips

I've mentioned previously that I switched my brokerage to thinkorswim (tos). I will tell you more about why in a full feature post, but for now, I want to share with you one of the many reasons. I've been listening to their free Wednesday chats during my commute and am picking up interesting bits of market knowledge from Tom Preston, Tom Sosnoff, Joel Blaum, Tim Knight, and other contributing members of the thinorswim family.

Tom Sosnoff tends to bring in fairly advanced topics when he presents on the Wednesday chats and the subject of Triple Witching is a rich point of departure. What is Triple Witching? It's a magical time that comes 4 times a year. I like investopedia's definition: An event that occurs when the contracts for stock index futures, stock index options and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December.

Tom Sosnoff has talked about triple witching on a few chats throughout the archive but so far the September 12 chat (download the mp3) is the densest I've heard. He covers many ideas about volatility and how to strategically position yourself to place the odds in your favor at a triple witching expirations. I find the information Tom Sosnoff presents very interesting and worth the time it takes to grok. I'm excited about this particular chat session even though I haven't heard all 15 points he presents yet. I've only heard the first 20 minutes or so, but recommend having a listen if you're prepared to delve into such dense subject matter.

The complete archive of Wednesday chats is available by clicking here.

Tuesday, May 13, 2008

Turtle Review Correction

After reading my 2fer Turtle Book Review, Michael Covel, the author of The Complete TurtleTrader has inquired about my source regarding his status as a Trader. In the introduction to his interview on wallstrip, Lindsay, the then host of wallstrip (very entertaining, nicely produced video podcast), states that he's not a Turtle (clearly he's human, but not one of the few "Turtle Traders"), nor a Trader. Michael has emailed me to inform me that, while he's not a hedge-fund manager, he does trade his own account. I stand corrected by the source himself and I think it speaks well of his credibility.

I'm as surprised as anyone that the author would read my little review but now I fear I may have stepped into a feud that I don't fully understand. From Michael's copious references, I believe that he put a lot of time and effort into researching his book. It seems the controversy stems from the inability to verify Faith's trading record while a Turtle because the records are missing. If memory serves, Faith's are the only missing records out of the entire Turtle experiment. Without such verifiable proof, the only source for Faith's record is his own version of what happened in Way of the Turtle.

Credibility issues aside, I found both books enjoyable and worth reading and while I'm critical of Covel's technically correct "zero-sum game" claim, his book is an interesting and rather comprehensive journalistic look into the famous experiment and I'll add Covel's Trend Following to my ever expanding list of reading materials.

To Michael Covel: thank you for stopping by and correcting my error and feel free to leave a comment. Also, thank you for your hard work in bringing together so many people's stories to get a more complete picture of what actually happened back when Richard Dennis decided to run this now famous experiment.

Michael Covel's website is:
Also check out the related sites: and

Saturday, May 10, 2008

2fer Turtle Books - Reviewed

Warning, this developed into a rather lengthy review.
Proceed with caution.
You have been warned ;-)

I have much to share with you and I've been having a little difficulty getting back into the groove of posting about my progress, so I thought I could continue my way back into regularly posting with this book review. Actually this is a 2fer book review. Recently I read both The Complete TurtleTrader: The Legend, the Lessons, the Results and Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders. I found both to be well written and easy to read even though the two told rather different stories in different ways. I particularly enjoyed Curtis Faith's style as it was clear, to the point, and well communicated. It practically reads itself and that's quite a feat for the subject matter. Covel's Complete TurteTrader was more of a journalistic look into the primary player's lives. Rather than a traditional review, I'm intending this to be a journey of my discoveries from reading these books, a what I learned, rather than a what they said.

The Complete TurtleTrader was a fun read. It seems to be rather well researched and has plenty of reference materials quoted to support it's voracity. Michael Covel does impress upon us an interesting view of Richard Dennis, of whom Covel seems especially fond. While I felt it was entertaining, it was not very educational for learning the turtle trading system. One thing that spoiled my experience of Covel's clean prose is the multiple times that he referred to trading/the market as a "zero-sum-game". I can't let someone get away with that. After all, even if a stock moves in your direction you could still lose money between slippage and commissions, aka Cost of Trade. Do you think Cost of Trade = Free? I could have let it go if he didn't repeat it at least 3 times. How can one have done such a brilliant job everywhere else in his research, yet still believes the myth that the markets are a zero-sum-game? This gives me pause. Yes, there are arguments to support the concept of the markets as a zero-sum game, but practicality and the experience of losing on Slippage and Cost of Trade tells me: while the markets may be a zero-sum game on the whole, individual participants don't share this benefit.

I was sucked in by Covel's representation of Richard Dennis' personality. He sounds like a friend that you think is either brilliant or crazy or some combination of both. An admirable quality. I like people who shake things up. The brave souls that go against the current way of doing things in order to bring everyone into a future where it can be done better are a valuable dissonance. The descenting voice almost always has something to say that is a benefit to hear. I have an outlook in which I want to improve the quality of life for everyone to whatever degree that I am able. This tends to bias me towards thinking that others have similar motivation. It may not be the truth, but if I can lead the way in what I do, maybe others can too. We're in this thing together whether wanted or not. Why not work together to improve it for everyone? Dennis' actions could certainly be interpreted as an act of giving back what he'd been given but I can't speak for another man's motives. The Turtle experiment created something for the record books and broke down some of the walls that separate the people from the market. It makes for a good story and I think Dennis may have simply done the experiment for the publicity and the sheer fun of doing something destined to become legendary.

Although citing the Turtles experiment is often used as proof that anybody can become a successful trader, there are too many unacknowledged points that don't provide support. You can get closer to the truth if you state what happen. Those few individuals (about 10% of those interviewed) hired based on Richard Dennis and William Eckhart's criteria had mixed results both during and after the program. Some of those became very successful traders, much of which could be attributed to their experience as a Turtle. So, if you define anyone as "a few out of a selected few" then yes, anyone can become a successful trader. Personally, I believe in the power of belief. If you believe you can become a successful trader than you will do so.

Despite Covel's criticism and denouncements of Curtis Faith's claims, Way of the Turtle made for a worthwhile read and was more educational than The Complete TurtleTrader. Covel goes out of his way to speak ill of Curtis Faith. While preparing this review, I discovered that Michael Covel isn't currently a trader and never was. Does that invalidate his writing? Certainly not, but it may help explain his adherence to the zero-sum-game dogma. While Covel may have collected a lot of information about trend following from others who are successful traders, it undermines his credibility as an authority on the subject. It's like a way of saying: while I know this works and you can get really great results, I don't do it myself because I don't believe it. What reasons can excuse a non-practitioner to sell you on something he doesn't do and hasn't ever done? While Faith no longer trades and seemed to have eventually wiped out, at least he actually did it. (see: Turtle Review Correction)

I say that Faith's book was more educational because he talks in depth about the actual rules, explains risk better than anyone else I've read, and supports his information with math. Yes, it is more technical than Covel's book, but the reader reaps the reward for the intellectual effort exuded. Faith successfully brings home some valuable aspects of risk and an interesting argument about efficient markets. One way to make money in the market is to exploit an inefficiency also known as finding an edge. If the markets are efficient, where could we find an inefficiency that could give us that edge?

Faith proposes that the inefficiency is the perception of the market participants and lays a foundation for psychology as the inefficiency. After all, why is AAPL trading at $183.45 a share? Because someone who owns a share of AAPL is willing to sell for $183.45 and someone else is willing to buy for $183.45. All market participants collectively agree that it's worth $183.45. This agreement is based on the participant's viewpoints about AAPL. If you're buying, you do so expecting it will go up. We're all in it for the money. Why would you buy something if you thought that it's overpriced? All of these competing interests have different expectations. Because group behavior is more primitive than an individual's behavior, you can profit from understanding how the group behaves as a whole. This is the realm in which you can have your edge as a trader.

It is also a strong statement for the ability of technical analysis to uncover certain patterns of behavior that result in the ability to choose a direction with a certain percentage of confidence for a profitable trade. A price chart is the history of each day's agreements amongst all market participants. Past price data is the agreement paper-trail. With that in mind, can we make money by looking for previous situations that are similar to current market condition? I believe that there is room to find an edge by looking at the past price data. Have you felt the pain of a trade go against you? Have you felt the joy of a trade that worked perfectly? I have. It could be stated that price is a gauge of the emotional response exhibited by market participants. The explanation of why "buy on misery and sell on euphoria" works is in the domain of behavioral psychology.

Faith's writing has helped me understand how a trader makes money. It's as if my job as a trader is to exploit the nature of group behavior. Will this make my trading perfect? No way, but it does give us a starting point. The rest is setting up a system that makes more money that it loses and leaves me with money to continue to stay in the game even in the event of the inevitable drawdowns. Any profitable system must mitigate loses and therefore employ risk management. Faith's explanation about risk is really eye-opening. It still gives me pause and forces me to look into how I diversify my strategies so no single event or risk will take me out of the game. It's not just a matter of diversifying the types of products traded, it's a matter of diversifying strategies.

Certain risks (directional, time-sensitive, etc...) are inherent in certain strategies (selling stock, buying options, etc...). Balancing these risks using multiple strategies with different risk profiles is an invaluable way to mitigate risk. This is also known as hedging and is a smart practice when you understand the kind of risks we are exposed to in the markets. Hedging strategies have overhead, but many can balance your portfolio in a way that is both profitable and not overly exposed to any single type of risk or risk element.

The Turtle trading rules wouldn't be described properly as employing hedging strategies, but the nature of the way Faith explains risk makes me feel more comfortable using hedges to mitigate risk. That's the opposite of what the Turtles were doing. They were going for high risk, high reward. You can capture big moves with a trend following system and when you do, you make big bucks but the contained drawdowns are more frequent. One reason it can work is because most people can't deal with losing that often and eventually less people are competing with your trading system. If your trading system has truly stood the test of time it will begin to work again because similar market conditions will return and there will be less competition. It may be more or less effective in the future than in the past. If you've tailored your system for a short sampling of time, you can become quite vulnerable to the kind of excessive repetitive drawndowns and be wiped out before more cooperative market characteristics return. The Turtles managed risk by having set units that would represent the same amount of money risked in each of the products they traded.

Another key distinction Faith brings is the tendency for outcome bias which helps to explain how recent outcome tends to color your view. For example, how do you feel if the last 7 trades went against you? 5 consecutive winners? You get the point, but a string of losses that are perfect executions of your system is the sort of thing that can cause you to bail on a system that will start working again. This is why any system you choose should be thoroughly backtested using robust statistic (another point Faith explains quite well) over a long enough period of time to weed out the noise and for you to get a better idea of how this holds up to many different market conditions.

I'm realize I didn't say much about what the authors actually said, but I did warn you that this is a personal account of what I walked away with. During this time I've also been listening to the thinkorswim Wednesday chats and I've also more recently finish Mark Douglas' Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude. No doubt that both of those will influence everything I just wrote about. You could be wondering: how did he get that from those books? The answer: I may not have, but I think I've fairly characterized my opinion of these books. I think they're both a good read, but now you know which one will deliver the kind of story that suits your interest.

Aside from the books themselves, this review: On The Turtle Myth: Michael Covel vs. Curtis Faith and the referenced materials it incorporated aided my research about the Covel/Faith argument.

Thursday, May 08, 2008

SPY Position

I thought I'd share with you one of my current positions and thanks to the selloff today, my IRA account is currently up 5% in 23 days. I funded this account for 2007 taxes and first traded it on 4/15/2008. I'm referring to my account's net liquidation value, so of course this is comprised of currently open trades. No guarantees. I have a variety of positions and I thought I'd show you the current risk graph for my open positions on SPY:

I switched brokerages to thinkorswim a few month's ago. I didn't share the news with you at the time and I apologize. Part of the reason why is because of the risk graph you see above and I'll tell you more about it in another post.

If you're having trouble decoding the graph, the price of SPY is along the bottom and my profits and loses are on the left side. The white line is today's value and the green line is the value at expiration in June. It doesn't look like a "standard" position risk graph, does it? That's because it's a combination of 2 spreads: a Skewed Iron Condor and a Put Diagonal (aka Diagonalized Put Calendar). You can see that I'm profitable at June's expiration if SPY is between $135.64 and $148.80 and reflects my current market outlook which is mildly bullish.

Mildly bullish? Everything has been going up like gangbusters but I don't quite understand why. I think a little hysteria could enter at any time, and we could see another drop, but the trend is up and a lot of news items are "softly" positive. It seems the market is reacting too positively and I think there's a good chance of getting hung up in this range for a couple weeks if not more.

The trend is up and as you can see I have very little to lose to the upside even if the bulls stampede to a new high before 6/21/2008 (I'd lose merely ~6% of risk). But come now, we're heading into summer which often softens the markets, in an election year which seems to have boosted volatility, and in a year where January closed down. The saying is: As goes January, so goes the year (it's not true, but often the things people believe, especially when enough of them believe it, will cause it to come true -- commonly known as a self-fulfilling prophecy). The three may just form a trifecta that blows the top off the market, but I doubt it. Those are my thoughts and I'm willing to place some bets in that general direction via a combination of option spreads. What do you think?