Neutral

I opened a fairly sizeable position (by my standards) in SPY 118 puts at the close. These puts are around a a little over a couple bucks in-the-money. I'm in them at 280.6 per contract. I think (hope?) the market is going to rally after the FOMC meeting on Tuesday. Despite that sentiment, I opened this bearish bet because I don't believe this big run-up into the close. I think the people who made money short yesterday and this week, were covering to get flat in front of the weekend. In addition it's the last day of the month, and long-only funds may have been defending their positions. Furthermore, on Monday the SEC is dropping the short uptick rule for many stocks...maybe Monday there will be a tendacy for people to exercise their new found freedom to short at will. At any rate, I hope to be out of this position prior to the FOMC meeting. According to IB's interactive Analytics I am now completely delta neutral, going into Monday. I'm not sure if that was my intent but oh-well.

The May Portfolio got hit big time by TWX today. Right now if TWX doesn't recover that one position will cost me all of the potential profits from the May portfolio. Of course, if it goes worse, I could start to get really hurt.

Nothing to see here.

I am very pleased how well the May Portfolio stood its ground today. We had a big sell-off today, and none of the May stocks dropped very much. A lot of these stocks were selling off big during some of the other sell-offs. I think this may mean that we have bottomed...yet I still have much trepidation with the fed meeting next week, and the market becoming overbought some time next week. Other than that, this was an un-eventful day for me tradingwise.

No more earnings plays.

I traded out of my last earnings play today at a 50 dollar loss. I was probably pre-mature.

The May short-premium portfolio is doing well. It feels like theta decay is starting to set in. GS and UNH were strong today.

Indecisive

I didn't do much trading today. I tried to get out of AFC at a small loss. This is the last earnings play I'm still holding. The spread was huge in this option. I offered in the middle, but never got lifted. I don't know why I want to get out of this position. Earnings don't come out until Friday. It's probably a good idea my offer never got lifted.

I also put in a bid at 2.80 for DNA September 85 Calls. According to optionetics' model it has a high theoretical edge. Eventually I cancelled my bid though, other than the theoretical edge I really didn't have a reason to buy. Furthermore, I have a general phobia against buying out of the money premium. I know that more than likely each time I do it I will lose money. If the expectation is high I should still be willing to lose money 2 out of 3 times, assuming I'll make it up every 3rd trade, I guess. Probably in this case it was a good idea to cancel the bid...I would have lost 30 cents by the end of the day.

I was tempted to buy QQQQ puts yesterday...wish I had. It just seemed to easy to keep trading counter-trend in the QQQQ's every day..I was concerned that my last 2 QQQQ successes in a short time frame was making me arrogant so I chose not to trade yesterday. Even though the market sold off today, I didn't buy either. I think it has been so easy to just buy every dip and flip the next day lately...the masses are going to catch on soon and get crushed. Maybe I'm out thinking the situation though? I'll be checking the Put/Call ratio tonight. If it ticks up again, I may be looking to buy if the market is down much tomorrow.

My May short-premium portfolio was down slightly today. I could get out of my May portfolio for a small loss at this point. If I trade around it a little I could maybe even get out for a push. I'm tempted to get out and wait for the easy money to return...it always returns right?

All my time on the tools...none on the actual work.

On the Elite Trader message boards, a guy who posts under the user name of Maestro posted this message:

The only high probability straddle play is the IV play. I normally buy a straddle on the following conditions:

1. Typical historical IV of a security on the day of the report/announcement is >= 60%

2. There are 3 - 5 days before the announcement

3. There are 10 - 30 days to the expiration day

4. Current IV <= 30%

If those parameters are met then buy a straddle and sell it on the day of the announcement as the IV peaks. It typically makes 10 - 15 cents profit after commissions and slippage.

Cheers.

Most of what is posted on Elite Trader is garbage, and only useful as a contrary indicator, but what I like about the boards is that there are a fair amount of professional traders who frequent it, and you often see a few gems of insight. I think Maestro is one of those people. I want to systemize and backtest this trade he talks about in his message...not because I think it's a great system that will make me a lot of money, but mainly because it will be a good exercise to help me learn about volatility trading. The tasks I will need to do to implement this system are as follows:

(1) I will have to write routines to import historical earnings data, which can be obtained from finance.yahoo.com. This will give me another valuable source of market information to study.

(2) I will have to buy options data, and create a database structure to hold it. Gala suggests that I buy it from Stricknet.com. It like their prices, and I am going to go with them. Unfortunately I will only be able to obtain data back to 2003, but that will be fine to start with. I will have to be careful how I interpret any results I get from analyzing this data because volatility has been steadily declining since 2003...eventually I will need to get some data from periods during which volatility steadily increased. Creating the database structure and tools to import the data will probably be the biggest task, but cnce this is done, the door will be open for me to do most any options study I could think of. This will be a huge step forward in my quantitative toolset.

(3) I will need to write routines for calculating implied volatility, from the options data. This won't be a huge task. This will also be a very nice addition to my quantitiative toolset.

So as you can see, whether backtesting this system gives good results or not, I will have built some very useful tools and knowledge from just testing it out. One of my favorite stock market authors is Victor Niederhoffer who wrote 2 great books Education of a Speculator, and Practical Speculation. One of the important points I've picked up from his blog and his books is to test everything that can be tested, and that is also why I want to take on the task of testing Maestro's system.

I took a little break from my regular work Saturday to start on step (1) from above. I determined that I needed to speed up my database before moving forward. I mentioned previously that my database of stock market information has grown recently, and my structure was no longer able to handle the immense amounts of data. I spent some time learning how to optimize MySQL.

I have a program that is used for managing and viewing the data in my database. The first time I executed it a few weeks ago, after the new data had all been downloaded, it took more than 15 minutes to execute it's first query. I closed the program before it could finish. I spent a few hours learning about database optimization. I added a few indicies and removed most of the inidicies that I had previously added because I discovered they were inefective. The query now takes exactly 1 minute and 33 seconds to run now. That is the power of a relational database system, and I am quite impressed that without changing any code...just optimizing the structure a litte I was able to get such a dramatic increase. (even though I work with relational databases on a regular basis, I was still surprised...) I also now execute this query in a separate thread so that the main program can be used without having to wait for this query to execute.

Maybe I should only trade the Q's?

I sold my QQQQ Calls today for a profit of 57.50 per contract. I'm pleased with my execution. I sold at 4.50, and I don't think I could have obtained a higher price today.

I buy or sell the QQQQ's in small quantity every now and then based on my "feel" for current market sentiment, which I get from reading the market news. If sentiment seems to bullish I short the Q's, and if sentiment seems to bearish I go long. I haven't maintained accurate records of these types of trades, but I think I almost always make money when I trade the QQQQ's, and when I don't my losses are usually small. Usually these trades are over a couple of days. I sometimes wonder if I should only do these types of trades. I would keep my entire account in cash, and just do these QQQQ swing trades in large size every few months.

The question is would I have enough discipline to do that? I would be following the markets every day, but only making trades every few months, or maybe every few weeks. I'm not sure I have the discipline not to overtrade. Furthermore, most of my Q's trades are short trades that I take on as a sort of hedge when I am nervous about my pre-existing positions in the market, which are always net bullish. If I didn't allready have bullish positions would I be able to take on the trades at timely market points without that gut bad feeling about my other positions? Finally, there is one other problem. Maybe I only remember the good trades and I'm not as good at trading the Q's as I think. This is the kind of thing this blog is for. Months from now, I will be able to look back at my trades and not only have a record of my trades, but also a record of how I felt about them at the time.

The May portfolio was down today. UNH dropped below its strike early today, but rallied and heald above the strike most of the day by a thread. Near the close it recovered a little. I am very concerned that this one position could wipe out all of my profits for the month, and maybe last month's profits too. I need this position to hold above the 90 strike for 4 more weeks...

On a side note, I have a volatility trading system I hope to backtest and post about soon. I still need to finish up some work for my main business, before I can feel good about spending a weekend programming trading strategies.

Easy Come...Easy Go

I took some losses today. Apparently HAR's earnings didn't help the stock out. I took a $155 per spread loss on the HAR bull debit spread. This brings up a dilemma. I could have closed the spread up $70/spread yesterday. Almost every single earnings season, I have a position where I'm up big prior to earnings, and I wait for earnings and the stock loses the gains. Afterwards I tell myself that if I'm ever up big prior to earnings that I will sell before the announcement. Will this be the last time I don't sell in advance of earnings? I hope so.

I re-entered the QQQQ May 31 calls that I sold yesterday. I was pleased that my price was close to the lows for the day. I probably could not have bought any lower. After I bought them, the market rallied a fair amount. Generally on a Friday like this where the market has moved big in one direction, I expect a counter-trend to develop into the close as winners take profits and get flat for the weekend. It seemed like today's rally off the lows was particularly fast and strong...could this be a sign that shorts are nervous, and maybe we had a bit of a squeeze? Maybe this is wishful thinking because I am long.

I added a new position to my long-term portfolio. My long term portfolio consists of stocks I hold for 6 months+. I purhcased a small amount of NITE stock and some out of the money January-2006 NITE 10.00 calls. One of my favorite RealMoney.com columnists, James Altucher(Trade Like a Hedge Fund, Trade Like Warren Buffett) has written a series of articles recently highlighting NITE as a value play. Today in the Columnist Conversation section of RealMoney.com, Cody Willard, who is another one of my favorite columnists, mentioned that he was acting on James Altucher's idea by buying NITE stock and some out of the money calls, so I decided to try the trade too (in small size.) My other long term positions are SHLD, CMCSA, LU, and XEC. My long term positions almost always come from reading Realmoney.com articles.

The May portfolio is no longer at a positive P/L. All positions are still above their strikes. Considering how much the market sold off, I am pleased how well my positions heald up. Compared to the other recent market sell-offs, my positions were not so volatile today.

First Profits of the month!

I took some profits today, and it felt great! I mentioned earlier that I had bought some option picks from two of Steven Smith's column on realmoney.com. In last week's column he had suggested YUM Calls, AFC Calls, and OSI Puts. I couldn't get a fill anywhere near the price he suggested buying the YUM calls at, but I did get fills in the AFC and OSI positions. OSI sunk today, and I sold my puts for a profit of $149 profit per contract. It was fortunate that I was not executed on the YUM calls. Yum's earnings weren't good enough, and it dropped today. I feel relieved that I did not chase that one up. If I had actually been able to get executed at the price he suggested it would have been a very small loss so it was actually a great call on his part, since it was such a low risk relative to the potential reward for the trade.

Steven Smith wrote another column yesterday where he suggested TXT and HAR calls as further earnings plays. Now this is a situation where I missed out because I was unwilling to chase the price up. He suggested buying TXT at $0.75. I put a limit order in at $0.75, and never got filled. There were plenty of opportunities to get executed at around $0.90 though after I read the article. The earnings for TXT must have been good, because the calls closed at 2.70 today, and traded well up into the mid $3.00s intra-day, so I missed out on a big gain. I did get executed on the out of hte money bull debit spread in HAR at about the price hs suggested. HAR was up big today ahead of the earnings, but the bull spread was still out of the money. Earnings were after the bell so we'll see tomorrow if I'm able to make any money off of this one.

I know why I was reluctant to chase these positions up. (TXT and YUM) It's because last week, I chased up TWX and UNH, which have been my most problematic positions. You win some, you lose some...phantom gains aside, it's still probably a good policy not to chase stocks that have run up. I must not let the missed opportunity in TXT affect my discipline.

I also sold my QQQQ May 31 Calls today. I feel very good about my other sale (OSI). By the time I woke up, it is unlikely I could have sold at a higher price than what I got. In fact I got executed within $0.10 of the high for the day. I do not feel very good about my sale of the QQQQ calls. I only made $28/contract. My intuition told me that the market would be strong all day. By the time I woke up, the market was up big, and I felt that shorts would be panicking on such strength and would cover into the close, pushing the Q's higher. Well after a small run in the nasdaq higher, the nasdaq ticked down a couple points and I opted to hit the bid on these options. I immediately felt dumb for it. It was pure emotion. I didn't want to risk having to get out of this position turn into a small loss. One camp says you can't go broke taking profits, but I disagree. For the amount of risk I was taking on in that position I should have had the patience to hang on for a bigger gain.

The May short premium portfolio ticked into the green today. The Good news for GOOG and EBAY obviously helped me quite a bit, but more importantly TWX moved up big today and is no longer in the money. I'm still concerned about GS and UNH. I suspect that the over-all market will trade higher between now and May expiration, and that should keep GS and UNH above their strikes. (I hope.)

A Green Day

The May portfolio had its first up day ever. After being down every day for like a week this was a nice break. The market was anticipating good earnings for Ebay, and apparently Ebay delivered. TWX is slightly in the money now. I will waitat least for TWX's earnings on May 4th before closing that position. GS is within a day or 2 of going into the money. Unfortunately since GS and UNH have both allready released their earnings (and they were good), I have no catalyst up ahead to turn these stocks around. These two will only stop selling off once the broad market stops going down.

I took on a few small long option positions based off of some "earning surprises" picks from the option guy on Realmoney.com. I'm starting to feel a little uncomfortable with the amount of capital I have at risk, considering these are all out of the money long option positions. There is a very high likelyhood that some or all of them could be near total lossses. I'm going to look to sell off my QQQQ long option position soon. I bought it in case of a quick bounce back, and we haven't gotten it. I will look to sell it soon, maybe tomorrow.

A reprieve from the bleeding?

Well it looks like the UNH CEO appearance on Cramer's show last night did the trick maybe? UNH was up today. TWX was up much of the day as well (closed 0.2 down though). Both are still above the strike of my short puts. Hopefully these 2 positions continue to hold out. INTC and Yahoo both reported good earnings and are way up after the close. Hopefully I get a nice pop on my QQQQ calls tomorrow. The yahoo earnings are also moving GOOG. This helps, but my GOOG short puts have always been comfortably out of the money, and have allready lost a lot of premium. I'm wondering if the yahoo quarter will be good for EBAY? EBAY is up after hours today....but if YHOO is doing well maybe that means EBAY has to spend to much for internet advertising?

Only 32 more days until options expiration. I'm starting to notice a monthly cycle. I'm biting my nails for the few weeks after expiration as my new positions for the next expiration get put on. The premium is largely a function of volatility (vega) at this point, and theta (time) helps me very little. If the stocks move against me, I see large losses in my P/L, but when they move for me, the options premium barely budges in my favor. Then a week or two before expiration, the premium starts to evaporate at a high rate and I'm much more relaxed. Options expiration has become something I look forward to every month. It's the same feeling I'd get in school when I looked forward to school letting out for the Summer.

Actually I would feel pretty relaxed now, if UNH and TWX weren't so close to there strikes. Normally I have a much larger buffer this far out from expiration. I need TWX to stay above 17 and UNH to stay above 90. Hopefully in the future I'll remember this fiasco next time I'm tempted to chase stocks up.

The market didn't crash!

Ok, I didn't really expect a crash today. It seems to me markets don't crash when all of the sentiment indicators say that we are at an extreme bearish reading, and the put/call ratio is high, but what do I know? I've never been in the market during a crash.

I bought the market every day last week, with my most bullish purchase on Friday at the close. Over the weekend I had nagging doubts, as I talked to my friends. It seemed most people weren't really aware of the extent of the sell-off that we had last week, which contradicted my feeling that the negativity was all priced in. I felt better Saturday Night. Flipping through the channels, I noticed the market decline got mentioned on Weekend Update of Saturday Night Live.

Anyway, I was a buyer almost every day last week. I tend to distrust volatile action during options expiration, and on top of options expiration, we had taxes. I was thinking that with the market down, people might be inclined to sell stock in order to lock in some capital losses to deduct on their tax returns, and that this could be aggravating the situation. Cramer had a column on realmoney.com with another tax angle. He said that the AMT is hitting more people than usual this year, and this is forcing people to sell in order to pay their unexpectedly large tax bills.

The May options portfolio is holding up ok except for 2 positions UNH, and TWX. I bought both of these guys right after the fed notes came out and the market had that huge reversal to the upside. I had been watching these 2 stocks, and was worried that I wouldn't find any more ideas for the May option portfolio. What a big mistake chasing those stocks was. These 2 positions are now close to being in the money. If I had waited a day or two I would have been in a much stronger risk/reward position. Furthermore I ended up finding plenty of other stock's to fill out a full portfolio for May expiration anyway...many of which were much more attractive than those damn TWX puts. I saw that the CEO of UNH was to appear on Cramer's mad money today. Unfortunately I had an appointment and had to miss the segment. Here's hoping he can pump up the stock. (I'm not optimistic.) I'm very dissappointed with myself for getting cought in that bull trap.

This is why I need to develop some good trading systems. Whenever you are trading on a discretionary basis...it's so easy to make huge lapses in judgement do to one's emotional state. My heart-rate was elevated while I made those trades. That should have been my first sign that they were a bad idea. It's been a long time since I've felt any kind of emotional response while actually making a trade.

Pairs Trading

So it looked like I was going to have a little time this afternoon to work on trading systems. I recently re-vamped and re-structured my stock database. I also added a huge amount of new data. I felt like working on some Pairs-trading. I wrote a C# implimentation of the Unilateral Pairs trading strategy in James Altucher's book "Trade Like a Hedge Fund" last summer, but I never did anything else with pairs trading strategy, but I did moniter the system using the QQQ/SPY spread off and on this past year. I don't think the system works anymore. It does seem like I see a lot of "buzz" on the internet about people using Pairs strategies...maybe that's why. Perhaps it's a crowded trade now-a-days. Anyway I had some ideas for pairs trading strategies I wanted to look at this afternoon. So I opened my control center app that I wrote for viewing the data...and I waited...and I waited...and I waited. Apparently with all the new data I've added to my database the database is now way to slow as it is currently structured. So I guess I'll spend time trying to figure out how to optimize my database instead. The first thing I did was add a new index. (about an hour ago) Now I wait for MySql to index the data.

While waiting for the re-indexing I started this blog. I've wanted to keep a trading diary for some time, but I lacked the discipline. This blog will serve as that trading diary.

Well it looks like the re-indexing worked. Now the query only takes a few minutes instead of over 15 minutes. I still need to get this faster, waiting 2 or 3 minutes to load my program so I can debug will mean for slow development.

What a week.

I'm so glad that April Expiration is over. Last week I was coming into expiration with a nice profit, and almost all positions profitable. I had read a link on Galatime (sorry don't remember post or link) about closing positions 4 to 10 days before expiration week. Basically the gist of the article was that options expiration week belongs to the professionals, and retail traders aren't equiped to compete at that time. This brought up a dillema...part of my rationale for selling out of the money premium was to avoid paying the spread both ways on most of my trades by just letting the option positions expire worthless, but still I could see the point of the article. So what I did was I closed some of the more volatile positions that were allready very profitable. I retained all of my positions that were trading at close to worthless ($5 to $10 on the ask for the short contracts), and I retained my volatile positions that still had a fair amount of premium left that were still well out of the money. Then options week came, and the market just started selling off. I ended up having to close several positions because they were getting in-the-money, or getting close to being so. I only lost money on one position which was good, but on many of my positions I ended up giving up substantial portions of the paper profits I had last week. The net effect was I gave up around half of the profits I could have taken last week. I suppose I should be happy I had profits at all after such a bad week I guess.

The one that hurt the most was a naked 32.5 INTC put, that I had sold around January for $125/contract. I could have covered that position weeks ago at $5 to $15 per spread easily. I ended up covering for $50 dollars on Friday. Ouch.

The question is what am I going to do moving forward? I don't know. In one sense this was kind of an extra-ordinary week. Maybe I shouldn't change my methodology because of one bad week. Options have such a large spread. I really hate to pay the spread twice. I don't know what I'll do next expiration, though.

I have 6 out of the money bull-put spread positions (GOOG, GS, UNH,TWX,ATK, EBAY) so far expiring in may. All are still out of the money, but I am starting to get nervous. One more day like Friday and some will start to move into the money. I also went long fairly deep in the money QQQ Calls (don't remember which strike) on Friday to attempt to catch a bounce next week. One nice thing about May's short option portfolio is that I had decided as I was building my positions for May expiration, to hedge with index puts for the first time. I went long some deep out of the money SPY puts in an attempt to protect the May portfolio against a 10% market decline. This is my first time hedging the whole portfolio with index puts...if the market keeps tanking maybe I'll get to see how well this works...

First Post

Testing...