Friday, September 30, 2005

This is where productivity comes from.

I saw this link on Nev's Blog today. It cracked me up. It's true though. People who can use google effectively have a huge competitive advantage over those who don't. If you are internet literate, it may be hard to appreciate just how amazing Google is. You probably take it for granted. A while back I was helping my Father set up his blog. He has been programming computers since the punch-card days. Unfortunately, they didn't have Google back in the punch-card days. As I was helping him with his blog I was shocked by how limited his googling skills were. He'd ask a questions and I'd say "I don't know...look it up on google.". He would look it up and not find relevant results. I'd say "No search using this keywoard, or put that in quotes", and then he would get results that he needed.

Here is one example in particular. My Dad took Latin in college, and knows it well enough to read whole books written in their original latin, although he cannot actually speak it. My Dad wanted to use a particular Latin quote in his blog. He couldn't remember the exact wording of the quote. He also wanted to confirm that the quote was from Cisero. He had googled it, and Google had returned lots of sites about Latin, including several full of famous old latin quotes from famous ancient Romans. He had spent some time searching through these sites but had not found his particular information that he needed. I said "hey let me try". I typed something into Google, and within 15 seconds, I had his quote up there, with its translation and source, right there highlighted on the screen. (I don't remember exactly what I was doing differently than him.) Despite the fact that he knows more about Latin than me, in that particular instant in time for that particular Latin problem, I knew more about Latin than he did, because I knew more about how to use Google than he did.

Using Google to find information is an art. It isn't simply typing a keyword in. Often effectively using Google is about figuring out what keyword will ONLY bring up the subject matter your interested in. It can be like a puzzle. With practice some people learn to solve the puzzle better than others. Google came out when I was in college or shortly after, I don't remember. Before Google I used Yahoo or Alta-Vista, mainly Alta-Vista. The problem was that as hard as it is sometimes with Google now-a-days to find relevant results, it was often impossible with Alta-Vista. I remember there was a period of time when no matter what you searched for in Alta-Vista, half the results would be porno sites and credit card scam sites. Search engines back then were not very good at determining relevance. Even worse, they were also easily gameable by the spam-site opporators, and so at times, they returned mostly spam. They just weren't very useful for finding information that wasn't fairly direct and trivial. As a result I didn't start honing my "googling" skills until sometime after college.

Now remember the scenario with my Dad and me? I am often a participant in the same scenario but with the roles reversed. Anytime I am using a computer with anyone younger than me, they always seem to be better at using google than me. An example is my girlfriend. Sometimes I have trouble finding stuff on Google. I ask her to help and she finds what I need almost immediately. The difference is that Google was out almost the entire time she was in college. When I was in college one still mostly did research in the library. My College Writing class actually addressed how to add a paranthetical reference to a website, but I'm pretty sure I was the only person in my class who used any internet research for our final research paper assignment. Not my girlfriend though. When she was in college, kids basically only used Google for doing research, apparently. She has a lot more experience using google than me. Despite the fact that I use google every day, several times a day to do my work, I still don't seem to be catching up.

I have several programmers who work for me. Google came out while they were still in highschool, so they have been using it since their teens. I am often amazed by the types of problems they are able to solve. Sometimes they have projects that I think they probably won't really be able to do because they don't know as much about Math as me, or because they haven't been programming as long as me, and they'll probably ask for my help later. The thing is they often don't need my help on this stuff that I think they will need me for. It doesn't matter that they don't know as much math as me, or haven't been programming as long. What matters is that they know how to use google, and this puts the expertise of the entire world at their fingertips. Someone, somewhere on the web who knows a lot more about Math than me has probably come up with the formula they need for whatever problem they are working on and posted it somewhere, and these kids know how to find it using google, so they don't need to know as much about Math or whatever.

American workers are the most productive in the world, and productivity has been increasing at a high rate since the 90's. I think Google is a big part of why this is. It will only accelerate as the young kids who are expert googlers reach their prime working years and begin to obtain positions of power in politics and industry.

Wednesday, September 28, 2005

Chasing Flies

I'm trying to work into the Oct 117/120/123 SPY butterfly for a credit between 0.20 to a 0.50. I started today by shorting the 120 calls for 2.85. This put me into a bearish position in the SPY with potentially unlimited upside risk. (Being short an in-the-money call is pretty close to the same as being short stock when the stock moves up.) In order to establish the position for a credit I need to buy the 117/123 call wings for less than 5.70 (2.85*2). I was prepared for this to take several days, if I am able to even pull it off at all. During that time I am exposed to the upside risk. If the fly gets completed for a credit it will be a nearly risk-free trade at that point. So that's the goal.

Now today it seemed like the market had quite a wide intra-day swing. After I shorted the 120 calls the market dropped quite a bit. At several points today, I could have completed the fly for free or a 0.05 credit easily. The question in my mind is should I have? I feel bearish about the market and think that I have a good chance of of buying those wings cheap enough to get into the fly for a good-sized credit.. This would then give me a guaranteed profit (at a nice rate of return) with an opportunity to make an even greater profit if the market settles down somewhere around 120 at expiration. The free fly (one where I buy the wings for exactly 5.7) would only give me a free oportunity to make a profit. I really wanted that guaranteed profit so I did not complete the fly.

Being able to get into a free butterfly that isn't that far out of the money in return for taking on an hours worth of directional risk seems like quite a gift from the market. (Although I don't have enough experience with this type of trade to really know how often this happens.) I hate to pass up good fortune. I fear that I was greedy. Holding a naked short overnight is a order of magnitude more risky than holding one for an hour. I could have mitigated the risk, and still heald out the oportunity to make a nice profit. The 123 call has a small delta and won't go down a whole lot as the market goes down. Most of the price reduction that will allow me to get into the fly for a credit if the market goes down will be in the 117 call as it is deeply in the money and has a high delta. It would have made sense to at least buy the 123 call and mitigate some of my upside risk. In hindsight, I regret not doing this.

Tuesday, September 20, 2005

Google's Core Business and the Demise of the Cellular Carriers

Many people think that the reason that GOOG raised all of that money in their secondary offering for the purposes of creating a nationwide Wi-Fi network. I see a lot of comentary that sounds like this:

A WiFi service, which offers a high-speed connection to the Internet, would take Google even further from its Internet search roots and move it into the fiercely competitive world of Internet access providers and telecommunications companies.

This isn't a departure from Google's core business, though. Google isn't in the "search" business. Google is in the business of placing context sensitive ads in front of your face as often as possible, by whatever means possible. Search is just one way they do that. Like most internet users, every time I use the internet I use Google. Every time I use a Google product, I give Google's software an opportunity to learn what I'm interested in by analyzing the words I type into the Google product (search engine, blogger, chat, gmail, etc.), so that Google can present an advertisement in front of me that reflects my interests. Because I use Google's products repeatedly every time I use the internet, it is in their best interest to make sure that I am able to access the internet as often as possible. Every time I use the internet the likelyhood that I might click on a google-ad increases. This is why a nation-wide free Wi-Fi network fits in perfectly with Google's business model. They have become such a ubiquitous and essential part of internet usage that they are in a position to benefit from increasing internet usage in general.

Google's new Wi-Fi network is a major threat to the cellular phone carriers business. Google's new chat software gives everyone essentially free internet phone calls. It has been widely recognized that companies like Skype and now Google represent serious competition to the phone companies land-line services. In a couple years no one is going to pay for land-line phone service when you can get that for free over the internet. I personally haven't had a land phone-line for almost 7 years. One thing I am willing to pay for still is cell phone service.

Now consider this. Almost everyone I know uses Google Talk now. Those people not on Google Talk are on MSN Messanger service. This includes freinds, family, and business. Everyone I need to talk to I can get ahold of using internet chat clients. If there was Wi-Fi internet access everywhere I go, and if the sound quality of the voice-chat in Google Talk is as good as cellular phone reception (it is), then why would I ever need to pay for cellular service for voice and text messanging? I could use any generic portable Wii-Fi enabled internet device for what I now use a cellular phone for. So now, not only are the legacy phone companies endangered by google talk, but also so are the cellular carriers.

(Disclosure: I'm currently long GOOG and QCOM call options.)

Monday, September 19, 2005

Wrong on OIH but I Still Made a Little Money

A while back I opened up a put ratio spread in the OIH. I was short the 115 puts and long the 120 October puts in a 2:1 ratio. This was a bet that volatility in the oil service industry might decrease with a slightly bearish directional bias. I know it seems crazy to go short volatility on the OIH (or any stock for that matter) in this environment. My thinking was this. In the aftermath of Katrina it seemed like there was a lot of fear in the market regarding the price of oil. Furthermore it seemed like everyone was bullish on oil volatility. It was getting a lot of press and I thought things were probably as bad as they were going to get, and at that point more than likely things would be just fine (comparitively speaking) and that volatility and the price of oil might decrease. Basically I was thinking of a slow drift downwards off of the prices at that time. Since I don't have a futures account, I decided to use OIH as a rough proxy for my oil idea.My feeling was that the main danger was that the OIH might experience large upward gaps. I had very little fear of a large downside move. The nice thing about a put ratio spread is that it can be (and almost always is) constructed with no upside risk. The position was established for a small credit which I would get to keep if OIH closed above 120.

Well I turned out to be wrong on OIH. It has stayed volatile and generally been going up. Today it was up over 4 bucks. There is concern about this new hurricane off of the Flordia Keys, and I think there has been some M&A activity in the sector. Whatever the cause, I was clearly wrong. I should have gotten long volatility, and I should have been bullish instead of bearish. The nice thing is that OIH has gone up so much that today it was very close to the maximum upside credit for the position. So I closed out almost all of the spread today. The profit from the credit actually turns out to not be that bad of a ROI considering how long the position has been open. I left a small amount of the 115 short puts open, in an attempt to capture some more premium since I feel much more bullish on the sector now (which means it's probably going to go down since I'm almost always wrong when I try to guess the short-term direction of a stock) The position is now pretty bullish, but I am still short gamma which is probably unwise.

Thursday, September 15, 2005

AAPL trade = more trouble than its worth

I got some clarification on how margin works from Interactive Brokers and from reading around on the web. I don't exactly understand why my margin ran out even though my account had excess liquidity, but the important thing is that I know how to know if it is going to happen again. Apparently I ran out of "Regulation T" margin for establishing new positions. This check is made 5 minutes before the closing bell by Interactive Brokers. I nievely assumed that if I opened my account window and the excess liquidity it showed was greater than zero I had plenty of margin to open new trades. Apparently this is not the case. I need to check another field called my "SMA" account. I don't really fully understand how this is calculated, and I don't care really. Due to my extreme distaste for losing large amounts of money I rarely use anywhere close to the max margin. The important thing is that I now know that if the SMA value is negative then I'm going to get a margin liquidation. I'm surprised this has never been a problem before. This was my first margin call/liquidation ever.

I closed out the AAPL positions today. The trade wasn't working, and it was using up tons of margin so it seemed prudent to take my losses now rather than try to keep working it to try to reduce losses further or get a profit from this point considering how much capital was required to keep the AAPL common short open. It's pretty stupid that a position that has the exact same risk as a put option (short stock, long a call) that can be purchased for a few bucks requires the same margin as a shorting a share of common stock. I know there is some move to switch equity options over to SPAN margining which is what is used in the Futures market. Maybe that will be addressed then, although I really don't know the ins and outs of SPAN margin calculations. I was able to narrow my losses slightly. I did manage to get out of the position with only a 66 cent loss instead of the 84 cent loss I was running yesterday. If you count the gains I made from my forced DJ position liquidation yesterday the loss was only 40ish cents. I'm going to count the DJ liquidation gains as part of this trade since the liquidation was caused by shorting all of those AAPL shares.

Wednesday, September 14, 2005

When good trades go bad!

I haven't felt like writing lately. I've mainly just been busy, and when I haven't been busy I haven't been able to think about anything to say. To get back into the swing of things I guess I'll just write about the interesting thing that happened with my AAPL trade today. Yesterday APPL sold off and seemed to be recovering. At that point I decided to try to leg into a free butterfly. First I purchased the wings of the butterfly, by buying the AAPL October 45 calls and the 55 calls. Then I put in a GTC (Good 'Till Cancelled) order to sell short the October 50 calls. My reasoning was that AAPL seemed to be moving up so I entered the bullish portion of the butterfly first. The over-all plan was to take some directional risk for a short period of time, in an attempt to build a risk-free trade at a later period of time.

Unfortunately AAPL stalled out and did not continue to go up, and thus my limit order to sell the body of the butterfly remained un-executed. My plan for today was this. If AAPL was up, I was going to give my GTC limit order to sell the body of the butterfly more time to work. If the stock was down, I was going to hedge my delta at the end of the day. This would lock in a loss, but I would still have the oportunity to either profit from a major move to the downside or still get into my butterfly at a good price if AAPL moved up enough, although I would probably no longer attempt to get into the butterfly for free.

When I woke up this morning AAPL was only down a few cents, so I was waiting to hedge my delta. I noticed the S&P started to sell off, and AAPL was trading a little below where it had been most of the day, so fearing a sell-off, I sold enough AAPL shares short to get to delta-neutral earlier than I planned. I still left my GTC order open to sell the body of the butterfly. It appears in hind-sight that my instinct to hedge was a good one since AAPL almost immediately sold off hard for over a buck just after I filled my order. I need to resist patting myself on the back for my great trading though, because more than likely I was just lucky.

The position is now basically equivielent to a long 45/55 combination (long strangle) that I have paid around 80 cents too much for. If AAPL has another day or two like today the position will probably be profitable. At that point I will have to decide whether or not to close the position or whether to adjust again.

A strange thing happened though. I had also been trying to leg into a bear credit spread in DJ all day today. I had sold short the OCT 40 calls, and I had an order to buy the Oct 45 calls to complete the spread. The position was working for me very nicely. DJ sold off slowly all day. Near the end of the day I noticed that DJ was now at a price where my order to buy the oct 45 call should be executed, but the order wasn't there and I had no position! Then I noticed that my Oct 40 short call position had been covered! Furthermore, my GTC order to sell the AAPL Oct 50 calls was also cancelled. I checked the executions page and sure enough there was an order to buy back the Oct 45 call that had been executed, but I never entered any such order.

Here's what I think happened. Even though I had plenty of excess liquidity in my account, I think I got a margin call (Interactive Brokers doesn't actually issue margin calls, they just liquidate your positions automatically) and this is how I think it happened. It has definately seemed in the past that some sort of margin check happens with open orders. It's not exactly clear how un-executed orders affect the margin calculation but I have noticed in the past it does have some effect in that Interactive brokers will cancel some of your orders automatically if executing all of your orders would exceed your margin requirements. (Often when legging into spreads I temporarily use more margin than the actual spread will use once it is completed.)

When I shorted my AAPL shares I used up some margin, although the account page showed that I still had plenty of margin left. I think what happened was that the GTC order in the system was affecting my margin maybe? My assumption is that that AAPL GTC order somehow affected my margin and caused that order to buy the DJ 45 Call to get cancelled. The strange thing is how did my DJ 40 Call get covered? It seems surprising that an open order would actually cause a liquidation. Even with the naked DJ 40 calls I still had plenty of margin as far as I could tell. Whatever happened it is very frustrating. The execution of the purchase of the 45 call would have greatly reduced my margin usage, and the DJ trade was going well. Furthermore my GTC order to sell the AAPL 50 calls had 0 chance to get executed so if that triggered this liquidation then that really sucks. If the order to sell the AAPL 50 calls had become even close to getting executed I would have long since covered my AAPL short position...which would also have greatly reduced my margin. Looking on the bright side, I guess I can be happy that the liquidation of the DJ trade did result in a decent day-trading profit...

I have an email in to Interactive Brokers asking for clarification of what happened. At any rate I think I learned a lesson today to not have too many large open orders.