You Don’t Have To Be Right

So perhaps it's just a bit ironic that I would post something about doing well in the market last Thursday, just before Friday's fairly significant selloff. More ironic still is that the stock I chose to use for illustrative purposes, Google (GOOG), took a significant dump to close down over 39 points on Friday.

Wow.

Well, I didn't lose a penny. In fact, on Friday, four of my option positions on the SPX expired worthless, just like I wanted. Why do I want that? Because when I opened those positions (spreads), I did so at credit, i.e., my sold position was worth more than the position I bought as a hedge. Today, I opened several more positions, all at a credit (meaning, I get money instead of pay money when I trade), and all-in-all, since just before the beginning of trading Friday, my account equity has increased right around 9%.

I'm bragging, right? OK, listen, I will guarantee you that there are thousands of people out there buying individual stocks and options who just gave the market a bunch of money, and in many cases, money they could not afford to lose. Hell, even very experienced and successful full-time traders. I watched emails hitting about Google in the late morning and early afternoon. There was a lot of money lost. There are equally thousands of people who hold stocks long, or they hold mutual funds, and Friday was just a bump in the road. What's the difference between all of us?

In the case of the buy-and-hold investors, they have simply decided to invest in the market, and unless they're dumb or have fallen for awful advice, they should do about 10% per year over the long haul, just like the market does. They aren't making decisions based on market analysis, they are not taking significant risk, and they have reasonable returns to show for that. In the case of the day and swing traders trading individual stocks and options, a whole lot of them have made the decision to trade in a style that requires them to be right most of the time. Moreover, they have to be right about a lot of different things, and they have to be right at the right time. And then they have to incur significant risk. If they're right, tremendous gains, but if they are wrong, loses just the same.

And you know how the market works: it takes the stairs up and the elevator down.

The difference between all of them and me, and those who trade like me, is that we've admitted that we're usually not going to be right about what the market or any particular stock is going to do, but we want to make excellent and consistent returns nonetheless (5-10% per month and more), and we don't want to spend a lot of time analyzing or watching the market every day (especially true when you live on the west coast and trading begins at 6:30 a.m).

When I used to buy a stock or option, it had to go up to make money. If it stayed the same, I not only wasted my time, but my money was useless and I was paying for sales commissions. If it went down, then I lost all the time, the cost of commissions, and I lost capital.

SpxSo I've quit doing that. I've decided that now, when I trade, I shall make money whether the market goes up, whether it goes down, or whether it goes sideways. How convenient for me, heh?

Well, there are some limitations, of course, so let's illustrate. The chart on the right is just a little piece of the S&P 500 index, the SPX. Do you see the horizontal green lines? Those are some of my sold positions for January. When I sold each one of those, right around the end of December, I received money (usually about $0.6 or $0.7 per share, and I usually contract for 1000 shares). They expired last Friday morning at the opening price of the SPX. To bottom-line it, so long as the Friday opening price of the index does not cross either above or below those horrizontal green lines, the options expire worthless and my return is whatever I received when I sold them. That vertical green line represents expiration day, so you can see how perfectly that trading range was executed. For February, the first positions are represented by the horizontal red, with February's expiration being the vertical red. I added quite a lot of Feb. positions this morning that aren't represented here.

Now, how right did I have to be to make money in January? Not very, huh? In fact, the one time I tried to be right got me into trouble. But here's the beauty of the whole thing. I got enticed by a larger credit of $1 per share on a spread closer to where the index is actually trading than we would normally do, i.e., there's a more than reasonable chance that the index could rise to the level of my strike price where I could incur a substantial loss. Well, I decided I could be right, and before I knew it, was wrong, and the index was all the way up into my position and over. I was looking at a potential loss of $7,000.

But since it would be silly to lose money (Warren Buffett Rule #1: "Never Lose Money"), and because a trade isn't over until I say it is, I just rolled that position into February positions a little farther away from the action in both strike price and time. And instead of losing $7,000, I made an additional $1,400. I still have risk and exposure, but I lessened the risk and delayed the exposure for a month, and the market paid me $1,400 to do it. Yea, it was a tough call. Trades can be defended and rolled over and over if you know what you're doing.

The style of trading I've outlined here is called the Iron Condor. I learned this system from the great guys over at OptionsLinebacker.com. Go check them out, and if you're interested, start with their short trading guide for $15. They also have a description of the system on their website. I subscribe to the daily newsletter, which is really by far the best daily information I get (and I used to get quite a lot). The first month, I just traded their same trades. Since then, I've done some of their trades, but I also do my own, which are usually a bit more aggressive. It brings me much higher returns, but is also riskier and requires a larger trading account and access to resources in case I have to roll and up the ante in order to protect my positions.

I'm really having a good time at this, finally. I'll post updates.

Getting the Feds Out of My Shower

Well, I suppose it's no great act of civil disobedience, or anything, but the silliness of the whole thing is at least far outdone by the utter absurdity of the federal government so entwining itself in my affairs that I can't even take a decent shower without the fuckers messing in my business.

Shower_head A little history. Back when I lived in France, 'round 1990, I hadn't been in my apartment a month when I had a leaking stem on the supply valve for the toilet. Rather than bother the landlord, I just went down to the hardware store and secured a new valve and installed it. While there, I noticed one of those cool shower heads, something like the photo on the right. It was simpler, though. Basically, it's a round disk of chromed metal with about 60 or so 1/32" holes drilled in it, all surrounded with a housing. This one didn't even have a ball socket for adjusting its trajectory. Didn't need it. It knocked out so much water over such a wide swath that it didn't need pointing towards any particular place. It was pure luxury, and for under $5, it became a prized possession that went with me to every place I was to live for the next 15 years. Installing it was always part of day #1 tasks in conjunction with any move.

Well, when we sold our home and moved last October, I decided to let it go. I left it. I'm not particularly sure why; I just didn't bother this time.

Man did I live to regret it. I haven't had a decent shower in over two months! So, today, I went out and found a good one, at OSH, of all places. You see them around, nowadays, but don't be fooled. All those ones with the little self-cleaning rubber nozzles? Vegetable sprayers. Forget it. Don't bother. I finally found one with reasonably sized holes in a metal disk. The next check was critical, though. A potential deal-breaker if not precisely correct. Did it have one of those spring-loaded flow limiters that's integrated into the plastic casing of the thing, or simply a nylon disk with its puny 1/16" hole through which no more than 2.5 gallons may pass per minute at 80 psi? Ha! A nylon disk. My pair of needlenose'll make quick work of that.

Now my only regret was that this Saturday morning wasn't one of those where I get up and start my tooling around before taking a shower, and sometimes, just letting it go by all day. Well, wait. I just realized I have to be at a family gathering at 3pm this afternoon. I think I might need a second shower. Glancing that way, it appears the coast is clear. Not a Fed in sight.

Do You Get it, Yet?

That's the twist of the knife to these GOP scandals. Not only have Republicans grown sleazy and corrupted by power, they've done so in pursuit of legislation that's wholly inconsistent with everything the Republicans once claimed to stand for.

Radley's as pissed off as I've probably ever seen him. But it really should be no surprise to understand that the only reason Republican politicians ever "claimed to stand for" [small and limited government] is because they wanted to get elected and wield political power. And, once elected, they "claimed to stand for" [small and limited government] in order to stay elected--all while rigging the process in order to give themselves a 98% chance at reelection--and all they really have to do is manage to get their miserable asses out of bed in the morning.

Hey, don't get me wrong: I've been just as fucking stupid as all of you fucking stupids for the many times I've been a little lulled and seduced by the next Republican who's going to come along and change things. Well, hell, I haven't fallen for that fantasy for well more than a decade, but I did fall for the fantasy that the Republicans were going to in any way stop or slow America's progression into becoming the equivalent of the next member of the EU. But, at this point, let's just fucking get it over with, OK?

You know, I dare anyone, anymore, to tell me that there is any real or material reason to care, one way or the other, who gets elected. Whether or not any Republicans ever started out with pure intentions is up for debate, I suppose, but let there be no debate over the fact that the entire place is a wretched cesspool through and through. Which means: it's no place to ever send good but naive people (good people who aren't naive would never want to go there). They won't stay naive and they won't stay good.

got coffee?

Well, in a world gone insane with wanting to be everyone's nanny, it's nice to get a steer once in a while to some news that things we enjoy consuming are actually good for us.

Who would have imagined?

Yea, I know. It's heresy. That hard-wired Judeo-Christian ethics has us so conditioned to think that everything we enjoy is bad for us and everything we hate is good for us. Never mind that we live longer and longer than ever.

Unfortunately, something like this is but a drop of rain in the ocean. It certainly doesn't signal any end to the general stupidity, nor to the nanny-state.

(link: Balko)

Selling Time

I've posted a few things in the past about my trading activities in the financial markets. These activities and my education continue, now more than ever. How about a 35% gain in my portfolio since November, and it has nothing at all to do with the "Santa Clause Rally;" and now, the New Year rally that will probably set a new benchmark and render 9/11's effect on the financial markets part of the settled past (for now)?

Since I began trading last spring and summer, I grew increasingly frustrated with the two steps forward, three steps back routine, time and again. There was no clear direction in the market. Gains one day are wiped out by losses the next, and vice versa, over and over. Frankly, unless one is prepared to trade full time, one is better off in such markets just buying good mutual funds or trading ETFs and checking them over once a month. And that's really the rub. Hey, I know people with good trading educations they paid lots of money for who do better than 10% per month, consistently. But it's a full-time job.

Not interested.

There is almost nothing that bores me more than researching fundamentals and technicals on stocks and their underlying companies. You do all of this work, and then you must stake your money and your time spent on being right; and what's more, it's all completely out of your control. You can invest in the best companies with the best rated stocks in the best rated and performing industries and the next day get screwed by something Alan Greenspan said. Yes, of course, it's the long term, and if you buy and hold a diversified portfolio of good stocks in good industries, you'll do 10, 11, maybe even 12% per year long term. We'll, you can do that and more with good mutual funds, without the hassle, without the commissions, and without the tax complications. Hell, buy a house and live in it for 10 years. Chances are you'll do better, and the gains will be tax exempt.

Options are--of course--to stocks what a mortgage is to paying cash for a rental property. They are leverage. Yep, I can buy an option to purchase a stock at a certain price for a certain length of time and pay only a small premium equating to a small fraction of the actual value of the stock. If the stock goes up, the value of the option increases, which I can then sell and profit almost as though I had owned the stock itself, but only for a tiny fraction of the investment capital required.

But did you know you can sell options too, even if you don't own the underlying stock? You can sell an option (a call) that gives the buyer a right to buy a certain stock from you at a certain price for a certain length of time. There's another kind (a put) you can sell that gives someone the right to make you buy a certain stock from them at a certain price for a certain length of time. When you sell these, you get the money up front and it's yours to keep.

So, suppose you sell someone the right to make you buy [to 'put'] Google [to you], currently trading at $436, for $430, and the option expires on Feb 17, 2006. Right now, today, the market will pay you $21 per share for that. An option contract is 100 shares, so $2,100 per contract. In your pocket. So long as Google is trading at $430 or above at market close on 2/17, the option will just expire worthless and you'll keep the $2,100 (or $21,000, if you sold 10 contracts). If the stock is trading below $430, then you'll be put the stock at the $430 strike price (even if it's trading lower). So, for one contract, $43,000 will be deducted from your account, but you'll own a hundred shares of GOOG at a basis of $430. There's actually a lot you can do at this point. Of course, even if the stock was trading as low as $425, you could sell immediately for $42,500 and you still profit $1,600 overall. In fact, so long at it's trading above $409 at expiration (430-21), you're break even or better.

You could also turn around a sell a March covered call (covered, meaning the sale of the call is covered by the shares you now own) at a strike price of, say, $440, collecting about $2,400 on that sale. Then, if the stock closes below $440 on 3/17, the call expires, you keep the $2,400, sell an April call and do it all over again. If it closes above $440, your $43,000 of shares will be sold for $44,000, giving you an additional $1,000 over the $2,400 for selling the call. Essentially, you win, or you win.

These are just some basics. Next, I'll cover what I'm actually doing, primarily, which are credit spread trades on the SPX (S&P 500 Index). But first, let me relate all this to the title of the post. Remember when I sold the Feb $430 Put on Google and collected $2,100? Guess what happens if Google continues to trade around $436 for the next month. You know, up a few points, down a few points; up, down; up, down between now and expiration on Feb 17. What happens to the value of that option I sold? It depreciates. And the closer you get to Feb 17th, the more rapidly it depreciates. On Feb 16th, so long as that stock is trading above $430, that option is only going to be worth a pittance. Around $100. Therefore, what did I sell when I collected $2,100? I didn't buy and I didn't sell any security, and certainly nothing secure. I sold time. When you comprehend the power of that is when you begin to understand how so much money can be made and lost in the markets, and how much there is to learn and master.

Difficult Choosing

Help me out here. I'm trying to pick a doc and have been looking at some websites around. Oh, here's one. Among other things, his website says:

His personal interests include Buddhism, Hinduism, foreign languages, philosophy (especially Existentialism and Eastern Thought), jazz, and orchids.

And, here's another guy:

In preventive medicine or while addressing acute or chronic problems, I always try to practice evidence based medicine, where there is compelling research to show a benefit to any treatment or test I recommend.

Hmm. let's see..."Eastern 'Thought'" vs. "evidence based medicine." Such difficult choices.

Goings On

Bea & I spent the weekend up in the cabin, by ourselves (other than the dogs, that is). It was a welcome change, seeing as two weeks prior, we had 19 people for New Year's Eve, with 16 sleepovers (yea, bags all over).

This weekend was spent mostly watching DVDs. I had just done an Amazon run. First up was Downfall, the story of Hitler's final days in his Berlin bunker in 1945. Bruno Ganz's performance is amazing. For a film covering the sort of subject matter, it's as good as such a film can possibly be. For those as meticulously interested in all things WWII as I, it's a must see.

Some moths back, it caught my eye that George Lucas' first film, THX 1138 was being released in DVD. Along about that time, Billy Beck had some interesting comments about the film, along with a link to a--what I was later to discover--spot-on article. See, I was 10 years old when I saw the film upon its release in 1971. Why did I see it? Because of the cool-looking car chase in the trailers showing on TV, of course. Needless to say, the film was a huge disappointment for a boy of 10. All I remember was white rooms, naked people, and bald heads. The car scene was about the last 10 minutes of the film. Boring. But I had to revisit it. Cinematically, it's a very cool film. Seeing it now is to completely understand Lucas' future success with the Star Wars franchise.

The message is unmitigated moronic crap; so typical of a complete know-nothing hippie of that era. In that vein, it can be seen as a monument to the general stupidity of the times. And, it puts the current state of politics in this country in complete context, since those elite of the times--such as those who might attend the UCLA and USC film schools, as a for-instance--are currently the ones fucking up America to the general point of no return.

There's one single redeemable political message in the film. That is--and all you fiscal conservatives and consequentialists take heed--economic efficiency is quite perfectly at home in a totalitarian regime. So, all of you who argue fiscal restraint for the government, but don't have your principles in order (freedom, for instance) are really just asking for a more efficient machine by which to oppress you.

Still, it's really, really a beautiful film to watch and I recommend it. Oh, also, with the director's cut DVD, you get a bonus disk with a bunch of stuff, including the documentary of the formation and early years of American Zoetrope. Francis Ford Coppola and George Lucas were the main players, but you had various others directly and indirectly involved, many with names you'll recognize, like Martin Scorsese. The most ironic part of that documentary is when it mentions, almost with pride, that neither Francis nor George were "political." Hey, no shit. I just got done watching THX. There's a distinction to be made between the politically aware and spoiled brats who haven't yet created a real dollar whining about how "corporations are destroying our way of life." The distinction can be many things, of course, but stupidity should never be mistaken for political awareness, and I daresay that it far too often is.

Next up was Conspiracy, an HBO film nearly documenting the 1942 Wannsee Conference in which Hitler's "Final Solution" was legally engineered. Yes, that's right: legally. Most of the attendees were lawyers or had studied the law. The legal basis was the 1935 Nuremberg Laws, which laid the foundation for defense of the German race. There was a legal foundation and logical hierarchy to the whole thing. They were "defending their race." The 1935 laws were step one. Rounding the Jews up and putting them in ghettos, step 2. When that became problematic, emigration was attempted, but no one would take them; and moreover, with the anticipated successful conquest of Russia (there was optimism, even though German soldiers were freezing in the Russian winter at the time), their numbers were about to go from 6 millions to 11 millions of Jews. Since, after all, they are just legally defending their race, there was only one solution and that was the Final Solution.

Now, does that give anyone a better insight to what I mean when I say that laws and logic are meaningless--potentially evil--without a sound moral basis? And I don't mean religious either. A religious basis can be just as deadly (and has been and is) as a we-the-people basis. Only an unequivocal, inviolable morality of absolute, unbridled individualism can protect against such evils. Without that, no one is ever really safe.

My favorite line from the film comes when one of the attendees (an SS Major who admits to "evacuating" 27,000 Jews) is asked about how he perceives his former study of the law. "It made me distrust the language. A gun means what it says."

Watched a few others, but none with the import of the aforementioned.

Just Facts

At age ten, American students take an international test and score well above the international average. But by age fifteen, when students from forty countries are tested, the Americans place twenty-fifth. The longer kids stay in American schools, the worse they do in international competition. They do worse than kids from countries that spend much less money on education.

That's John Stossel, who's putting on a 20/20 special tonight called Stupid in America. There's a couple of things that aggravate me when I discuss schools with other individualists, who, like me, think the government has no business in them at all. One thing is that factoid, above. There is a distinction to make between grade school and all of the rest. A lot of very real and very good schooling goes on at the public grade school level, and that is a fact that should not be evaded. Fully integrated education? No, but that's obtainable almost nowhere, even in the private sector.

The second thing is that to condemn all teachers collectively, regardless of the values they produce, is wrong. It's just as wrong as condemning an American soldier actively angaged in producing the value of freedom because he collects a government paycheck and works for a bunch of boobs.

The point has been made to me, well taken, that value is not to be measured, strictly or primarily, by the fastidiousness of the labor that went into producing it. Value is measured, subjectively, by the one for whom it is intended, i.e., the consumer. And he's always right; never wrong. Still, there is room to admire people who work very hard at producing values that find a good and happy home. This has been my general experience, around here, with regard to grade-school public education.

By coincidence, my wife forwarded an email this morning that she had just received from one of her 5th grade students. He's 10 years old. And, yes, he is among her best.

Subject: MATH PROBLEMS

Mrs Nikoley-

Excuse me, but I don't seem to find the online intervention when I went onto Netscape 8.0.3.3 Firefox-based. I didn't clear my cache, but when I refresh, it should come out. But, I only see a chapter Six. If I did end up on Chapter Six, there would be an NEXT CHAPTER button. But there isn't. Please tell me when the thing is on, since I'm  itching to do more math. Oh, and by the way, please shade in the green, blue, and purple parts. I am now on the red part. The one under the final one is also incomplete, so you can X the box.

-Matthew

The Gulag Americana

The "bright side" is that it's all nice and legal. Affirmed and Upheld, even. You know. It's like a lot of your are always telling me, "it's the law." Yep, reflexively abiding by the law, without any particular deliberation or conscience is what's important. So human. Not robotic. Very good.

Justice

I'm not laughing, because people getting killed of their own willful neglect and stupidity isn't really funny. Yea, we have the Darwin Awards, but that's not like 345 people getting crushed in a human stampede.

MINA, Saudi Arabia - Thousands of Muslim pilgrims rushing to complete a symbolic stoning ritual during the hajj tripped over luggage Thursday, causing a crush in which at least 345 people were killed, the Interior Ministry said.

The stampede occurred as tens of thousands of pilgrims headed toward al-Jamarat, a series of three pillars representing the devil that the faithful pelt with stones to purge themselves of sin.

So, here we have issue number one: primitive and moronic superstition. So great is the irrational fervor that human beings behave as cattle, and the do so with regularlity:

The site is a notorious bottleneck for the massive crowds that attend the annual hajj pilgrimage and has seen deadly stampedes in the past, including one in 1990 that killed 1,426 people and another in February 2004 that killed 244. Seven of the past 17 yearly pilgrimages have seen deadly incidents at al-Jamarat.

The latest crush came despite Saudi attempts to ease the flow of traffic around al-Jamarat. This year's hajj was marred by the Jan. 5 collapse of a building being used as a pilgrims' hotel that killed 76 people in Mecca.

The stampede happened as pilgrims were rushing to complete the last of three days of the stoning ritual before sunset, said Interior Ministry spokesman Maj. Gen. Mansour al-Turki. Some of the pilgrims began tripping over dropped baggage, causing a large pileup, he said.

Issue number two: Ignoring the plain reality provided by the fact of numerous past instances.

What this is, is not is a tragedy. The tsunami was a tragedy. This is simply the justice that happens when people allow their feelings and superstition to trump reason and good sense--even when they have good evidence to suggest significant and uncontrollable risks.

You know, I once got caught in a crowd so dense that I was unable to direct my own movement, or even stop. T'was about 10 years ago on 5th Avenue in New York City. St. Patrick's Day Parade. I realized then what would likely happen if I--or anyone else--lost footing. I managed to extricate myself at a side street, after having failed several attempts at same. Never again will I allow myself to get caught in a crowd like that.

Failing all that, a good rule of thumb is to never allow yourself to be part of anything where you're debased to the point of being referred to as a "pilgrim." It never ceases to amaze me; how easy it is to render human beings so pathetically meek, weak, and shameless. I'm reminded that Christians often refer to Christ as shepherd and themselves a flock of sheep. I don't know about you, but that analogy makes me ill enough to want to vomit.

Screw anyone who thinks or claims that the wonders of humanity are the moral and intellectual equivalent of a flock of dumb sheep. Curse them a million times.