Thursday, August 6, 2015

Oops, I did it again... Learning from the mistakes of others

Dough has been an invaluable place to learn from the mistakes of others without having committing my capital in it's endeavor.

Once again, our favorite trader Robyn, has done it with yet another earnings play. This time it is the video card manufacturer Nvidia. Anyone growing up in the 90s knows the importance of this company. Back in the day 3D Fx was a player on the graphics card platform. They had some really great ideas such as SLI by linking two graphics cards together for additional parallel processing power. Alas 3D Fx couldn't keep up with the bigger players such as ATI (AMD) and Nvidia (NVDA) and got acquired by the latter in 2002. Nvidia graphics cards all of a sudden had SLI power and a new market segment was formed. Again, I digress...

She sold a strangle, yet again, for 7AUG 19P and 22.5C. The MMM on this is 1.473 and it closed at 20.45 today. That means the stock can go up or down, priced by the market, 1.473 [18.977, 21.923]. That's all good because here is the analyze tab from ToS:

(click to enlarge)

 She stands to make $40 while risking $2366.28. That's a 1.6% ROC. The current price of NVDA is at 22.6-7. At $22.6 she stands to make nothing and at $22.7 she is -$5.38.

Good trade, bad trade should run a few segments on her because she is also responsible for the "I'm Ready to Start" show. They also have 9 reasons that new traders should follow her into the fire as well:

Robyn is a "neutral" trader, she takes advantage of theta, trades high IV rank (debunked on 29JUL15 MM segment), # of occurrences bringing her broker the commissions...

#5 - Massaging trades into winners, #6 - Trading underlyings that she doesn't know, #7 - Plenty of Earnings plays...

Those are three reasons why a trader should NEVER follow her in the first place. You NEVER trade things you don't know, never massage losers in hopes of recovering a dog shit position, and never play earnings on stocks you don't know or don't play them at all! Refer to my strategy on post-earning plays which I consider to be significantly safer than pre-earnings.

Stay strong and trade with a clear mind.

Oh My Goodness... Part 2 - Requiem for a Tasty Dream

Today I decided to follow my heart and not my brain in trading. Net result? An up day but my profits were eroded quickly when I took winners off the table as losers and then decided to get greedy which delayed closing out of winners and a few other winners turning south. TSLA rallied due to the initial buy to cover and then plummeted as I expected to new lows. I grabbed a few puts and rode the volatility train all the way down for about 100% ROI then before closing out the position I decided to add addition positions on, albeit too late, to get some more juice. Bad move... Market turned abruptly upward and the volatility soon faded.

All the while my initial guess on FB was correct but I got a little cautious of the sudden dip and exited my positions for a loss... The same position turned out to a handsome winner in 30mins! Apple spreads I had on were in the green at the starting bell and then Apple took a nose dive. NFLX also went down but I sold out of the put after an abruptly upwind gust.

Point of the matter is there is no way I can focus on 4x level 2 and charts at the SAME time. Managing these stupid positions all at once is not only taxing but costly. The result today was around 30 trades within 1.5 hrs which definitely gave Bob the Trader a run for his money. It's funny because I used to think it would be so cool to put on a large number of positions and "be like the pros." In reality, that is the dumbest thing I've been doing and need to adjust my mentality to trade SMART not often.

Had I kept my eyes on the prize for TSLA and NFLX while sitting out FB and AAPL today would have been a good day and perhaps a 5 figure day (banking +$10k). Instead, it was a four figure day turned three figures because of excessive failed scalping/trading. A friend of mine told me that his BioTech stocks tanked today which explains why my positions in NQ are further in the red and Mickey and his friends are doing a garage sale over there in Walt Disney land. Yikes... But I digress as I am here to talk about our famed trader Robyn. Before I start on her I have to mention that IF you want to scalp options for directional assumption do it on narrow spread and highly liquid contracts. $SODA would be a bad choice (foolish am I to listen to fools), GMCR doesn't trade actively either, but TSLA/GOOGL/FB/AAPL/etc are better as they have substantial amount of volume with no issues clearing when you hit the mid.

Here is the latest from her regarding GMCR from our TastyTrade expert:

So she got a $3.30CR for executing this strategy. Let's examine how. So she sold off the 67 AUG7 puts (for a loss) and sold a SEP18 55C and a SEP25 67P to obtain the $3.30CR. She sold a deep ITM put in a further month in hopes of theta decay combined with non-movement of the stock. In the case of non movement she would collect most of the $3.30CR.

Let's review here... She got a $2.98CR for closing out her puts and then she sold an inverted strangle for $3.30CR... What was her debit again? -$11DB on those 67 puts. So how did she get out of this one? She sold yet another 67 put for even MORE credit to "cancel" out this bad trade. But is that wise? Let's examine this strategy for the worst case scenario.

So she got $3.30CR for this "strategy." If she finishes between 55 and 67 she would stand to lose quite a bit of money... The width of the spread is 12 and she got $3.30 to facilitate this transaction. The put buyer would auto exercise leaving her with buying GMCR at 67 and then the call buyer takes delivery of the stock at 55 with an instant $12 loss per contact x 100. Her net loss would be $8.70/contract provided that she got the $3.30CR. This is if she holds til expiration without further adjustments. What about it ending OTM on either sides?

Well, the "best" case scenario is being between the width of the strikes because at 54, while the call is expiring worthless, she would have to take delivery of the stock at 67 which yields a $13 loss per contract vs $12.

So how can she win and why did she do this? Well, like I said before, she is screwed big time on this strategy and without admitting defeat and taking the loss she is trying to slowly buy more time as the executioner is finding more time to sharpen the axe. Whether her head rolls today or in a month or so is irrelevant. She is banking on the stock moving up so that the credit received will negate the price action and volatility compression in hopes of mitigating a huge losing position. Any further movement down south would spell her doom and she would be back to beginner status below Alex W and Jacob Wohl. No beuno, as Tony from Mexico would say.

This is how earnings are as binary events and why playing earnings has huge risks. You might end up delivering a huge amount of stock you don't want to buy OR taking delivery of huge amount of stock you don't want to own all for a thesis on statistics as presented by Market Measures? Please...

What I've found as a more effective way of playing earnings is POST earnings strategies where the market has already priced in  the movement within 5mins of the opening bell. All the volatility is already gone and now it is more about level 2 reading and seeing if there is additional panic. This is MORE predictable than attempting to flip the coin and guess what happens the day before. Why? Because the initial reaction to some stupid news for a day or two is ALWAYS overstated in majority of the big stocks. Look at NFLX, DIS, GOOGL, FB, AAPL, etc if you need some proof of this. DIS is on it's second sell off day and AAPL is on it's 7th straight day of being under $120. This stock has been above $120 for months and now the market feels it is worth $114 but a while ago it was valued at $132. The current P/E on AAPL is 13.3, TSLA and AMZN doesn't even have earnings (no love, no profits), GOOGL is at 33.69, and NFLX is trading at 284.3 times it's earnings. Which stock is discounted? Hmm, I wonder... DDD was at one point trading 200 times it's earnings as well in the 20/30s after falling from almost 100 at the end of 2013. Surprisingly, DDD jumped 21% after missing earnings. Short squeeze?

What's on the radar for tomorrow? It's going to be news from the Government that people will price in regarding the interest rate once again. Stay strong as it is very rough out there and remember that CASH is always a position. When there is no clear indication of movement, direction, etc, play a neutral strategy (calendar/diagonal). Jump on the train and watch the T&S very closely for a good exit or use the IV_rank of course because below 50 means sell and above 50 means buy... Did I get that backwards? :) I think our TastyTrader might have as mentioned above.

Don't trade earnings! It isn't worth the risk. I say this with personal experience as I have a significant portion of my account resting on failed earnings plays I am looking to liquidate.

Maybe she should DOR... "I've got no where else to go..." A moment of silence for our TastyTrader.

Wednesday, August 5, 2015

Bitter Sweet Tasty Trade Symphony

After my last post on TastyTrades on sizing I have to mention once again the fine balance between greed and size. To make money you have to keep your costs low (commissions) and look for superior risk/reward opportunities.

Is it really worth trading earnings when you have unexpected moves that are outside of market maker move? (ATM straddle breakeven strikes).

Well... Let's take it from Robin the expert professional trader:

GMCR is at 53 right now. Calls are worthless and that's fine giving her some credit. Two calls at 83 (win), one put at 67 (big lose) and 72 against a 75 put (small win). I think she will be in for some pain tomorrow. NO way to roll her way out of this crazy loser.

She's at a max profit of +3 on the 75/72 times however many contracts she had on with this one. She's 14 down from the 67 strike... I'm assuming that's -1 delta per contract for $14 per contract... That's -$11/contract on 100 size contracts... I hope she listened to the Mantra of trading small. Let's put this into perspective.

She actually closed that out for $2.98 but $3 is close enough.

She got overall $1.25CR for doing this strategy and on the put side she is $11DB for this strategy... She lost 780% of the credit she received or she paid 880% of the credit she received. On one lot this is -$9.75 per contract or a total of $975.00. If she did this for say a "small" position relative to her portfolio of 10 contracts then that's -$9,750.00 lost on this trade for an initial credit of $1250.00 or a ten-fold loss on initial credit received.

For a person with a small account ($25k) following this trade this would have resulted in a 40% blow out on account. I am not sure if these guys know what they are doing but this is a great education point on delta and gamma risk.

Not a single one of these self proclaimed experts demonstrates an audit of profit or track record. For all we know they are doing papertrades on everything with nothing verified. Why? Well... check out Jacob the teen turn Hedge Fund's comment on these experts while being interviewed on TastyTrades:

(Everyone gravitates to writing premium until they get that one 5% loser that blows them out. $CMG. Jacob shorted, probably wrote, since beginning of 2015. Lucky he studied risk management because that rip up probably ripped him a new one post earnings)

They are all peddling subscription services! Just as says which is now becoming the pattern I've discovered myself. Even the self professed Erik Trofatter claims all his methods are proprietary but in fact it is just repetitions of market measures. The real pros figured this out before Black Scholes like Blair Hull and Thomas Peterffy who are now worth north of seven figures. These "genius" kid traders are no match for the real smart guys who already work for prop shops or automated trading firms.

So where do you go for information? Try books like Trading Volatility which is essentially ALL the useful content from TastyTrades without watching hundreds of hours of T&T jokes/nonsense. The only real forum of legit discussion is on EliteTrader forum NOT BigMike's. People there are experienced professionals with real feedback that isn't trying to peddle one single minded way of trading based on any one particular scheme. Find someone to bounce ideas with or off of and see what happens. ToS can be used for back testing strategies or trading 'live' in different trading atmospheres and historical times.

Review Dough's trades carefully and you will notice that they are almost always commission laden trades where the broker takes around 30% of the entire profit on execution. Why would you long put spread and then sell an OTM call up top? As the strategy moves in your direction the call starts to roll delta/gamma and if you want to exit the trade after it touches the upper leg of the put spread the call will almost always be bought back with a debit hence losing money... Unless of course your intention is to carry this through the Call's expiration then that might work but is it worth the upside risk of losing money shelling out for an initially worthless call? I've found out the hard way on this one today and a few days ago writing a near worthless put. The situation with the call is writing on an up gap and exiting it with a significant loss beyond initial credit. Put that I had experienced gamma risk and I found out live what it means to have gamma risk or pin risk upon expiration as I exited my position seconds before the closing bell... Was it a profitable trade? Hell no! But it would have been because the market rallied at the closing bell where the option I wrote was OTM. Worth the $40 on 10 contracts I wrote? Hell no.

When premium is cheap and there is direction... You buy. You don't sell. You only sell when other people are foolishly buying stupid rallies on stuff like FB, AAPL, TSLA, etc. Even when you sell you play the gap up on another month or at a different strike. But, what do I know.

Enjoy this video:

And a message from TastyTrades:

Do not trade earnings, do not pass Go and collect $200

One thing I've noticed with all self proclaimed experts and pundits is that they are often wrong and how they come to this admission defines his or her character.

I've been following TastyTrades for a little while now here and there and noticed that most of their problems are glaring issues with earnings. They claim that it is a wonderful opportunity to exercise the law of large numbers by betting on movement within the expected move priced in by the markets. Too many times their fellow Dough traders got DoughJoed by these unexpected moves. (i.e. NFLX, GOOGL, etc). That's got to hurt when the size of the trade is disproportionate and you end up losing all the little profits you nickel and dimmed from the other small trades.

This brings me back to my other post regarding trade small, trade often. This is such a bogus statement that I have to clarify this once again. Do NOT trade often! There is paper trading and simulated trades for a reason and do not fall into the temptation to trade because Bob the trader trades 40-50 times a day. Why does he trade a lot? It is because he has too many broken positions that he needs to fix and the broker wins on every transaction. It's not too hard to be a market maker with a huge spread, sell ToS, and then tell everyone to trade a lot to harness their commissions through Dough.

I used to think SPY was the best product to trade... WRONG! ES/SPX are much better. SPX is 10x the size of SPY, cash settled, expires Thursday of the third week vice Friday, and has larger options volume as compared to SPY. (10x size and often times larger equivalent volume). It is better on taxes since it is a 1256 and not considered an equity. The list goes on but the most important thing is I pay ~$1.2-1.4 per contract on SPX vs paying 10x that trading SPY! (SPY on a good trade is $6-7 and bad trade is $12-14 for 10 contracts). You compare a roundtrip of $2.50 vs $12-24 and do the math for trading "often" on 10 trades... That's $25 for buying and selling SPX ten times vs $120-240... Going on Bob the trader trading 40 times a day that would be $100 on SPX and $480-960 on SPY... That's on one day! Imagine doing this for 5 days in a row with SPY commissions in the upwards of $5k vs $500 for SPX.

Point is, find the right product and trade intelligently. ES is also more expensive to trade than SPX ($50 vs $100) with the same or more expensive contract fee. I feel kind of stupid coming to this realization this late into the game as I've already spent a few thousand dollars on commissions and could have saved a few hundred trading more intelligently.

Then one need to question the trading style for oil futures as well. Should you trade crude oil or USO ETF? Crude lot size is 1000 barrels. Contract price x 1000 = what you pay. So one contract goes a long ways as compared to the equivalent USO etf. Same deal here with respect to liquidity and sizing. CL is one of the most heavily traded commodities in the world. It is traded almost 24/7 while USO trades 9:30-4:00... Hmmm...

Keep sizes small on intelligent products and do not trade a lot! Managing multiple positions is insane and can be a handful. The best thing to do is to intelligently manage a FEW positions rather than throwing out a lot of positions hoping for something to stick.

Lastly, IV_rank is directional. It is highly inversely correlated to the movement of the stock and around earnings. IV_rank is one of many considerations for putting on a trade but it is NOT the end all be all as proclaimed on TastyTrades. A rolling 52 week high/low is no better than any other technical analysis indicator because just as Alex Weinsenbach says "Past trends cannot predict future events." Yet IV Rank is based purely on past performance and volatility movements...

Last night I made a good trading friend with another blogger (Henrik the Lazy Trader - We've had some good discussions of all of the above. Conclusion? All these gurus are morons and no better than you and I at anything they do. They typically have more capital to play around with or have alert/subscription services to feed them so they can become great "educators" vice trading. Almost all of them do not have verified trades or audited verified trades. This website is great are debunking a lot of these self-proclaimed prophets who make little or no profit (

Happy trading!

Thursday, July 16, 2015


HOLY Smokes. What can I say... NFLX and GOOGL made a move today with NFLX making a move post-market yesterday on 15JUL15 and rallying today after a minor dip this morning.

I had 30 contracts total on NFLX; 20 contracts 18SEP15 @ 115 and 10 contracts 18DEC15 @ 120. The market makers and others shook the stops this morning and I thought the direction was going down so I sold... Too early!

I made out with about $4000 but had I held out I would of gained another $10-15k. My hunch about NFLX was bullish, the volume said bullish, and all day the news ran for NFLX was bullish. Analysts probably upgraded the stock and raised the price target and the joker Cramer even felt elated by the earnings. At one point I was considering selling options at 115 to cover the dip...

The mistake I made today was sitting out on the action. I knew the moment I sold that I made a mistake and I sold twice! Instead of getting back into it as usual I went and moped all day missing out on MANY opportunities to double or triple my returns. Volume speaks volumes and I knew the underlying was going up no matter what...

Sometimes we are too short sighted and hate being wrong that the mistakes clouds our judgement and stops us from getting back into it. There is nothing with people wrong or acting incorrectly. The most important thing is to get back into the positive mindset to push forward.

Between last week and this week I've made more money than I've ever made in a month in the military. Total potential gains that I let slip away total to more than my account value right now. To say that the opportunity isn't there is simply not true. It's what you make of the current opportunities that is in front of you that makes all the difference.

Keep learning, making small and infrequent mistakes, and keep trading. The more I looked at investing from a fundamental standpoint the more useless I think it is for most investors. It's easy to 'invest' if you are a billionaire that can get shares 20-30% below market value, sit on it for a while, collect dividends, and then sell it for a 100% ROI. For rest of us, we have no other choice but to swing trade either stocks or options.

There is nothing wrong with being a fundamental investors as those strategies are crucial for those wishing to invest in LEAP options or other leveraged instruments. Determine your investment goals and strategies then execute them with a clear mind.

Sunday, July 5, 2015

Everything starts within the mind

This post is a departure from the normal talk of money or investing but leans more to self development. There are many who have mastered the art of persuasion (ability to sell) and self discipline in mind, body, and spirit. Why are these things important and what does this have to do with investing?

Right now I am going through Jordan Belfort's Straight Line Persuasion system. Yes, that's the same Jordan Belfort aka Wolf of Wallstreet who was depicted by Leonardo in the film. Reading topics of self improvement has always been a habit of mine since my teenage years and I am developing a greater sense of appreciation for it a decade later. Jordan's course is good, his ideas sound, and the system easy to understand to get in the right mindset to putforth the action necessary for success.

In discussing books recently I was talking to my friend about Napoleon Hill's books Think and Grow Rich and Positive Mental Attitude. What triggered this discussion was that a few weeks back I attended a career presentation by Combined Insurance which was founded by W. Clement Stone who was a successful implementer of Hill's book Think and Grow Rich. So I figured if Stone was successful and Hill wrote about successful people that I should read Stone's book The Success System that Never Fails to gain his perspective followed by subsequent reading of Hill. Stone's book is way better than Hill's for many reasons because it gives the reader his first hand experience with the strategies and his view on how to implement them for success. Hill's book, while good overall, is riddled with excessive stories. I am a fond believer of simplicity and Hill's book can be read by strategically capturing key information while leaving out the filler for subsequent reads if necessary.

My friend and I agreed that most of these books are common sense but that we, from time to time, need a reminder of these principles to go forward. There is no better time than today for me to refresh on some of these ideas as I transition between jobs and determine my true path for future success. All successful people succeed in similar ways and all unsuccessful people fail in the same ways. This is common in all self improvement books regardless of author and how they decide to spin the steps to get from no where to somewhere.

What I want to share is the key elements that makes a person successful:

  • Believe in yourself
    • Self empowerment - You can or you can choose not to
    • Confidence - if you don't who else will?
  • Self discovery and introspective reflection
    • What's your purpose?
    • What are your strengths?
    • What makes you happy and why?
    • Are you willing to sacrifice vices for success?
  • Mentors
    • Save yourself the time with someone who is more experienced
    • Guide you through similar situation(s)
  • Act Immediately
    • Else everything remains the same
    • At least you are doing rather than thinking
  • Persistence/Dedication
    • Can't quit
  • Success, What's next?
    • Repeat
The idea that you have to sell to yourself is that you CAN be successful at some or all aspects of life. After you truly believe that you CAN be successful then you can have a higher level of thinking or be in the winner's mindset so as to be able to accomplish something.

I've never truly enjoyed accomplishment thinking like a loser even if I won but I've always enjoyed every bit of success no matter how small in a positive mental mindset. Joy is empowering, boredom enervating. Plan to succeed, act on it, and make it happen. The first step, however, is in the mind as with anything else since it is the origination of thought and your existence.

Tuesday, April 7, 2015

Trade often or trade strategic? You decide!

So I've "grown up" trading options by listening to segments on TastyTrades and trying strategies out for myself. Their main strategy is selling premium (buy into weakness, sell into strength) through spreads.

This strategy, while beneficial in some aspects, gets rather expensive. With any study, one must take into consideration the impact of commissions. I've been informed by TastyTrades research team that all studies P/L are post commissions. This is a good thing but the consideration of contract size is also very important.

Here are the fee structures of some of the brokerages:

TD Ameritrade TD Ameritrade (alternate) OptionsHouse OptionsHouse (alternate) Interactive Brokers
Ticket Fee $9.99 $0.00 $4.95 $0.00 $0.00
Contract Fee $0.75 $1.50 $0.50 $1.00 $1.00

TD Ameritrade's alternate fee structure is from their promotion. OptionsHouse also advertises an alternate 5 for $5 deal on options and $1 for contracts over 5. Interactive Brokers (IBKR) lists their price at $0.70/contract but the hidden fees make the actual total to be greater than that of $1.00.

Now why does this matter? Well... If you sample enough you will find that all things tend to look like the Normal Distribution. So if you exercise a winning strategy over the long run on many plays you will be profitable (incrementally). This sounds great on paper if things were commission free but in the real world you have to deal with commissions and taxes.

Looking at TD Ameritrade first we have the following graph:

Note: All transactions are round trip (i.e. buy to open and sell to close on x number of contracts). Comparisons are done at a $1.00 profit per contract (unity) to make the numbers readily comparable between brokerages.

Y-axis is Profit/Commission 
Breakeven point at 13-14 contracts for TDA.

If you are doing less than 14 contracts on spreads or less you are essentially being squeezed out of your profits by commission. Around 20 contracts is the point of inflection, 40 is where the hurt starts to level off and it gets better after 60 contracts (round trip).

If you trade small (sub 14 contract) then the $1.5/contract makes sense from TDA but if you are doing spreads with 14 contract size it is a whole lot better to have the $9.99 + $0.75/contract program.

Now let's compare this to OptionsHouse:

Breakeven point at 10 contracts for OptionsHouse.

Obviously, with a cheaper rate, OptionsHouse is more profitable for the trader who trades more than 10 contracts. Ideally, more than 40 contracts is good and 100 is great in terms of 'cost-savings.' Since IBKR has the same commissions as Options House at $1.00 a separate chart is not necessary.

Notice that the profit/commission at 40 contracts is 50 for TDA and 80 for OptionsHouse which is a 60% larger profit to commissions ratio.

Moral of the story is to trade smart in terms of size and always take commission into the equation. No matter if you win or lose the house will always win on commissions. If you win, you want to minimize your expenses and if you lose you want to reduce further pains from selling.

Long-term LEAPs strategists would live ideally in the 80-100 contract range while the trade often trade a lot strategist would live in the sub 10 contract (5/5 or 10 singles) range.

Since people trading options understand the Greeks, perhaps an appropriate letter for this discussion is Omega (Ω). Omega is the cost of exercising strategies as a function of the number of contracts. We haven't even addressed the issue of assignment/exercise fees which is $19.99 for TDA, $4.95 for OptionsHouse, and FREE for IBKR. Strategies involving spreads always face the risk of assignment and those going long might want to exercise some of their options. Always account for the expenses.

Bottomline: TDA's $1.50 promotion through only makes sense if you trade sub-13/14 contracts roundtrip. If you trade any higher than that switch to the ticket and contract fee structure. Make your own comparisons on strategies you want to implement and the Brokerage of your choice. Aside from fees, look at the SEC Rule 606 on the brokerages on how and who clear/routes their orders and pay close attention to the %s for each category of order type.