The Night Trader

Alesco Trade Journal

2011-01-29T19:42:00.002-06:00

Many of you may have wondered why there haven't been any recent posts on my blog. The reason is because I have taken time off of trading to develop a Mac application. As with all projects it has taken much longer than I ever imagined, but I think the time has been well spent!

Alesco Trade Journal is a Mac application for traders. It allows traders to record thoughts and notes before, during, and after a trading day. It also will track trades along with chart snapshots, giving traders a visual history of trading decisions. Combine these features and traders can more readily identify strengths and weaknesses in their trading habits and strategies.

Please see our website at: http://www.alescotradejournal.com

I hope to get back into my trading/blogging later this year once Alesco is off and running.

What are the disadvantages of virtual trading?

2009-02-24T12:45:00.001-06:00

Welcome back to the third and final part of my series on virtual trading! If you haven't done so already, be sure and read through part 1 "Why everyone should be virtual trading" and part 2 "How should I virtual trade?". In this part I am going to cover some potential pitfalls that can hinder the effectiveness of your virtual trading experience.

Part 3 of 3 - What are the disadvantages of virtual trading?
As with anything, virtual trading is not perfect. Being diligent and using the right tools can give you a very realistic virtual trading experience, but there are a few things you should be aware of. First of all no virtual trading system will be able to replicate order fills perfectly. In the real world buyers and sellers have to be matched up for a trade to take place. And that can not be perfectly simulated. Following are several aspects of this to keep in mind:

Virtual trading may not account for trade size. For example, if you are trying to trade 100 contracts of an option with an open interest of only 50, you will never get filled. However, most virtual trading platforms will fill the order if the price matches your conditions.

It can also take longer to receive a fill in the real markets. From what I've seen paperMoney does a decent job at that by only filling an order when a live order has executed at the same price or better. I have not however checked to see if they track order size.

Virtual trading doesn't simulate negotiating the bid/ask spread. In real live trades you can often negotiate up to 1/3 of the spread using limit orders. For the specific strategies I use I don't count on that, but some do so keep that in mind. Negotiating the spread can also affect fill times.

Also, regardless of how much you try and convince yourself, the reality is that it's still not real money at stake. Psychologically you will take slightly bigger risks, or play out trades a little different. After time and practice this can be kept to a minimum, but it's something else to be aware of (or not aware of). On the flip side though, I have found that taking those greater risks has helped prove to me that sticking to a game plan is important. It helped me see during un-emotional trades how well things worked when I traded very logically. If you're doing funded and unfunded trades side-by-side this becomes even more obvious, which has helped me to keep emotions out of my trades. I have gotten emotional about an identical real trade and lost, while my virtual trade that stuck to the game plan turned a good profit.

Finally, you can see all kinds of virtual profits that are "good for nothing". Some people ask why I would waste perfectly good profit opportunities trading virtually when I could just use real money and have something to show for it. The problem is that those opportunities also bring risk. When I'm virtual trading it's either because I'm out of real cash available to trade, or I'm not 100% confident in the trade. Now I understand that trading is all about risk management, but I'd rather practice my risk management with play money until I reach an acceptable risk/reward track record. That level will be different for everybody so go with what makes you comfortable. If something falls below my comfort level, I virtual trade it that way I still get the learning value from it, but without the financial risks.

Have you learned any lessons on virtual trading lately? If so, leave a comment and share it!

How should I virtual trade?

2009-02-10T22:25:00.001-06:00

Welcome back to the second part of my 3-part series on virtual trading! If you haven't done so already, be sure and ready through part 1 "Why everyone should be virtual trading". In this part I am going to cover some good practical advice on how to ensure that you get the most out of your virtual trading experience. I will also give some ideas on what tools you can use to make virtual trading as accurate and efficient as possible.

Part 2 of 3 - How should I virtual trade?
This can be as simple or as complicated as you want it to be! I have used various methods of tracking my virtual trades and the tools available now are much more advanced than what I started out with. The methods you use to track trades are not vitally important. Find a method that works well for you and stick with it.

What is more important is to make very sure that you are closely simulating a real-life trading environment. In order for virtual trading to work effectively you must make it as realistic as possible! The following list covers the essential items to ensure that you will get the biggest benefit from your virtual trading experience:

"Fund" your virtual trading account with a realistic amount of money. If you have $10,000 of real cash to trade with, then don't go creating a $100,000 virtual account to trade with. You will be a sloppy, careless trader and will learn nothing more than how to throw up a million trades and maybe get lucky.

Treat your virtual account like it's real money. You can't expect to learn anything if you don't treat it like the real thing. For every trade, stop and think "Would I do this if it was real money?" This rule is more for the beginning traders. For you more experienced traders, I mentioned using virtual trading to try out questionable or new trades. You're mostly exempt from this rule, but you still need to keep it rational.

Don't trade in hindsight! One temptation is to enter your orders at the end of the day by looking at the stock price and think "Oh I could have bought this stock here." NO!! You put in conditional orders before the trade, just like any real trade. How you do this will depend on your tracking method, but make a static note of some kind beforehand what your entry/exit conditions will be. Unless you are backtesting a specific strategy (a topic for a whole discussion of it's own) you do not pick your trades in hindsight.

Now that the important points have been emphasized, let's take a look at some ways that you can use to implement virtual trading. I originally started out years ago using a few paper forms and file folders to track trades. It was cheap, and worked fine for the slower moving stock strategies I was using back then. However monitoring trades written down on paper can be cumbersome, and there are much better computerized methods available. If you are just going to be trading a few stocks this method could still work, but any more than that and I'd highly recommend finding a more automated method.

The next thing I used was a simple spreadsheet to keep a record of trades, profit/loss, and running totals. I actually still use this method for tracking the performance of my individual strategies. This method is also very cheap. If you don't already have Microsoft Office there are also free alternatives available. I currently just use a Google Docs spreadsheet so it is accessible from anywhere I have internet access. The other advantage is that there are almost endless possibilities for tracking and mining data from your spreadsheets. There is however still the disadvantage of not being directly tied to the markets. This makes it very difficult to virtually trade options if you buy options with the stock price as a trigger like I do. There is no good way to figure out what the option price was at the moment your trigger was hit. So I only use the spreadsheet to track trades after they are closed in my paperMoney account.

The best method is to use an online virtual trading tool, such as Thinkorswim's paperMoney. The great part about using an actual virtual trading tool is that it is tied to live (or 20min delayed) market data, which allows for the most realistic trading experience. It provides easy trade tracking and order history. I would highly recommend finding and using an online broker that offers a virtual trading tool! The additional advantage you gain is that your virtual trading platform will closely match the platform you use for live trades. This helps to make your virtual trading feel a lot more real, and it simplifies the transition from unfunded virtual trades to funded live trades.

There are a lot of social fantasy trading sites for stocks, such as Wall Street Survivor and Covestor. Unfortunately I still have not found any good sites for trading options other than a few of the online brokers such as Thinkorswim, OptionsXpress, and Zecco. I personally use Thinkorswim (ToS) for both my virtual trading (paperMoney) and my funded trading. The great thing about ToS is that they use the same platform for all trades. If you want to virtual trade you log into your paperMoney account, and if you want to make funded trades you just log into your normal account (same login credentials). This makes for very realistic virtual trading and ease of use. I have been very satisfied with their customer service even for issues with paperMoney. So far I've always received a resolution within a couple minutes via an easy-to-use online chat feature built into the platform.

If you want to sign up for a paperMoney account just go here and sign up. They may start asking questions for funding a live account, but you can just cancel out of the registration at that point (it's been while since I signed up for mine). They will let you demo their platform and virtual trade before funding an account. I used mine for about 2 months before funding, and a friend used it for longer than that.

To be continued ...

Be sure and subscribe to my RSS feed so that you don't miss part 3 "Downfalls of virtual trading". And, if you would like live trading updates be sure and follow me on Twitter.

Part 1 of this series was recently featured in the 191st Carnival of Personal Finance. Be sure and check it out.

Trades closed in January

2009-02-06T22:37:00.002-06:00

Finally getting my month end summary up for the month of January! Life has been pretty busy lately with finding our first house and getting all the paperwork ready. We have a closing date set for February 13th (guess I'm not superstitious :-) ), and a move date of February 21st. Since we're going to have that nice first-time home buyer credit coming I've also gotten most of our taxes done and entered into Turbo Tax. Planning to submit right after closing and get that fat check coming :-)!

Trading has been a little slow so that has been a blessing in disguise, but that doesn't mean it hasn't been profitable! I love trading strangles because I can just let them ride out the storm and when the markets finally decide to make a move I make money no matter which way it goes :-). A great strategy when you don't have a lot of time and energy!

January Trades

1/9 - OXY May 55P - Net profit $134.10 (19.84%)
1/16 - SPX Jan 815/810P 975/980C - Net profit $183.20 (60.10%)
1/20 - GS Apr 55P/80C - Net profit $213.20 (10.02%)

Total loss realized in January $530.50 (8.03%)

Ending account value = $6,847.35
Realized/unrealized January gain of $725.30 (11.85%)

Why everybody should be virtual trading

2009-02-02T13:38:00.000-06:00

Virtual trading is something that I think is a highly overlooked tool that any trader can use to make themselves a better, more effective trader. In this 3 part article I will look at several reasons why I think any trader should be virtual trading. Then I will jump into some good practical, hands-on ways that you can use to put virtual trading to work for you, and then finally some good tips and cautions to make sure you get the most out of your virtual trading experience.

Virtual trading goes by many names - "paper trading", "simulation trading", "fantasy trading", "practice trading". But no matter what you call it, the fundamental idea is the same. You are pretending to trade something (stocks, futures, options, etc) without actually trading the real thing. For the purposes of this article I am mainly referring to stock and options trading, but the same principles can be applied to just about anything.

Part 1 of 3 - Why everybody should be virtual trading
Beginning traders are the first people that come to mind when I think of virtual trading. Even though I think it can help all traders, I think beginning traders need it the most. The stock market is not a place to get rich quick by any means! Some people see it as this magic place where people make fistfuls of money for very little work. Granted some do, but I'd rather not find out I'm not one of those lucky few after putting my own hard earned money on the line and losing it all. The markets can be a harsh and unforgiving world for those who haven't learned the skills necessary.

Virtual trading provides several benefits to beginning traders. First of all it allows them to get their feet wet in the markets, and get a feel for what it's like. Then after trading for a little while a trader will start to get a good feel for their trading style, risk tolerance, and maybe some favorite strategies. Once a trader has learned a little more about how and where they feel comfortable trading, they can start honing in on those areas and gaining more specialized expertise. There is no right answer for trading the markets. Some people think they have the win-all and be-all strategy for the markets, but they really don't. You have to pick the style of trading that fits you. And you will only find that by being active in the markets.

Why risk your own hard earned money before you know what you are doing?? Sure some of you probably have loads of money and can risk a small piece to get going. Others of us only have a small amount that has taken years to save back. My advise to you is to virtual trade until you have proven to yourself that you have found your niche, and can be successful at it. Then you can put your own money out there with confidence knowing that you already have proven skills you can use to make a profit in the markets.

For all of you more experienced traders I still think virtual trading holds two very important benefits. I have met some very successful options traders in the past (read multi-millionairs who started with a few thousand), and every single one of them said that they made a habit of trading unfunded virtual trades in addition to their normal trading. When asked why, they usually gave two answers. They used virtual trading to learn and develop new trading strategies, and to maintain an edge on the strategies they were already using.

Once your accounts start growing and you have more money to trade, you will probably want to start diversifying trading strategies. For example, I have been trading long strangles on stocks, but I am now starting to diversify into iron condors to help hedge against markets running flat and causing big losses. Also, I would have a hard time trading either of these strategies on an account much over $150-200,000 because you need to keep trade sizes small enough to remain very agile in the entrances and exits.

When learning a new strategy in some ways you almost go back to beginner status, especially if the new strategy is much different. What better way to tinker around and fine tune your trades than to trade the new strategy with unfunded virtual trades? Once you have built a solid record of virtual trades, then once again you can take the strategy live with confidence.

Even if you're not attempting to learn a new strategy, any trader that has been around for very long knows that the markets are continually changing. Trading is part science and part art. You can rely on technicals, but those only help tell you what is happening, it still takes a special feel and skill to know what to do with that information. Because of this, I feel that is is good to always run at least a few virtual trades along side of your normal funded trades. You can make little tweaks and changes, and then watch how the two accounts compare. Often you will find that you can sense changing market conditions a little sooner this way, and already have a few adjustments ready to implement. Or maybe you have a trade that looks really good, but you just have that funny gut feel about ... just do it in an unfunded account and see what happens. Who knows, you might find some adjustments to your strategy on accident :-).

To be continued ...

Be sure and subscribe to my RSS feed so that you don't miss part 2 "How do I virtual trade?" and part 3 "Downfalls of virtual trading". And, if you would like live trading updates be sure and follow me on Twitter.

Late night update with a new long strangle play

2009-01-28T01:50:00.000-06:00

Markets haven't been moving much in any one direction much the last week. That combined with no new good trade candidates has made for some slow trading. But that's fine by me as I have been busy getting a contract finalized on our new house :-), and helping start a new non-profit organization (not related to stock trading). Waiting to get a signed copy back in my hands, but it looks like we have a brand-new 3br/3ba house :-)!! Huge answer to prayer with the baby on the way, and our apartment lease coming due. More details to follow as things progress ...

Potential Trades

RIMM Jun 45P/60C ~12.00/contract
- Typically I put in separate orders for the put and call legs of a long strangle. The problem I see with that on this stock is that it gaps a lot. That is the one downside to separate legs with triggers based on stock price ... you can get burned if the stock gaps significantly. So, I'm going to try something new by submitting an order for the full strangle to execute at the market 15 minutes after market open. The 15 minute delay is to try and avoid the crazy first 15 minutes of trading that can throw off option premiums.

Updates

MS Apr 15P/20C - Seems to be bumping up against resistance at $19.58. It broke through yesterday, but then pulled back to close below. Today it closed above that line, but only marginally on lower volume. I'm putting in a trigger to dump the Apr 20 calls if the stock falls below $19.05, which is below today's low and the 100-day moving average that it broke above today. It showed a little strength after-market tonight, but we'll see.

OXY and FWLT - Both of these stocks have yet to make a decisive move. They are both May expiration, so there's still plenty of time.

Almost 90% trade accuracy!

2009-01-20T23:12:00.001-06:00

There was a lot of chatter all over today about the big event, and how change is coming, blah, blah, blah. I'm not going to say much because this is a financial blog, not a political one (though they are very much tied together). I'll just say that the markets were about as, or more, excited for our new president as I was. Change is coming alright, but I'm afraid it's not for the better.

GS was somewhat frustrating to me today. Ended up giving up about $312 in profits if I hadn't sold it first thing this morning :-/. I did still make my target profit of 10% so I should be happy, it's just hard to see easy profits like that slip away. On the other hand that's expected with the way I play strangles. My idea is to make consistent, steady profits and not go for the big ones. Take a little piece on every play, and be more consistent at it.

Speaking of consistency, I currently have a profitable trade ratio of almost 89% :-)! Since I started tracking my trades the end of May I have had 39 profitable trades, out of 44 total trades. Not bad considering the crazy markets we've been in during that time. My trading account also crossed the $7,000 mark for the first time today, which puts me at 62.2% growth since May 27th. Every single trade I've closed can be seen here. (Note: In the interest of full disclosure, I did have another small account for a while where I was trying to see how small of an account I could start trading with. I am not counting those trades as that account was a bit of a flop. Also, my Iron Condor trade is not yet on my trade record spreadsheet since I haven't figured out yet how I want to track individual strategies in the same account.)

Recent Activity

1/16

Opened OXY May 50P/55C long strangle - 1 contract for $14.80
- Entered limit GTC sell order for $16.40 (~10% net profit)

1/20
Sold GS Apr 55 put - 1 contract for $6.95
- This closed out my long strangle for a net profit of $2.132 (10.02%)

Potential Trades

Not seeing anything that looks good right now. Trying to be patient and save my cash for a good trade when it comes along.

I will be opening a new long strangle tomorrow

2009-01-15T22:40:00.000-06:00

Wow, crazy markets today huh?! I was busy most of the morning dealing ironically with putting in an offer on a house, and the 5% layoffs at my job. Guess I must be fairly confident in my position! I'm not too worried because I have made it a point to always put out quality work, and give 110% when the crunch is on. I have probably close to a month of uncompensated overtime (I'm and expempt employee) I put in last year, so I'm hoping that buys me some job security if nothing else.

I recently found Brian over at AlphaTrends who posts daily video technical analysis of the markets. Worth a look!

Potential Trades

OXY May 50P/55C ~14.00/contract
- Putting in my order triggers for a $0.30 move either direction on the stock. (Stock moves up I buy the call and/or stock moves down I buy the put)
Follow me on Twitter if you want to see live updates on how the trade goes.

Updates

GS - Dropped a lot in morning trading today, but recovered most of it by close to create a nice big hammer candlestick. I'm going to leave my trigger for the call buy-back where it's at ($81.30) and not chase it. If it would have stayed lower today I might have adjusted.

SLB - I still have my Jan 65 call from the strangle I stopped out on in December, that will expire worthless tomorrow. Normally when I stop out of a strangle I dump both options, but it was already worthless then, so I held it just in case. Never hurts to try right :-)?

SPX - I was extremely tempted to bail on my SPX iron condor this morning as my bottom spread was is at 815/810. I held on though to see if support around 820 would hold, and thankfully it did. The fact that this was more of a hedging play helped me resist temptation. As I was losing on my iron condor, my GS position was just about compensating the entire loss. Plus I have two other strangles catching the volatility as well. So long as the S&P 500 doesn't gap down more than 28 points I will clear just over 60% net profit ... in only 8 trading days!! Not to shabby for an "insurance policy" :-).

First iron condor trade is fully opened

2009-01-13T23:20:00.000-06:00

I've spent most of my evening tonight analyzing a house my wife and I are thinking about buying. I know the real estate market is looking pretty gloomy, but we're looking at some distressed properties that have some great sweat equity potential. I'm very familiar with home remodel so I feel comfortable doing the work myself which helps a lot. It's just a lot of work making a checklist of repairs and then putting together estimates to figure out whether a property really has potential or not.

Yesterday was a pretty profitable day for me. I didn't close any trades, but had some decent unrealized gains on just about all my open trades. Today was a wash overall, but I didn't lose any ground, so I can't complain.

Recent Activity

1/12

Opened SPX Jan 815/810 bull put spread - 1 contract for a credit of $0.65
-Already opened Jan 975/980 bear call spread on 1/6, so now I have a full iron condor with a total credit of $1.95 and total risk of $3.05. So far so good with my first iron condor trade.

1/13
Opened FWLT May 20P/30C long strangle - 2 contracts for $5.70 each
- Entered limit GTC order for $6.40 (~10% net profit)

Updates

GS - I'm tempted to lower my trigger for buying back the call, but I'm not going to give in just yet. The temptation is that I'm allowing for a lot of upward movement (and thus increase in call price) before buying back the call. There is a resistance level right about $80.75 that would be a good spot. The problem is that when a stock breaks out like it did yesterday it can often rise back up and kiss the previous support goodbye. I don't want to get caught picking up the call, just to have the stock drop right back down. Right now by trigger is set right about the resistance line of the wedge it broke out of. The other spot I could use is the last peak around $88.75. I'm going to leave it where it is for tonight and analyze it again in the morning. Be sure and follow my Twitter feed since I'll tweet any order changes/executions right away.

Don't micro-manage strangle trades

2009-01-11T23:07:00.002-06:00

Over the last few months I've learned a bit of a lesson on managing long strangles that don't turn a profit quickly. The one risk with strangles is that the stock stagnates, and the options decay too much before the stock makes a significant move. I took 3 big hits (AMZN, FDX and SLB) in December from stocks that lost their volatility right after opening the trades.

As explained in my (Long) Strangle Details post, I have learned a method of "legging out" of a strangle to help turn a profit even on a stagnating stock. The problem I have had is becoming too involved in the process. The whole purpose of this blog, and the strangle strategy, is to have something that can be traded only in the evenings with no or little intra-day monitoring. What I was doing was watching for a support or resistance point on the daily charts where I could leg out of the put or call. But then I would manage that using the intra-day charts. Basically I was trying to play a daily game on an intra-day schedule. My concern was that the location of the entry/exit points on the daily charts allowed too much stock movement, and therefore was risking too much in the option prices. But what I was really doing was not giving the stock room to move around, and wasting a lot of time and effort selling and buying back options with every little stock move.

So what I've gained from this is to continue finding my exit/entry points from the daily charts in the evening, and then stick to those. None of this intra-day, micro-management where I lose the big picture, and get caught up in every $0.10 move of the stock. That's why I pay money for good charting software ... so I can find those reversal points, and pick good entry and exit triggers. Because of the limitations of complex order types I still often need to enter an order or alert intra-day, but I'm not glued to the intra-day charts. And even those are triggers that I've pre-defined the night before, so there's no last-minutes decision making involved. Stock and option trading is about managing risk, not trying to eliminate it altogether. So this is a big message to myself "put in your trade criteria and stick with it!" :-)

So am I the only one that struggles with becoming a micro-manager of my trades? What tendencies do you struggle with in your trading? Leave a comment below and let me know.

Quick 19.84% profit on OXY

2009-01-10T23:45:00.002-06:00

Started the year off with a nice week :-). My account ended the week up 9.4% overall (realized and unrealized gain). My quick 2-day play on OXY was a nice little profit that helped out. That was a good example of why I "leg in" when opening a long strangle. See my (Long) Strangle Details post for how this is done. Sometimes you can catch a trade like this one that ends up just being a single long option play and make some quick cash. The better you can pick and time your strangle entries, the better your chances are of picking up a 1-sided trade.

Recent Activity

1/7

Opened OXY May 55P long strangle - 1 contract for $6.70
Legged out of GS long strangle May 80C - 1 contract for $16.45
1/9
Closed OXY long strangle (single side) - 1 contract for $8.10, a net profit of $134.10 (19.84%)

To see my trades as they happen be sure and follow me on Twitter!

Updates

GS - The trigger that I discussed in my last post was hit and I legged out of the call. I now have an OCO order to either sell the put when the whole trade reaches 10% net profit ($6.95) or re-buy the call if the stock moves above 88.75.

SPX - So far so good on my first Iron Condor :-). I still only have the top half (bear call spread - Jan 975/980) of the trade opened. I am waiting to see what happens at the 850 area before locking in a bottom end. There seems to be a reasonable support there, but if that's broken we have a little support around 800. Beyond that we only have the November low (bear market lows) to look at.

Venturing into Iron Condors

2009-01-06T23:28:00.001-06:00

So I decided to branch out and try another strategy today ... Iron Condors (IC). I've been thinking about doing one for a while now and decided I needed to just do it :-). The markets seem to be running out of steam, so I figured now would be a good time to open up the upper 1/2 of the trade (Bear Call Spread). I will open the lower 1/2 of the trade (Bull Put Spread) once it looks like the markets have bottomed out, or at least moved lower. This is something pretty new for me, so I am by no means an expert. I did take a 2hr online course on "Siamese" ICs about a year ago, but they are a bit different than the normal IC.

The basic idea behind an IC is that you make money when the underlying stock/index stays within a certain range. A good hedging strategy for long strangles, since they need the underlying to move outside a specific range to make a profit. I'm going to experiment with a few ICs and see how they work for me. If any of you out there are trading them please let me know what you're doing and how it's working for you!

Recent Activity

1/6

Opened SPX Jan 975C/980C Bear Call Spread - 1 contract for a credit of $1.30

Potential Trades
OXY May 55P/70C ~$12.00/contract
- I'm going to enter an order on this one for $0.30 move in either direction on the stock (OXY moves down I buy put, OXY moves up I buy call)

Updates

GS seems like it's peaking out, so I'm putting in an order to dump the call if it breaks the low of today. It did move a ways into profitable territory today though, so I'm going to do an OCO with the current 10% profit exit on the whole trade in case it does move up tomorrow.

MS had a nice run up yet. Still not profitable on the calls yet though.

Trades closed in December

2009-01-05T00:30:00.001-06:00

Finally getting back to blogging :-). I had a great holiday break, and 12 days off work (8 of them paid)!

December was a pretty bad month for my accounts though. I've realized that my smaller account was just too small of an account to start with, so I will no longer be trading with it. It seems to me like ~$5,000 is the minimum amount you want to start trading long strangles with. My larger account (starting with $4,325.75 the end of May) has done much better overall. I finished the year with a 41.5% return ... in just over 7 months of actual trading :-).

Account 1
12/19 - SLB Jan 55P/65C - Net loss $875.40 (-22.59%)

Total loss realized in December $875.40 (-11.70%)

Account 2

12/18 - FDX Jan 60P/80C - Net loss $735.40 (-78.2%)
12/18 - AMZN Jan 40P/65C - Net loss $672.60 (-81.5%)

Total loss realized in December $1408.00 (-48.14%)

Ending account values
Account1 - $6,122.05 (Realized/unrealized gain of 4.61%)
Account2 - $925.47 (Realized/unrealized loss of 38.5%)

Financing my first "flip" along with some stock picks

2008-12-11T23:55:00.003-06:00

To give a little background I'm getting geared up to do my first house "flip" (I use this term lightly as it will be a 2yr process). I've always loved remodeling work, and have had a decent amount of experience. Now that my wife and I are ready for a house I figure we might as well get something that needs some work. The hope is to find a depressed property, and then use my 3 weeks of saved vacation to beat out the major issues before we move in. The rest we can work on over the next 2 years before we sell and move to Colorado. Or so goes the plan :-).

Tomorrow I have an appointment with Bank of the West to see what they can offer me in the way of a home mortgage. I need something that either has a low down-payment requirement, or the ability to finance the house and repairs in one loan. I really wish the tax credit could be received up front, but so far that hasn't been changed. There is some talks of raising the cap and allowing it to be used at closing, but I'm not going to base any plans on that. We have some money saved up, but we'll need a chunk of money to make the needed repairs before move-in. If we could get the house and repairs rolled into one loan that would be ideal I think. And then just make a $7,500 payment against the principle when the tax credit comes to get our payments down.

Another thing I'm still trying to decide is whether or not to just do an interest-only loan. That is typical practice for "flippers" since the property won't be owned long enough to really make even a dent in the principle anyways. The money could be better used by investing it back into the property repairs, and helping build equity that way. The risk is that we end up living in the house longer than we planned and have to refinance. I don't feel comfortable going all the way to a 5/1 ARM, but I'm thinking a 30yr fixed interest-only type loan might work well, without quite as much risk.

Some people would say I'm crazy (you know who you are ;-)), but we will see what the bank will give me tomorrow. I know credit has been getting harder and harder to find, but the Wichita market is still doing very well in comparison. Since this is my first house purchase I'm not terribly familiar with getting a mortgage. Is it usually worthwhile to meet with a couple of banks before picking one and getting pre-approved? I've heard that getting pre-approved at multiple banks can ding your credit score from the barrage of credit checks. Is that true?

Recent Activity

None

Potential Trades

I don't have any available trading cash at the moment, so these are suggestions for anyone who wants them.
FWLT May 25P/30C or 20P/35C - This stock has been swinging about $10 withing the bollinger bands and just bounced off the upper. For ~$7 the 20P/35C is pretty affordable. I almost have enough free cash to do this one, but not quite.
OXY Apr 55P/60C - This one looks really good if you can swing the $20.00 cost. None of the wider strikes had enough open interest. This stock has been channeling between about $42 and $55 and appears to be turning back down from the upper bollinger.

Updates

AMZN looks like it's reversing for another ride down. I don't think it's worth legging out of the call since it's only worth $0.70 at this point. The small amount I would gain on a large drop doens't really justify the risk and commissions. Just have to ride it out and hope it drops fast and far.

FDX is on a support trendline and near the lower bollinger band. It's finally gotten some volatility, so I just might make it out of this one with my shirt :-). Today it didn't really drop until the last couple hours of trading. Earlier in the day it kept trying to push up and almost legged out of the put at one point. Just have to keep a close eye on this one. I am actually reasonably profitable on the put with this one. Still close to 40% in the trade overall though.

SLB still seems to be channeling between the 10-day moving average and the lower bollinger band. It just bounced off the 10-day, so maybe this trip down I'll finally at least hit break even.

MS and GS both are at a slight loss on both the call and put. They've also got a lot of time left, so I'm not really doing much of anything with them right now. Just let them do their thing.

Our car is becoming a money-hungry beast

2008-12-09T18:59:00.002-06:00

So far this week we have a rebuilt transmission (thankfully covered under warranty since it was rebuilt in February) and 4 new tires ($490). Still to come are new front brakes and rotors (~$50 for parts), new belt ($20), and an alignment ($60) ... as well as the $1000 medical deductible whenever insurance gets their act together. When it rains it pours I guess! It's frustrating, but I'm so thankful for our financial planning that has kept this from being a disaster. Overall it ends up just being a major annoyance for being without a car, and spending money that wasn't planned.

I was planning on getting a couple new tires this month, and the other two in a couple months. But when my wife got to my workplace to drop off my forgotten cell, I discovered a flat tire. Like totally flat and flopping on the rim :-o! "It just felt funny" Ummm, yeah!! Thankfully the tire store I always use was right across the street, so I left work and limped it over there on the flat without hurting my rim any.

Now the delima ... do I buy 2 cheap tires at full price, or go ahead and get 3 performance tires like normal, and get the 4th free. I really needed all 4 soon, especially with winter upon us, and getting 4 performance tires now with the sale was only $40 more overall than getting 2 cheapo tires now and 2 later. So I now have 4 - 70K mile performance tires on my car. In the process of getting the tires changed they alerted me to the need for new front brakes (the outside pad looked fine, but the inner pad had 2mm left), and a chunk missing from my serpentine belt. One of the front rotors doesn't have enough left to turn it, so I'll have to get a new one. At least I can do all the work myself tomorrow night.

I had already saved back $210 in our car repair fund, so that's decent amount toward the repairs. The rest will either have to come from house savings (just when we were going to meet our $4,500 goal at the end of this month), or the emergency fund. Either way we're blessed to not have to put anything on a credit card :). Stuff happens, so that's why you better plan for it.

Recent Activity

None

Updates

FDX dropped like a rock today on back earnings previews. And just when I was starting to turn a profit on the upside too :-(. It dropped so far overnight that there wasn't any way to salvage my gains on the call. Just have to see if it bounces or continues the plug tomorrow.

AMZN had a nice run this morning, but just couldn't hold above the 50 moving average. It's showing some signs of weakness, so I'm ready to leg out if it drops off.

The rest of my open plays aren't really doing much of anything newsworthy. Just as an update, these are my current positions:
- AAPL Apr 190C
- AMZN Jan 40P/65C
- FDX Jan 60P/80C
- GS Apr 55P/80C
- MS Apr 15P/20C
- SLB Jan 55P/65C

Waiting for the markets to pick a direction ...

2008-12-04T21:18:00.003-06:00

I got a 4 day weekend to "catch up", but still feel stressed and out of time. My project at work is supposed to be finishing up a phase this week, and I'm lagging behind so I'm getting wound a little tight about that. Which means I've been working extra hours, and haven't had the time I'd like to stay on top of the markets and blogging :-(. To top it all off my January (expiration) strangles are slowly strangling themselves, so that's a little discouraging. But enough whining ...

What has also been taking a lot of time the last few days is setting up my new MacBook Pro :-). So far I LOVE it! It's going to take a while to get everything all setup and optimized, but so far it's coming together. I never realized just how much crap I use on my computer until now! And yes I'm a total geek and perfectionist, so I'm writing scripts and all kinds of crazy stuff to make it "just right". :-)

Recent Activity
12/4
Bought GS Apr 55P/80C - 1 contract for $21.15
- Entered limit sell order for $23.40 (~10% net profit)

Updates

My strangles that have January expiration are still looking pretty wilty. The stocks have been moving again finally, but in the wrong direction for my trades. The P/L graph for a long strangle is a U shape where you lose the most money if the stock stays put, and then your profits go up as you move either way. As the stocks have been cautiously rising my profits have been sliding down the left "arm" of the U. If they keep moving up I might be able to turn a profit in the other direction, but I don't see that a terribly likely. If the markets turn back down, they better do it soon or I'm afraid it will be too late.

Trades closed in November

2008-12-02T21:15:00.001-06:00

I should have posted this sometime this past weekend, but it was a holiday. And to top all that craziness off the transmission went out in my car late Saturday night :-(, and I got my new MackBook Pro yesterday :-). So I have not been sitting around getting bored to say the least.

This is a list of ALL trades I closed during the month of November. I list both realized and unrealized gains since there are trades currently open in both accounts. The month of November was extremely slow, which is in stark contrast from October where I was trading like crazy. The markets aren't maintaining any single direction for more that a few days at best, so strangles are not the best trade to be playing. No realized losses for November, but I'm afraid there's going to be some big ones this month :-/.

Account 1
11/3 - RIMM Mar 35P/60C - Net profit $196.40 (10.10%)
11/24 - GS Apr 40P/65C - Net profit $223.20 (9.96%)

Total profits realized in November $419.60 (5.94%)

Account 2

No trades closed in November

Total profits realized in November $0 (0%)

Ending account values
Account1 - $6,446.25 $5,852.25 (Realized/unrealized loss of 9.21%)
Account2 - $1,505.64 (Realized/unrealized loss of 17.96%)

Markets are already on Thanksgiving break

2008-11-25T21:05:00.001-06:00

Markets have been rising since my last post. The catch is that volume has been moving the opposite direction ... down. We are closing in on the holiday season and it's typical for activity to dry up, so it's hard to get a good reading. We probably won't see any meaningful action until next week.

Speaking of the holidays, I've been working in overdrive this week trying to get my work project far enough along so I can have a nice relaxing Thanksgiving weekend. So, I'm not going to have much more that a quick trade activity update today. I am hoping to have enough free time this weekend to start working on an article I've had rattling around in my head the last few weeks, so keep an eye out for that soon.

Recent Activity

11/21

Bought GS Apr 40P/65C - 1 contract for $22.30

11/24

Sold FDX Jan 60P to leg out - 1 contract for $5.20

- Bought back for $4.30 at the end of the day (lowered cost basis of the strangle $84.10)

Sold AMZN Jan 40P to leg out - 1 contract for $5.85

- Bought back for $4.90 at the end of the day (lowered cost basis of the strangle $89.10)

Sold GS Apr 40p/65C - 1 contract for $24.65, a net profit of $223.20 (9.01%) in 1 trading day!

Opening a long strangle on Goldman Sachs

2008-11-20T23:24:00.003-06:00

I'm so used to not opening any new trades I totally forgot to add my new trade for tomorrow to my last post. I've still got ~$2,400 cash in my larger account that I've been hesitant to invest with the markets killing my other plays. But now that stuff is breaking out of patterns and heating up I feel comfortable opening a new trade.

GS Apr 40P/65C - I wish I would have gotten into this one a while back as it's just been steadily marching along. I'm getting in the options on a +/-$0.50 move on the stock.

"New" MacBook Pro!!

2008-11-20T22:45:00.001-06:00

So the big news this post (and probably a few more in the future) is my new laptop :-). I'm a big mac fan, and have been using them since I was about 9 years old. That poses a slight problem with the whole saving like, mad so we can live like no one else later. For me a PeeCee is not even an option as I've never bought one, and I don't plan on starting anytime soon! Macs tend to be a bit on the expensive side, though I would argue that comparing oranges to oranges they really aren't as inflated as people think. (I think I just started a flame-war ;-))

I've been getting by on my 4 year old PowerMac G4, but it's starting to get a little outdated. However, as a testament to Macs even after 4 years it's currently been running for 251 days without a reboot. And it's out only computer, so my wife and I both use it all the time. My problem is that the charting software I use is Windows only, so I have to run it emulated with Virtual PC. And my OS (10.3.9) is too old to run my stock trading platform. So I have just been using the limited web-based platform at home, and then I have the desktop version on my work PC.

Seeing other people with brand-new laptops has been tough, but every time I just repeat the phrase "Live like no one else, so you can LIVE like no one else!". But my moment finally came. I had totally forgotten that December was an "extra paycheck" month, so it wasn't figured into our long-term financial plan. Even nerds have to let go sometimes, so I figured it was now or never. Once I convinced my wife it was OK, I figured I better get it before she changed her mind ;-)!

I was actually going to wait until December, but a good deal came by that was just too hard to pass up. I got a 10% off ($100 max) coupon from eBay that expired 11/30, and then I discovered an amazing deal put on my Microsoft Live! search. I found a NIB MacBook Pro 15" (MB134LL/A) on eBay for $1,399 that qualified for the 25% cashback ($200 max), so I took it! It's the previous model, so it's not the latest and greatest ... but a $1999 laptop for $1099 is nothing to laugh at! I do find it very ironic that Microsoft is giving me cashback for an Apple product ;-). I still don't have the cashback in my account yet, but everybody says it can take up to 2 business days. It was posted all over eBay, so it seemed legit. It better be, or my wife will kill me!

Updates
As promised last time, I'm including the current state of all my positions. Which by the way are looking much better than last post so procrastinating paid off ;-).

AMZN Jan 40P/65C (Currently up $19.20 (2.06%)) - Amazon had a failed rally today. In the morning trading it ran up over $4.00, and then closed $0.81 in the red. It's been following the lower bollinger pretty close for a while so a rally could come anytime. But with rallies like today it's hard to trust anything for a legitimate reverse to leg out on.

FDX Jan 60P/80C (Currently down $94.30 (8.80%)) - This one finally made a move. It broke through support yesterday, and strongly continued that move today. I almost reached break-even at the low today, so this one is starting to look fairly hopeful. The temptation will be too just dump it when I reach break-even, but I'll see how it looks then.

MS Apr 15P/20C (Currently up $60.70 (7.21%)) - Another stock that's just following the lower bollinger. It's still got a lot of time and it's almost to 10%, so not much to worry about here :-).

SLB Jan 55P/65C (Currently down $126.80 (6.56%)) - Oil dropped today again, and SLB exaggerated that move. Down over 16% today, which gained me $1,085 on my strangle! It's now below all my indicators, so who knows.

Three strangles have 31 days left, will they make a profit?

2008-11-18T23:05:00.001-06:00

I keep trying to leg out of some of these long strangles with no success :-/. I haven't really lost much either, so that's good I guess. The stocks ride up a little ways and then whiplash back down so I have to buy back the puts to cover myself. Good thing I get cheap commissions :-)! I wouldn't be so aggressive about legging out of these trades if they weren't looking so sorry. My January expiration plays now have 31 days to turn a profit before I have to pull the cord. I think a little look back in history is in order ...
Back in July - September the markets flattened, which just killed my open strangle trades! So what happened? Well I got scared and sold off my real money trades at a hefty loss :-(. But I was curious, so I held a few of my paper trades to see what would happen. I tried legging out and in on one of them at that time, and didn't have any better luck than I am now. But I held on. The longest one I held for exactly 2 months, and I did not lose on any that I held.

SLB: I held the Nov 85/110 from Aug-6 to Sep-9, and sold it for 10.2% profit, 73 days before expiration.
MER: I held the Jan 14/35 from Jul-29 to Sep-12, and sold it for a 9.1% profit, 126 days before expiration.
COF: I held the Dec 40/45 from Jul-18 to Sep-18, and sold it for a 9.8% profit, 92 days before expiration.

The discouraging data I see is that none of those were held as close to expiration as the ones I have now. January expiration is only 59 days out. The good thing is that I've only held the 3 stragglers I have now for about 5 weeks. Oh wow, I just realized I bought all 3 on the same day too ... scary!

The lesson here is time value is your friend! It's costly, but it can save your hide. I always buy at least 4 expiration months out, but in this case I bought them right before Oct expiration, so really I only got 3 months of actual time :-/. Might need to change that rule a bit. A lot can happen in a month though, so lets see what happens! I may still try and leg out again, so keep an eye on my twitter feed.

Recent Activity
11/14
Sold MS Apr 15P to leg out - 2 contracts for $11.80
- Bought back for $11.80
Bought back AMZN Jan 40P - 1 contract for $4.95 (Legged out 11/13 for $4.95)

11/18
Sold FDX Jan 60P to leg out - 1 contract for $4.80
- Bought back for $5.40

Updates
I was going to post an update on exactly where I'm at on each of my open trades, but I keep my trade notes in my trading platform. The problem is that the only computer I have is a 4 year old Mac laptop that won't run the desktop version, so I use the web platform at home. The notes are only stored on the desktop version which is currently on my work PC. I forgot to start drafting a post while still at work so I could share. I could VPN into my work computer, but it's late and I need to get to bed. So maybe next time ...

Operation Christmas Child by Samaritan's Purse

2008-11-16T16:36:00.003-06:00

It's amazing how fast Christmas has slipped up this year! Local radio stations have already started playing Christmas music, and the stores are stocked up on Christmas wares. That also means it's time for what has become a tradition in our new family ... shoe boxes for orphans :-).

Ever since we started dating, Laura and I have taken the opportunity to go shopping together and fill up some shoeboxes for orphans. Once we have kids we plan on involving them by letting them shop for an orphan their age each year as well. It's something that doesn't take a lot of time or money, but can help chilren who have almost nothing. Most years we try and do at least 4 boxes, but this year the budget is a little tighter so we chose to only do one.

I would encourage each of you to reach out to someone less fortunate this Christmas season, and make a difference. This is something that only takes a few minutes. My wife and did our shoebox this afternoon after church. Took 30min to drop by the dollar store, and we filled our box for only $25. If you would like to participate in filling a shoebox for an orphan they need to be dropped off to a local collection center by November 24th.

Key reversal day, and some good and bad with the strangles

2008-11-13T23:41:00.000-06:00

Wow! Today would fully classify as a key reversal day in my mind. Now some people are saying this is just like a couple other key reversal days we've had in the last month. I would argue that this has a much better chance of not being a "dead cat bounce", and that the others didn't really qualify as a key reversal.

Let's take the S&P 500 as an example. If you notice first of all that today set a new low for the downtrend. Not only the latest downtrend, but the greater long-term downtrend. It closed above yesterday's close, and almost as the very top of the today's range. All this on significantly higher volume. For example the bounce on Oct 28th was a good bounce that came after a downtrend. However it did not set a new low, and it advanced under only slightly higher volume. It still managed to pull off a rally just past the 1000 mark.

Does this mean we're out of the woods and on to a bull market. LOL! No! It's possible yes, but most likely wishful thinking. Don't forget the looming credit card crisis on tap for next year. Though with Obama's bent for rewarding stupid people, maybe I should rack up some CC debit over Christmas so I can get bailed out ;-). Anyways, I think a rally to 1000 on the SPX would be reasonable. At that point it will depend if it can break resistance there or not. It's going to have the resistance line from the last two "rallys", and the 20-day moving average to fight.

Recent Activity

Sold SLB Jan 55 put to leg out - 2 contracts for $22.00

- Bought SLB Jan 55 put to cover - 2 contracts for $24.20

Sold AMZN Jan 40P to leg out - 1 contract for $4.95

- Entered OCO to buy back Jan40P if stock drops below 41.35, or sell Jan 65C @ $4.80

Updates
AMZN play went OK for me today. I legged out of the put after the markets turned around and headed sharply upward. Once AMZN moved above the open I sold the put, and then set an alert at the 100bar moving average on a 5 minute real-time chart. Thankfully it cooperated better than SLB and I never had to re-cover. I thought about going ahead and buying back the put so I wouldn't be single-sided in the play overnight. But AMZN closed ~$3.00 above where I legged out of the put and it very rarely ever gaps that much. So I put in an OCO to either re-cover by buying back the put if the stock falls, or to sell the call once the whole trade reaches 10% profit.

FDX is still sitting there channeling between ~62 and ~69. Hopefully this thing will break out of this channel soon, so I can get my money back. Expiration is 64 days out, so I've still got over 30 days.

MS was my total miss for the day today. I was watching it as the other stock and markets were turning around, but it was running flat. When it finally decided to move it blew above the open while I was busy actually working ;-). I'm still profitable on the put and looking at the chart now it bounced off the lower bollinger band quite nicely. I'm going to watch it closely at the open tomorrow and hopefully successfully pull off legging out. Watch my twitter feed tomorrow for updates.

SLB didn't do so well for me today. It started up in early trading so I sold the put in order to ride the call up. I set a market buy order to re-cover the position by buying back the put if the stock dropped below $45.50. As luck would have it the stock tanked to $44.00 shortly thereafter and I bought the put back for $1.20 more than I had sold it for. To pour salt on a wound the stock closed at $51.70 >:-(. Oh well, even looking back I don't know what I could have done differently. I set my entry and exit points and stuck with them, without letting emotions getting involved. And I waited until 15 minutes after market open to sell the put to let the markets pick a direction.

Does anybody trade iron condors?

2008-11-11T20:23:00.001-06:00

The markets are consolidating right now, and as mentioned before, my strangle plays are really starting to feel it. Three of my four open trades have just over a month of time left before I have to bail on them. Which is still enough time if the markets make a decisive move soon. This is the second time this year, that I've had this problem. The one weakness of strangles is stocks that run flat.

I've been trying to figure out a good way to hedge against that weakness, and the only strategy I know of would be iron condors. I took a 4hr class on trading iron condors, but it covered one specific type of iron condor that the instructor call a "siamese condor". Both options that were sold-to-open were at the same strike, so your spreads were joined at the hip. This allows for very little movement (VIX <20), style="font-weight: bold;">

Do any of you all trade iron condors (IC)? I know you can trade them with a larger spread, I just don't have the training or the experience yet. For example the SPX has been channeling between ~850 and ~1000, so I'm wondering if there is a way to setup an IC to work with that. If anybody is actively trading ICs, I'd like to hear how they are working for you right now. And if you are a fellow blogger I'd welcome a guest post, if you are interested.

Updates
AMZN (Jan 40P/65C) touched the lower bollinger band today, but then rose back up at the end. I'm almost profitable on the put, which is good because the stock is still $6 above my put strike. That means the delta (rate of option value increase relative to stock movement) will be increasing quite a bit if the stock drops farther. A few days of downward movement and I should be able to get out with my profit.

FDX (Jan 60P/80C) has been pretty frustrating. It has had a big rally the last couple of weeks, but now I'm sitting at a loss on both the put and the call. I'm almost wishing that I had sold the put back on 10/29 when it bounced like I mentioned in my update. But looking back at it, even with this nice rally I think I'd still be in the hole a little bit. Overall I did the right thing with the market uncertainty and all. It's just frustrating to watch a stock make big moves and not gain anything. We shall see what happens, but I suspect a test of resistance in the $70 area.

MS (Apr 15P/20C) has been channeling between ~15 and ~20 for a while now. I have the April options, so I have tons of time left on this one.

SLB (Jan 55P/65C) has been forming a flag pattern, which is usually a continuation pattern. It's sitting on the lower limit of the flag now, so if we see a drop on increased volume tomorrow it would be a confirmation. I'm finally profitable on the put as of today, but the call has a loss of 87%. The good news is that the call can't lose much more, so any drop from here on out should be good profits.

Strangles are requiring some patience

2008-11-10T22:45:00.001-06:00

I haven't made a regular post in a while, but it's not just because I've been slacking off. For one thing I haven't made any trades since my last post. The markets have been pretty indecisive the last month, and my strangles are feeling it. I still have over a month of time left on the nearest expiration (have to bail on the play 1 month before the actual expiration), so I've still got some time. I've come close to a profit on most of them, but about that time the markets reversed and my strangles got dragged with them :-/.

It hasn't been all bad though as my wife is 9 weeks pregnant with our first child, and it's been pretty rough the last few weeks. Not having a lot of activity in my trades has given me more time to spend with her and help her out some. She's trying to finish her last semester of college including a part in the last musical of her college career.

I've also been taking some time to do more research on blogging so I can be better equipped to make this blog fun and helpful for all of you. I am going to stop doing a post every day so I'm not flooding all your inboxes and feed readers :-). I will still post if there is big news to share, but otherwise I am going to try just doing updates on Tuesday and Thursday. If I make trades in between I still want you all to know, so I will move those updates to my new Twitter account. If you want the updates you can subscribe to my twitter feed, or just check the feed in my sidebar.