Winning By Losing

As soon as I heard on Bloomberg Radio that DELL was withdrawing from the PAR bidding war with HPQ, I set myself to my trading platform to put on a appropriate "quote" -- trade. My general thesis was to short the winner and long the loser. It's a little twisted, but there is the issue of the winner's curse that one must consider. Thinking quickly (yup, must be quick), I constructed an Iron Condor with short put verticals for DELL (it's going up) and short call verticals on HPQ (it's going down, down). Both short puts and calls where placed just out of the money, so 12 for DELL and 40 for HPQ.

Firstly, I did a ratio of 3 DELL for 2 HPQ. But this was derived from thinking too quickly and I owned up to my error in thinking in short order by adjusting the ratio to reflect 3 DELL for 4 HPQ. I wanted to risk equal amounts on each side, I think.

It took only a matter of hours for me to take this trade off, for a small loss. The commissions I paid were actually greater than the trade loss, and thankfully they were relatively small in size.

The true course correction was not adjusting the ratio of call spreads and put spreads, but of realizing that I was trading from the proverbial "hip" and it was high time I stopped this horrible habit. Jumping into a trade with my only confidence being I could be clever in constructing spreads is not good. This is one of my major weaknesses. Being clever. My other big issue is getting out too soon, but that's for another post.

I lost on this Iron Condor day trade, but I won by overcoming my impulsiveness. Sometimes when you lose, you actually win. Weird, huh?

Taking a Shot at Shorting the Euro

I really like when the Euro rallies, because it provides a nice shorting opportunity. I still hold the view that the Euro has many issues that must be dealt with (such as sovereign debt default) and eventually reality will overwhelm the cappuccino addled euphoria they're experiencing now. I'm staying away from the US Dollar though, because I'm still sorting out what Bernanke and Friends are planning.  He's either drinking espresso or selling it. Not sure which one, yet.
 
I'm short the Euro via long the Canadian Dollar, entry price is 1.357, or .357 for short. I need easy-to-remember numbers because in the heat of market turmoil, it's easy to get confused about where you are.

Hurricane Season in Equities

I'm positioning myself, just like everyone else is these days, for a major sell-off in October. To me, this is not the time to go swimming in the ocean. This is time to buy plywood for the windows. I'm not sure how the season will unfold, but someone is going to lose their roof.

Yesterday, I went long the OEX 460 put calendar for SEP/OCT. This cost me $6.25. As you know, when you are "long" option spreads or calls or puts, you have defined up-front how much you can lose. It's whatever you paid.

I've considered buying ITM VIX calls as a proxy for being long VIX, but the VIX futures, which price the VIX options, are trading at 3-4 points above spot. It's better to buy the present volatility, which is implicitly embedded in SPX or OEX options. After all, VIX is the volatility of SPX options.

My Big Fat Long Silver-Foil Conspiracy Wedding

Long "John" Silver. Silver Wedding. Big Fat Greek Wedding. Silver Lining. Silver Foil Conspiracy. Actually, I can't choose. Like Mozart trying to pick a wig in the movie "Amadeus", I want them all. At once. I love silver. I want to get married to it. As you know, every trader quote -- "must" be married to a trade. It's the trade that you embrace in good times and in bad. It keeps you grounded. And makes you feel like you have gravity. In a Beethoven Opus 135 sort of way, if you know what I mean.

Of course, the common plebeian wisdom is to "never" get married to a trade. This is a term used by nihilists and bacchanalian pleasure-seekers. We are not those type of people. We can commit, because we are not flying potato chips. We have some weight and integrity.

Silver is going up because precious metals will become the new reserve currency. Fear will rally gold and there is a certain ratio between the yellow metal and silver. Actually, the Romans dictated it to be 15 (ounce per ounce). According to my charts (created with quantmod package in R), it's currently at 63ish.  Were the Romans really that wrong? And what about the issue of certain investment banks holding short positions in excess of concentration limits soon to be imposed? And what about the thesis (which I personally have not validated via COT reports) that there are more short contracts in silver than there is physical silver above ground?

Am I blinded by love? Maybe. But you are a fool if you have never experienced the blinding force of love. And love for a certain trade? Well, that's unheard of - like a merger between Capulet and Montegue. After all, we only live for a short term, and love lasts forever. Please trade small though. Your kids still need your love more than your fanciful trade. 

A Simple Exit

I'm done with my complicated trade in shorting TLT by buying ITM TBT calls. I was beginning to talk myself out of this trade right after I put it on (these things happen, you see), but then I got the TLT sell-off I was originally expecting. Good thing. I took the money and ran. Simple. Sold SEP TBT 25 call for $6.70, which represents a $1.50 profit. I really hate doing the "percent return" thing with individual trades. But for getting a $1.50 profit from a $5.20 investment, I can at least call it good.

I'm starting to think that maybe TLT is not overbought at these levels. Where would we prefer it, like around $100 or so? Yes, the move was parabolic and due for a spring back, but look at the yield on 10-year, 5-year and 13-week Treasuries and you see it's not crazy-end-of-the-world to be getting 3.5% on the long Bond.

The Fed doesn't really manipulate the long end anyway, so any conspiracy about manipulation will have to turn to the Bilderbergers, or some such secret society. On a side note, TBT is a 2x inverse fund, if I didn't mention that before. That means that it decays. Any long-term holding in such a fund needs to be evaluated with the realization that one is trading ice cubes in the desert and time is not on your side.

Be Wrong, Often

If you are smart, you have a distinct disadvantage. You "quote" - must be right. If you do not have this curse, you are blessed. You can be wrong because you don't have the burden of being smart. You can postulate without reprisal because you are, after all, a plebian thinker.You can wantonly call things incorrectly because nobody is listening to you anyway. Ahhhh, the refreshing element of playing dumb.

Be dumb. Postulate nonsense. Pontificate with a tin hat. Do what you must to be different from the "quote" - common wisdom. But you must make money, else you are a true moron and no better than the geniuses that know what is what. True idiots and celebrated idiots share a common gene. They are wrong. Don't be wrong. Be smart, but not like "super-smartness". Rather, be wise. Make money my friend. Make money and prosper. 

A Complicated Trade

If you like to keep things simple, then you'll despise the following trade. But if you're not scared about a little complexity and are interested in some ideas, then read on. The basic premise that I'd like to express in a trade is that US Treasuries are overbought and due for a pullback. You could sell the ZB future or short TLT, but these scenarios expose you to unlimited risk (more or less). You can place a "quote" - stop - on your trade and thereby console yourself that you have defined risk, when really you've just described how much you are going to lose.

No, we are going to go all-in on this trade and sleep (comfortably)  in the bed we make. The risk (amount we are willing to lose if we're wrong and US Treasuries skyrocket to the moon) is the amount we are going to pay for an in-the-money (ITM) call. We need to choose an underlying that goes up when we are correct, so we need an inverse ETF. For our purposes, we will use TBT. Buying the SEP 25 call for $5.20. We are exposed to a little time-decay, but not stupid like if we were to buy out-the-money (OTM) calls. Three weeks until a decision is made for us, if we chose not to take it off before then.

Note: though I like to blog entries, I'm not likely to blog the exit so please follow me on twitter if you are interested in my exit.