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.

Long Chocolate, Short Baklava

I've gone all-in on a long Swiss Franc, short Euro position. Not like all-in with my house mortgaged sort of thing, but all-in as far as my isolated forex account is concerned. Why? The Swiss National Bank is done betting their national GDP against declines, and the Euro-zone is basically DOA (dead on arrival). I'm not the first to say the Swiss Franc is the European Japanese Yen. But I agree with the premise.

The Euro has enjoyed a free ride courtesy of Bernanke and Friends, and that free-ness is about to come to a close. Austerity in Europe for non-watchmakers is a fantasy. And traders love fantasies.

My Trading (Solar) System

After reading accounts that our moon is shrinking, my thoughts turned to our solar system and I began to ponder its design and configuration. That means it's just a matter of time before I coerce it into a metaphor for trading. As is my style, I often take on more subject matter than is necessary and even practical. What does svn have to do with trading again? Oh yeah, it's a file management system that keeps track of programming scripts I wrote to extract data that will be fed into a model that will predict the market. Well, back to my metaphor. My trading solar system includes several "planets", each part of the whole, but each with its own atmosphere and unique characteristics.

Let's start with Mercury. I've assigned the topics of Ubuntu, svn, vim, gcc and bash to this orbital. I'm thinking a progression here, so we start with the basics before we get "way out there". Next is Venus and its inhabitants are compiled languages that include C, C#, C++ and maybe Java at some other time. This planet shines brightest in the night sky and is often mistaken for a UFO, which to me is appropriate. Of course, Earth is next in line, but nothing in trading is really worth the title of "home", so this is a reserved spot for my non-trading life.

Mars is the "red planet". Red starts with an "r", and so Mars is for R. And maybe some other functional languages in the future including Python, Perl and Ruby. In any case, R is the first place where trading takes on a significant demographic. Saturn is for data mining and harvesting. Data is an important topic in trading and deserves its own planet. Fundamental traders use data, as do technicians. And certainly model builders, because you must feed data to a model to have it produce a prediction, you see. Saturn's rings remind me of data in a way I cannot explain. Let's just leave it there.

Jupiter is the big boy in our system, and is the realm of models. Neural networks and statistical models reside here and are in a perpetual dispute over who is heir to the kingdom of Prediction. They are quarreling brothers, really. Same DNA, but different temperments and demeanors. The older Statistical Modeling has an edge over his younger brother Neural Networks, but the drama is still unfolding.

Do you remember the movie "E.T." and the line about "your extra-terrestrial is from ... blank"? Well, let's try to forget that for now and think about nuclear explosive devices instead. Uranus is like uranium. It powers our electrical grid and is the realm of trading systems, those elusive little devils that say "Go Long" or "Go Short" or some such thing. They are devoid of emotion because they are made nuclear fissionable material. Remember that you, my fellow space traveler, are not.

I've reserved the planet Neptune to a future deployment of leasable trading algorithms. And Pluto, which is "way out there" and not even really a planet per se, is reserved for my managed-futures fund.

This metaphor is handy in that it provides me with situational awareness. Where am I now and where am I going? Well, these questions are easier to answer now. Today, I'm going to Mars to check out how R handles environment path variables. On my near-term itinerary I have plans to revisit Mercury to better acquaint myself with svn, and then I'm planning a "working" vacation on Venus as I launch into my C# education. I'm excited about Winter break because I've got a couple weeks on Jupiter to spend on Bayesian statistics and Long Short-Term Memory (or LSTM as the locals call it). 

Next time I get that quizzical look and question about "Milk, where are you going with this?", I'll be able to respond. I'm on a little space traveling journey, of course.

Managing Market Studies in R

I'm currently working on seasonal studies for various markets and have decided it's high time I got an organized workflow established. How does sugar behave in August every year? Is it random or are there some fundamental drivers that coerce its behavior? How about gold, silver and the gold/silver ratio? Or crude, heating oil and the crack spread? Or soybeans, soybean oil, soybean meal and the crush spread? You get the idea. One's imagination can generate a crazy amount of combinations.

I'm doing my studies mostly in R, and with the quantmod package. The quantmod package is cool because if you load it first, you get zoo, xts and TTR with it. It's a dependencies thing. This is important because I have decided the best way to treat time series data is to first convert it to an xts object. Once you've gotten past this hurdle, you can index time frames and do other data manipulations on your way to delusional curve-fitting adventures.

If you are using R with Windows, stop it. Get Ubuntu on your machine this weekend. You can install the VM Player, load Ubuntu on it and then install R and its packages (this will cost you zero dinero, by the way). Then you must familiarize yourself with svn (also gratis), since that is the version control software R package developers use. It's best to learn how to use it from command line and that is what I'm doing here below.

R has this built in memory file that comes in handy for our purposes.  I think it's called .RData (you see, you don't need to know absolutely everything to get started). Where you store this file will make all the difference in organizing your studies. This is a trivial process, and I'll get to it shortly.

Once you get your svn layout organized in your mind, you can create a special one for a particular study. I called my SeasonalStudy (pascal cased for the repo). My checkout folder is called desk.seasonalStudy (camel-cased with my unique 'desk' prepend to signify to me it's a checkout folder). Once you get the folder setup with the standard trunk, branches, tags layout, you're ready to get analyzing.

You need to get to the point where your command line looks something like this:

    milktrader@ubuntu:~/Dropbox/desk.seasonalStudy$ 

From here, you should have the trunk, branches, tags directories. Let's switch to the trunk.

     milktrader@ubuntu:~/Dropbox/desk.seasonalStudy$ cd trunk

     milktrader@ubuntu:~/Dropbox/desk.seasonalStudy/trunk$

In here, I've placed some template type of R scripts. One to efficiently convert csv files to xts objects called makeXts.r and another to index months called getSection.r. These files are general, but we're going to copy them into a branch and then make them market-specific. The svn branch theory is that it copies the trunk, so general is good. I created a sugar branch by doing the following (dropping milktrader@ubuntu to save space):

    :~/Dropbox/desk.seasonalStudy$ svn copy trunk branches/sugar
    :~/Dropbox/desk.seasonalStudy$ svn commit -m "sugar study"

There is a shortcut method to this, but I couldn't get it to work. In any case, I now have an svn branch called sugar, which contains the template R scripts I uploaded into the trunk. I navigate to this directory and I get the following:

    :~/Dropbox/desk.seasonalStudy/branches/sugar$

On this prompt, I simply type R and the R programs opens up. After sourcing an R script that extracts sugar data, I now have objects in my R session with which to work. This is cool. When I exit the R session with q(), I get a prompt asking if I'd like to save the workspace image. You can guess my answer. I've gone to some length to make this a unique and organized study, so I press "y" (which stands for yes). A unique copy of  .RData has been saved on your behalf. Easy peasy, like I said.


You can follow the same procedure for other studies and every time you open R from a specific directory, it remembers the objects and you don't get all mixed up with too many objects.


Alright, that was the easy part. Now the hard part. Making sense of all the seasonal data. Or more to the point: making money by making sense of all the seasonal data.

Buying German Beer, Selling Japanese Sake

I'm long the Euro/Yen cross at 109.50. This after a substantial sell-off in the markets. A sell-off, I will point out, that was not met with enough hair-raising put buying to vault the VIX to a meaningful "fear" level. This trade is contrarian in many ways. Everyone doubts QE 2.0 will save the universe, but they don't know what they're up against. You see, the financial well-being of civilization is no small matter. Sell-offs will be dealt with in due course. Everyone also knows that Europe is operating under an illusion of financial health, but what they don't realize is that it doesn't matter. German workers will "carry" the load, unlike an aging Japanese demographic.

Besides, the U.S. equities have gotten oversold. And the EUR/JPY cross is a nice proxy trade for simply going long ES futures, because how boring is that?

Punched in the Nose by the Fed

I'm not ready to call it a sucker punch, but I can say that I didn't see it coming. My ears are ringing and I know when I've had enough. I've taken a 254 pip loss on a not insignificant position in the Aussie Dollar / US Dollar pair. I made the choice to enter the boxing ring, yes, but I'm not going to take responsibility for the loss. I blame the Fed for that. Or perhaps "credit" the Fed for my loss. They have their reasons for impaling the US Dollar and I realize that it's nothing personal for them. What I now see more clearly is that nobody is better at manipulation than the Fed. From now on, I'm watching them much more closely.

I could have realized a lesser loss with stops, but I don't get into the ring to throw a white flag just because someone lands a punch. Or run for the ropes when someone looks my way. No, I get in to play. Giving up some blood every now and then is part of the game.