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RUT Weekly Calendar Trade #10

I opened my tenth weekly calendar trade Tuesday, June 16, at the 1260 strike. The market was 1261.61 at the time of fill. I placed the order at the mid and caved $0.10 over 16 minutes to get filled $0.15 off the then mark.

Two days later with the market just over 1280, I rolled one of the 1260 put calendars to a 1285 call calendar for a $0.20 debit. Later that day with the market at 1285, I rolled the other 1260 calendar to 1285 for a $0.65 debit. This would be my last adjustment for the position, which was now down 12%.

In two days, I had basically closed the initial trade and reopened another 25 points higher. For this trade to turn out well, the market pretty much had to stay calm for days.

On Tuesday, June 23, the position was down 3% and just a couple points away from the upper expiration breakeven. To have a chance at a profitable outcome, I figured I would have to hold into the last two days. As I have done previously in this case, I closed one of the calendars to decrease risk in case Wednesday were to welcome me with a big gap opening.

The market traded lower on Wednesday and my contingent order to close was triggered at 1:32 PM with the market at 1285. This position made about 10% in nine days.

Investing Meetup Report (Part 5)

I’ll complete this review of the Meetup from three weeks ago by discussing a couple other attendees.

One attendee was a real estate investor who stated his reason for attending was to learn more for diversification purposes. The implication was clearly that he does well with real estate and has money to invest elsewhere. Also supporting my inference is the fact that he passed his business card out to everyone present. As we were leaving, he engaged me in conversation by asking if I or anyone I know might be interested in real estate. I said “not at this time.” He quickly dismissed me soon after saying his wife had texted telling him to come home for dinner.

Speaking of ulterior motives, this is something I have also commonly seen at Meetups: people in unrelated fields looking to market their wares. Was this guy really looking to learn about stock investing to put his real estate profits to work? Maybe. I think it’s also likely he was looking to advertise his real estate experience of buying and flipping houses to a group of people eager to make money. We’re attending a stock investing meetup because we want to make money, he figures. Why not try and make money through real estate and give him our cut instead?

The last person I want to discuss is another financial advisor in attendance. He was not with the company organizing the Meetup. With conflict of interest in mind (how could it not be?), I wonder why he chose to attend. He said he loves learning about investing and finance as a whole. I then asked the pointed question: what was he hoping to learn that he, being in the business himself, did not already know? I wonder if he was just checking out his competition (other advisors) or if he was looking to network and possibly find new clients himself? I’ll found out more as time goes by.

This Meetup was typical of others I have attended: arrogance, sales, marketing, ignorance, and a lack of useful connections. At least it was an excuse to get out for the night.

Free food, too… who can forget about that?!

Investing Meetup Report (Part 4)

I left off explaining what the Meetup presenters did that left me wanting.

I just asked whether Dimensional Fund Advisors was a company like Blackrock.

For the record, I am very skeptical about the supposed “DFA advantage” that Dimensional Fund Advisors advertises. It was never my intent to argue about whose funds were better.

Rather than just saying “yes, DFA is another fund company,” they gave me an unnecessary/lackluster attempt at sales. By pooh-poohing DFA out of ignorance, they implied superiority of their product. This certainly doesn’t sound like an objective Fee-Only advisor to me. A Fee-Only advisor should do what is in my best interest and that would require knowing what else is out there! If they were going to deliver a sales pitch then they should have had a politically correct response why Blackrock is as good for me or better than DFA. Their ignorance does not mean theirs is better if they are simply fools.

And their ignorance did suggest to me that they may simply be fools. DFA has been a subject for discussion in Forbes, by CBS, on CNBC and MSNBC: they are world renowned. Their list of “Academic Leaders” (board members) is a veritable Who’s Who of options, investing, and risk analysis: Eugene Fama, Kenneth French, Robert Merton, Myron Scholes, Roger Ibbotson… are you kidding me?! How could our presenters not know about DFA? Despite my skepticism, even I am awestruck by the celebrity of DFA’s board members and the level of “expertise” they represent. To plead ignorance strikes me as utter incompetence on the part of the presenters.

I’ll wrap this up in the next post.

Investing Meetup Report (Part 3)

Last time I reviewed Mr. Know It All’s contribution to my recent Meetup experience. Today I discuss the presenters: a financial advisory team headquartered just across the street.

Yes, they were actually financial advisors! I can see your jaw on the floor so I’ll wait just a moment for you to pick that up.

One advertised purpose of this Meetup was to teach. How can they aim to teach gratis and work to financially advise us, which entails teaching for a fee? Without the fee, would they teach enough to enable us to invest on our own? No…

Another advertised purpose was for networking. Do they really want prospective investors to meet and potentially collaborate when that may preclude us from hiring financial advisors? No! Only if good feelings from meeting others translates to gratitude and perhaps the eventual hire of their company has the Meetup achieved its true marketing purpose.

For these reasons, I consider this Meetup to be a significant conflict of interest. If the organizers knew beforehand that no Meetup attendees would ever become clients then I doubt they would ever spend the money to create and fund this group.

In the presentation, one topic they discussed was “questions to ask potential financial advisors.” They discussed Commission-Only, Fee-Based, and Fee-Only advisors. They were eager to identify themselves as Fee-Only advisors. They said Fee-Only advisors have a fiduciary responsibility to the client and don’t make money off the particular funds sold. Fee-Only advisors pursue the client’s best interests at all times.

For me, the presentation fell apart when I asked about Dimensional Fund Advisors (DFA). I noticed their slides had “Blackrock” (a financial services company) in the lower left-hand corner. I asked if DFA is a competitor of Blackrock. The speaker looked around at his two colleagues and shrugged his shoulders. He explained something about how he sticks with the funds that trade in largest volume, that have the best and most experienced management, etc. He did not answer my question nor did he even acknowledge DFA.

What is wrong with this picture?

RUT Weekly Calendar Trade #9

I opened my ninth weekly calendar trade Tuesday, June 9, at the 1250 strike. The market was at 1249 upon fill. I placed the order $0.05 off the midprice and caved another nickel after one minute. I got filled $0.05 off the then mark.

On the very next day, the market zoomed higher. I rolled one calendar to a 1275 call calendar with the market at 1268. The trade seemed to be down 15% in short order but the trade was now centered.

The market then traded sideways. My contingent order to close was triggered around 1:00 PM on Tuesday, June 16. This trade made about 12% in eight days.

Investing Meetup Report (Part 2)

Today I continue reviewing a Meetup I attended earlier this week.

Three of the six attendees were totally new to investing. From speaking to many beginners over the years, they are often in search of “holy grail” type knowledge. As I compliment them for taking the time, they feel they are gaining edge over others who make no effort to learn. They seem motivated to soak up everything they hear and they seem to believe anyone who seems credible or authoritative.

Aside from the Organizers, Mr. Know It All seemed most credible the other night! He spoke dogmatically and two of the newbies were quite taken by his words.

Since Mr. Know It All mentioned that he trades futures, I went over to him afterward. I eventually interrupted his monologue and asked point-blank whether he makes money. He responded negatively. He said he’s retired, he does this “just as a hobby,” and he expects to lose.

This gambler’s mentality is not uncommon. Many people go to Vegas with hopes of striking it rich while expecting to lose. I hope most have a reasonable limit in mind of how much they will lose before they quit. Whether responsible or not with this limit, for someone like me who trades for a living this gambler’s mentality is appalling.

The problem I have with Mr. Know It All spouting “knowledge” to beginners is that he loses money. He clearly likes to talk and he enjoys when others listen but why should they: so they can lose money too? Unfortunately, I think people are often so ignorant about financial literacy that even if told someone loses money they will listen anyway. At the very least, beginners may figure he’s further along the path to wealth than they are so they might as well grab onto his coattails.

We really don’t know if Mr. Know It All is on the rainbow walking toward the pot of gold or whether he is caught in a vicious cycle with a mistaken belief that every subsequent loss teaches him something critically new. As an irresponsible gambler, he may be prepared to lose all his money until he starts to see gains and no beginner should ever be exposed to toxicity like this.

Investing Meetup Report (Part 1)

I have attended several trading/investing Meetups over the years. Because I perceived an inherent conflict of interest between the Organizers and the attendees, I used to be very put off by these events. I have since developed an appreciation for networking in this business, however.

The other night, I attended a new Meetup. The advertisement for this Meetup specifically included a time slot for networking. This felt different to me. For this reason and the promise of free appetizers, I decided to go.

In the end, I found this Meetup to be very typical of others in my experience. I will review the evening in this blog series.

I arrived 15 minutes early and found the auditorium to be locked. An older man, dressed business casual in a coat and button-down shirt, was also present. He was another attendee and in short order he began spouting off “knowledge” about the markets, how investments work, ETFs, etc. I didn’t ask any basic questions or do anything to suggest I was looking for him for any answers.

This guy definitely fell into the “know-it-all” classification. He started talking about “market truths.” First, everything about the markets is random. Things have a 50/50 chance of going up or down. Second, over the long-term things will go up. “Believe in the power of humanity,” he suggested. Believe that innovation and productivity will continue, earnings will grow, new inventions will be created, etc. I wonder if this guy had ever seen a dystopian movie?

His third truth was John Maynard Keynes’ “markets can remain irrational longer than you can stay solvent” concept. I asked if he was therefore a trend-follower.

“Absolutely,” he said.

“What happens when the markets revert to the mean?”

“Well sometimes when you have a fractal trading within a fractal and something gets overextended…”

I’m not kidding: he honestly started talking about a fractal within a fractal. I could virtually see the stinky brown, gushy stuff overflowing from his brain compartment.

I will continue in the next post.

RUT Weekly Calendar Trade #8

I opened my eighth weekly calendar trade Tuesday, June 2, at the 1250 strike. The market was at 1251 upon fill. I placed the order at the mid and got filled immediately.

Here was the market price action during this trade:

With the market moving sideways, this position was like manna from heaven. I closed the position Friday morning. This trade made ~10% in four trading days.

Thus far, eight trades have seen me profit on six and lose on two. My average return is +0.57%, which is better than losing!

Calendar Calculations

Trading can be challenging especially when trying to manage the heat of a moment. In reading lots of material and hearing even more discussion, I find people rarely discuss actual trading details. As opposed to “optional activities,” trading activities include: reading and manipulating charts, running stock/option screens, recording trades, modeling positions, entering orders, and keeping abreast of what needs to be executed when. Perhaps the most important trading activity is the application of simple arithmetic.

Here is my spreadsheet from my last calendar trade:

The “Premium” column shows prices. First, I bought two 1240 put calendars for $7.60 each. I then rolled one to the 1260 call strike for $0.84 resulting in a double calendar. If I want to exit for a 10% profit, what price do I require to close?

At first I thought this was simple: ($7.60 + $0.84) * 1.1 = $9.29 [1]

Wrong. As a combination of two calendars, the double calendar price should be much higher.

Perhaps the answer is ($7.60 + $0.84) * 1.1 * 2 = $18.57 [2]

Wrong again.

Let’s look at the “Amount” column to see if we can figure it that way.

$1,522.70 + $86.44 = $1,609.44 [3]
$1,609.44 * 1.1 = $1,771 [4]
$1,771 / 100 = $17.71

Profit = $1,771 – $1,609.44 = $161.56
$161.56 / ($1,522.70 + $86.44) = 0.10, or 10%.


What was so hard about this? Didn’t I do the same thing with [3] / [4] as I did with [2]?

If I overlay [2] and [3]:

($7.60 + $0.84) * 1.1 * 2 = $18.57 [2]
$1,522.70 + $86.44 = $1,609.44 [3]

How are these different?

The two calendars [2] are $7.60 * 100 * 2 = $1,520, which is about $1,522.70 [3] without transaction fees.

Rolling one for $0.84 [2] should be $0.84 * 100 * 2 = $168, which is not $86.44 [3]. Why?

This is the mistake. The initial cost of $7.60 must be multiplied by two to account for both calendars. The subsequent cost of $0.84 is the entire roll of four contracts traded: no need to multiply by two.

In fact, if I take half of the roll debit and calculate:

($7.60 + ($0.84 / 2)) * 1.1 * 2 = $17.64

If I multiply that by $100/contract then I get $1,764, which is about equal to $1,771 [4] minus transaction fees.

Trading platforms usually do not track running profit/loss of positions. As traders, we must have a reliable means to do this simple arithmetic if we want to make money rather than lose it.

No experienced trader ever said this was easy; here is another House advantage the markets use to take our money.

RUT Weekly Calendar Trade #7 (Part 2)

I have been reviewing my JunWk1 calendar trade. Having made two adjustments and holding into the day of trading, how did this turn out?

Let me point out one key detail about holding this trade into expiration Thursday: my risk was significantly lowered. The last trading day is exceedingly dangerous for a trade like this because negative gamma can increase exponentially. In looking at the risk graph, I thought I could achieve my 10% profit target with just one calendar in place. I therefore closed the second put calendar rather than rolling it. This halved my gamma and were the market to make a huge gap move to put the calendar at max loss, I would have already closed one of the calendars for a reasonable price.

On expiration Thursday, my contingent order to close was triggered around 11:10. This position gained 10% in nine days.

This trade demonstrated some important points about profit target calculation. I will talk about that in my next post.