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Option Fanatic, RIA (Part 6)

Today I will continue responding to Internet posts about managing OPM.

       ”There is a massive difference between setting up [a] business offering…
       trading services and doing it for a friend… tax and regulation are
       not matters that concern you if it is an informal agreement between you
       and your mate… it is a very simple process, you just need to trust your
       friend to pay up when/if you make him money.” [1]

I interpret this to suggest agreeing to trade money for a friend or family member in exchange for “under the table” payment.

One benefit to this would be forgoing the need to hire an attorney, to verify and maintain compliance, to get registered through FINRA, etc. I could save money in overhead, too.

I worry about liability, however. Emotions may turn sour if money is lost. People who are friends or family today can become vengeful enemies tomorrow. Nobody would think twice if I had official legal documents to sign as part of the investing process. I think they would even feel safer and more protected.

       ”Your friend sets up a [brokerage] account. When activated he
       requests a power of attorney form… now [you]… have the power
       to place… trades… money can only go in and out from… [your
       friend's] bank [account]… agree [on] a [payment plan] and make
       sure your mate understands that there are risks involved. [Your]
       friend can’t sue… as… both signed a legal… agreement for [you]
       to place trades on his behalf… the account holder can withdraw
       money [to pay your fees]… the key issue here is that they are
       friends. They don’t need to set up a hedge fund…” [2]

I love the idea of not having direct access to clients’ funds. I am not setting up a [hedge] fund and I am only looking to trade as many accounts as I can log into individually. While the power of attorney may therefore be part of the arrangement, I still think this could still leave me open to additional liability if I don’t go through legal channels with compliance mandates, registration, and consent forms.

These comments give me very useful content to discuss with a lawyer. I don’t fear clients would sue me because I traded for them. I fear they might sue trying to claim that I was not qualified and/or that they did not understand something.

Option Fanatic, RIA (Part 5)

Today I continue with a second reaction to [1] from the previous post that involves detachment.

I find it interesting how calm trading educators, the financial media, and many financial advisors remain when the market gets volatile. I am sometimes jealous of their calm because I usually get scared! More than once I have reached the conclusion that had I simply walked away when the market started acting crazy then by the time I got back the market would have calmed down and/or reversed. Doing this could have prevented exacerbated losses.

I do not have the monopoly on fear in volatile markets, either. Robert Lang’s words in his Real Money article “On Human Nature and the Markets” (February 2, 2014) are echoed by psychologists and commentators aplenty:

> Human behavior never really changes and, as I’ve often discussed, in the
> stock market this plays out along a very specific emotional spectrum —
> one with fear on one end, and greed on the other. As traders vacillate
> between these two extremes, their behavior reveals itself via the charts…

How can I possibly manage OPM during crazy market environments when I am fear-stricken and on-edge for myself?

The solution is to insist my clients invest no more than a reasonable percentage of their total net worth. If I am trading reasonable size then I will not worry for myself. Knowing my clients have committed to investing reasonable size means I will not worry for them, either. If I have adequately explained the risk and my clients have understood the message then I should never be receiving emotional phone calls at the end of a trading day.

As a marketing point, my wife suggested it may be a good thing that I am never one to calmly sit back and say “everything will be fine” (remember the asterisk). Unlike most representatives of the financial industry who probably do little more than sell products, I actually trade. Trading experience gives me knowledge of how markets really work: details most “financial advisors” don’t [need to] understand because they are generally salespeople with a glorified title. Furthermore, having skin in the game means I will be more vigilant and able to do what it takes in the critical moments to manage risk.

Option Fanatic, RIA (Part 4)

Today I continue with discussion of Internet posts on the subject of trading OPM.

Another voice in the crowd writes:

       ”From what I have read over the years, managing OPM… has been the downfall
       of many a good (profitable) private trader… this game is psychologically
       very difficult without the added burden of worrying about losing your friends
       and/or relatives savings and having them ask you every couple of days/weeks,
       ’how’s my $10K doing? Have you doubled my money yet?’” [1]

I have a dual reaction to this post.

First, my goal is to make money consistently. My goal is not necessarily to make money fast.

I aim to hit singles rather than triples and home runs.

All this sounds very cliche to me and I hate (remember the asterisk) that I echo outward sentiment held by many in the financial industry (i.e. “slow and steady wins the race”). This is one cliche with which I, for the most part, agree. Presentation of my trading approach will thoroughly emphasize this goal. Should I include a written test of some sort as part of the application process, I may even include a question about this concept.

Yes, I believe it possible to make money fast trading the financial markets. I also believe this greatly accelerates risk of Ruin (going bust). I might be stupid to do this with my own money but I’d be criminal to try it with others’.

I will discuss my second reaction in the next post.

Option Fanatic, RIA (Part 3)

I left off discussing some potential disadvantages to the business of trading OPM. My ultimate goal is to decide whether this is the next logical course of action for my personal trading.

Another post I found through my Internet research follows:

       ”Unless you are dealing with very sophisticated people who understand
       risk… evaluate your friends and family. How will they feel about a 30-40%
       drawdown… in at least 95% of the instances, you will reach the conclusion
       that they are incapable of understanding and bearing risk… it is not all
       wine and roses.”

I feel strongly that concern over how others will react cannot guide my thinking. I set the bar at being true to myself. I can do this with a comprehensive presentation that accurately describes my understanding of the risk. I would strive to educate why this is about probabilities and not about certainties. An instructor used to say, “as with the markets, as in life: there is no free lunch… only pluses and minuses.” My job is to explain these completely. Provided I do this, I will not have blame on my conscience should clients later determine it was worse than expected.

       ”I bet your friend has NOT asked you to show him… trading plans, money
       management plans, max drawdown… Did he say something like… ‘I heard
       you doing well… trading… I have $100K… you trade it for me and I’ll look
       after you…’ golden rule… in managing OPM… get the right client… they
       have to understand what you are ‘selling’… You got [sic] to also
       understand what you [are] getting yourself involved in, its a huge
       responsibility. If it’s not crystal clear and planned out it will cause… more
       trouble than you ever imagined.”

Many points here follow nicely from above. My goal is to be crystal clear about risk to the best of my understanding.

I’m not sure what the “right client” is… someone who actually understands what I say? I could follow-up my presentation with a test to make sure they understand. Although strange, I like the idea. Remember the asterisk. I want something to set me apart in order to escape the greed and sociopathy that I feel inundates the financial industry.

Option Fanatic, RIA (Part 2)

I left off presenting the logical question why I don’t attempt to make money for others if I have been successful making money for myself.

Many points for debate come courtesy of the Internet through my research. In no particular order, I am going to include some posts to guide my deliberation. After discussion of these posts, hopefully I will be a bit closer to making a decision.

       ”You have been trading successfully recently and you have talked to some of your pals
       about your success and they want the same success and don’t know the risk or at least
       they cannot understand the pain of losing money so they have decided to ask you to
       take their money which is sitting in 1% CD and generate 20% a year. I am one million
       percent sure that if you lose just 1% of their money they will be mad at you like hell.
       They won’t tell you this now because they are so sure that you won’t lose money so
       they don’t want to talk about impossibles.”

I would want to make absolutely clear to my clients what kind of risk my trading involves. I have done some rather unique backtesting that will offer a comprehensive answer to this question. This is never a game of certainties but rather one of probability. For that reason, I will insist committing a limited percentage of total net worth to my trading strategy. Yes it will be likely to generate consistent income–much like a fixed or variable annuity (without the ridiculous fee structure)–but in the event something improbable does happen, catastrophe should never be waiting in the wings.

       ”Politely decline and thereby retain them as pals.”

I wonder if many of these comments aren’t directed at those people aiming to sell snake oil. If the product is fraudulent then one can expect loss of friendships.

I don’t want to sell my trading strategy as much as I hope to educate people about it and have the strategy sell itself.

I will continue with more discussion in the next post.

Option Fanatic, RIA (Part 1)

Trading has given me freedom to retire from corporate America and to successfully pay the bills as an entrepreneur for six years running. Today I begin deliberation over whether to go into business trading other people’s money (OPM).

Part of me has trouble understanding why I even entertain such an idea. I am admittedly somewhat jaded with regard to the financial industry. This very blog has made common usage of the term optionScam.com!

Short of sticking heads in the sand and blocking out all media, I am sometimes surprised how anybody can have a positive view of the industry. I agree that we shouldn’t necessarily believe everything we hear. Nevertheless, stories about investor fraud, Bernie Madoff, Ponzi schemes, and financial corruption in the name of the almighty ravage informational websites, television programming, books, and magazines to such an extent that some negative influence would seem to be inevitable.

Trading money for myself is one thing but doing so for others would be a jump to the dark side. I would become part and parcel of an industry riddled by greed. Do I want to risk being perceived in this light?

As long as something sets me apart from other financial advisors and money managers, the answer is yes. For me personally, this is necessary to at least ward off cognitive dissonance (hypocrisy). Let’s put an asterisk by this point to be revisited later.

Since I have been successful making money for myself, wondering why I don’t apply myself to make money for others is the next logical step. If one store is operating successfully then common business practice is to open a second location. This idea dovetails nicely with the reality that I have time, which I currently spend on “optional” activities, that could be allocated to trading OPM instead.

I will continue analysis of this point in my next post.

Career Update (Part 2)

In the last post I explained how much of what I do during my work day may be seen as an inefficient use of time. When I feel this way, I look toward other things I might do to improve that efficiency.

For the most part, my work day consists of blogging, listening to trading calls, reading articles on trading strategy, backtesting, trading my own account, and managing positions. The latter two items are solely responsible for profit generation. These two items also take much less time than the first four.

While all this is taking place, in the background I have a short list of untapped interests that includes:

1. Assembling a group of talented high school students who want to learn about investing.
2. Collaborating with a business student to develop trading systems in exchange for
    discussion about my 6+ years of experience in the business.
3. Hiring a freelancer to teach me the ins and outs of a system development platform
    enabling me to do the work myself.
4. Working to develop an approach to day trading futures.
5. Organizing an option trader Meetup where experienced traders share ideas and/or
    research.
6. Managing money for others.

When income generation is consistent, part of me feels I should revel in the moment as a successful entrepreneur and just work hard to keep doing what I’m doing. I feel thankful for this opportunity and will ride the wave as long as I can. I’m a big believer in Karma and to this end, I feel it couldn’t hurt to “give back” while I am enjoying personal success. This is the motivation behind items #1 and #5.

Items #2-4 are more transparent with regard to income generation.

That leaves item #6 for my next post.

Career Update (Part 1)

I am now in my seventh year of trading for a living. I spend my days blogging, listening to trading calls, reading articles on trading strategy, backtesting, trading my own account, and managing positions.

The minimal time necessary to trade and manage positions is what translates to income generation. When family life gets complex between shuttling the kids back and forth, helping out around the house, etc., my work time slips. Although I spend less time blogging, listening to trading calls, reading articles, and backtesting, I am still able to trade and monitor positions.

I know that blogging, listening to trading calls, reading articles on trading strategy, and backtesting are all important activities for the development of future streams of income that I hope to one day implement. Since they are not generating income now, I can’t help but feel the activities to be somewhat optional… like busywork created just to occupy my days.

If that is the case then why not do something else to generate more income right now?

Flashing back to my pharmacy career, this reminds me of a prevalent attitude toward managing high blood pressure (hypertension). Treating hypertension is hard work: consistent medication, adherence to a strict diet, and regular exercise. Since hypertension won’t kill me today, the payoff for my hard work is not apparent. I may be rewarded later with longer life but even then I could never know. Alternative universes are only perceivable in the realm of science fiction.

It makes sense why many hypertensives have trouble following doctors’ orders. All those lifestyle changes sometimes seem like a waste of time.

Similarly, because most time is spent on activities that don’t translate to immediate profitability, I don’t miss them when work time gets short. Upon detached reflection in other sporadic moments, I catch myself feeling they are a flat-out waste of time.

Logically speaking, whether it takes five hours per week or 50, if I can pay the bills on a regular basis and have money leftover for select luxuries then I am successful and I should be proud of myself for that.

Sometimes I am.

But sometimes I’m not because I feel otherwise: if I can convert some of my spare time into profit-generating activity then I should still aim to do better.

SysCW: Fraud or Failsafe? (Part 3)

I am wrapping up this long series on CC/CSP trading with a focus on Rich MacDuff’s SysCW trading service.

I continue with content from the SysCW on-line forum.
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> Why not just start small with 10 positions and do ten buy-writes and see
> how it works for you and then slowly graduate into more… and once you
> have experience with selling calls than learn about collars and adjusting
> trades along the way to create a money machine.

I don’t believe there is any such thing as a “money machine” in the world of trading. You are going to have good times and periods of loss. If you never have a big loss then you’re extremely lucky (i.e. people do occasionally win the lottery) and perhaps more hobbyist than someone who trades full-time for a living. Never expect a money machine despite what select proprietors tell you. That encourages trading too large, which can put yourself at great risk for catastrophic loss.

> It becomes really fun and very simple after awhile.

Everything about CCs and CSPs has been fun over the last few years. Same goes for pretty much long anything. What matters with regard to a viable strategy is how it fares during the toughest of times. The toughest of times are easily “out of sight, out of mind” when the going is good. When the going is good, the toughest of times are hard to remember or recreate but this is precisely what we must do when properly researching a trading system.

> Sorry if I didn’t answer your questions. I’m sure Rich will chime in.
> But it sounds like fear is your greatest concern.

Fear should be everyone’s greatest concern until all moving parts are identified, pieced together, and making sense.
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My goal is not to debunk SysCW. My goal is to better understand it and put myself in a good position to evaluate its merits as a comprehensive trading system.

I encourage you to explore and to do the same.

SysCW: Fraud or Failsafe? (Part 2)

Last time I inched the spotlight away from CCs and CSPs and onto Rich MacDuff’s SysCW trading service. I will conclude this blog mini-series with some content from the SysCW on-line forum.

——————————-
I see two major hazards. First is the [black swan] market crash…

Second is the “trap,” where I have an Interim trade (maybe a Weekly option that is collecting “juicy” premium) and the market suddenly catapults higher. Now, that juicy weekly premium is irrelevant because I need to search months to years out in time to roll for a credit. In backtesting I have seen cases where no credit opportunity exists (like Vegas with its maximum bet on blackjack tables, all optionable stocks have a longest-duration option series available). My remaining options are:

–Roll for a debit and hope (hope is not a viable market strategy)
–Dollar cost average (cannot do this if I am fully invested, which Rich has most recently started to recommend)
–Accept assignment and realize the loss

In 2008 where everything tanked, all of my positions would be Interim trades. In 2009 when the V-bottom printed, I could be trapped on most or all of my positions and forced to lock in huge losses across the board.

That is my biggest concern with SysCW.

> Why not just start small with 10 positions and do ten buy writes and see how it
> works for you and then slowly graduate into more.

That is fair… 10 positions in an account that could handle 20, for example. While the Math Exercise looks for 15% annualized return, though, I would only be realizing 7.5% annualized overall. I will increase allocation over time but ultimately the question remains as to how much I can increase because Rich says I should be making 15% annualized on the whole account.

One way or another, the question about whether or not to be fully invested must be answered. If not then how much cash sits idle on the sidelines? In this case with the Math Exercise targeting 15% annualized on every position then the transparent reality is a system unable to deliver on its promises. Period.
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I will continue in the next post.