Coffee with Professional Commodity Trader (Part 2)

Today I continue with miscellaneous notes from two hours of sun exposure and a delish grande Carmel Frappuccino while conversing with professional commodity trader NK:

• I asked whether he has a desire to work full-time for himself and he said he has recently been doing some contingency planning since he doesn’t expect his current job to last forever. The owner of his firm is getting older and showing signs of questionable judgment and commitment to business decisions that are not in the firm’s best interests.
• NK and some co-workers have formed a trading business to manage assets for friends and family. Capital is invested in land (farms) and tradeable assets.
• NK disagreed with me that we have not had a large sample size of market shocks on which to backtest hedge strategies. Aside from fall 2008, we had the Flash Crash in May 2010, Aug 2011, Aug 2015, Feb 2018, and Mar 2020.
• NK said Brexit in Jun 2016 had a minor effect on the market. The Q4 2018 market selloff was similarly too gradual to really affect term structure and/or cause a major market shock. In contrast, China’s revaluation of the yuan in Aug 2015 had a big impact on stocks and caused IV to spike in a big way.
• With regard to stocks, NK buys stocks that look cheaply valued.
• NK thinks hogs are the best place to start if I want to start trading commodities.
• Look at weekly COT report as a directional guide because investors will not flip from significantly long one week to significantly short the next.
• If for no other reason then as a self-fulfilling prophecy, NK believes commodities are one segment where TA may actually work. He does not believe stock TA has any efficacy.
• NK does not believe short-term strategies are effective for commodities.
• NK does not believe any strategy will work forever. To always be on the lookout for new strategies or tweaks to augment currently profitable ones therefore makes good sense. I agree with this 100%.
• NK and I also agree that hefty doses of ego are on display when it comes to casual discussion about the markets and investing. For this reason, NK does not believe anything he sees on Twitter or other social media.
• NK claims to have made money trading on his own (including full-time for about six months in 2016-7 while between jobs). He doesn’t claim to have killed it, but he believes he has fared well. I would say the same for myself to date (see this blog mini-series).

I will continue next time.

Coffee with Professional Commodity Trader (Part 1)

I recently met up with a professional commodities trader (NK) to talk about trading in general. We sat outside Starbucks and I enjoyed a Caramel Frappuccino in the sun for nearly two hours. Once I got through the whipped cream, I found the sun had melted the drink to liquid. 1-2 days later, I also regretted not having sat in the shade.

In any case, here are some miscellaneous notes about our conversation:

• NK believes the permanent portfolio (Harry Browne) is worth looking at with 25% allocated to cash.
• I was talking about potential benefits of time spreads and NK mentioned another (besides horizontal skew and weighted vega) that he couldn’t name or completely describe. This has something to do with IV getting cheaper as options move ITM (maybe involving the second or third derivative of IV).
• NK believes low IV makes options on GC and 6E prohibitive to sell.
• One thought about commodities that makes common sense is to go long (short) when term structure is in backwardation (contango) because price will then move in your favor over time.
• NK is a believer in LT trends for commodities.
• As trend followers, CTAs may have four good years followed by eight bad years, etc. The good years will far exceed the bad, and commodities are generally a good [e.g. inflation] hedge regardless.
• Another idea with commodities, which is probably something most CTAs (as trend followers) employ, is to go long (short) when price is above (below) the 200-SMA. They may get chopped up at times, but they should catch big trends and never incur catastrophic drawdowns.
• NK suggests watching for opportunities to sell options after limit moves when IV explodes because even if market directionally moves against the position, IV contraction may result in profit. He has seen cases where same-strike options in far-apart expirations have been priced equally due to term structure.
• Beware of wide bid/ask spreads on commodity options.
• NK sometimes trades futures options and other times the ETF (options?). He finds the pricing is different and may even be an arbitrage opportunity. As an example, ETF price based on options from the nearest two months of a futures market may not respond as expected if IV explodes in one of those two months (I forgot to ask at this juncture whether 60/40 tax treatment is a factor in making this decision).
• NK previously worked for a brokerage that messed up client PM at initial rollout causing them to blow out accounts.
• NK doesn’t personally trade with PM and didn’t know much about its calculation. He occasionally gets firmwide risk sheets and never realized why it’s broken down into categories between +/- 15% on market price.

I will continue next time.

Trader Networking, Trading Success? (Part 2)

Part 1 discussed frustration over spotty e-mails when trying to network with other traders. Should consistent, prompt e-mail replies be a prerequisite for trading group candidates, and does effective networking bode well for trader success?

I honestly don’t know how often people check e-mail these days so I did a quick internet search. Reliable statistics are hard to find, but here are some potential answers:

• 40% of people surveyed thought they checked e-mail 6-20 times per day
• 2009 study: 56.4% of people check their e-mail between 0-5 times per day
• About 15 times per day
• 2021 study: 81% check as little as once per day up to continuously (real-time)

How often e-mail should be checked is also unclear. I have seen so-called “experts” recommend:

• Never in the morning
• Every 24 hours
• Five times or less spread throughout the workday
• Three times per day to limit stress

Any of these would be satisfactory for my purposes. I don’t even need a response the same day. Getting a response within 2-3 days is more than sufficient for the purposes of planning a group meeting a couple weeks out in time.

These cursory findings also confirm my frustration over spotty replies. If most people check e-mail so often then why do my leads seem so disconnected? The caveats listed in Part 1 still apply, of course: accidental oversight could be involved.

Switching gears a bit, I think it safe to say that not too many people have substantial success trading the markets. As discussed in the sixth paragraph here, I have had very little success finding other full-time traders. 90% is the oft-quoted failure rate, which I wrote about in this blog mini-series. I also wrote about it here many years ago, and here I discussed one actual study that suggests the failure rate to be even higher.

I had a challenging time organizing this group, which managed to survive for a couple years. We had decent participation across 7-10 members. 3-4 members presented at least the occasional trade while two of us presented frequently. Only one of us (me) was trading full-time.

I have seen many trading meetups struggle to find consistent attendance and subsequently shut down. The AA District Library once refused to advertise an investing program because historically, they found such content to be in low demand.

I wonder about a possible relationship between consistent group attendance and trader success. Might retail traders benefit by coming together to discuss and develop strategy? Might organized trading teams offer accountability benefits? In my humble opinion, AB-SO-LUTE-LY! For various psychological reasons, getting ahead in trading by working alone is very, very difficult.

I would certainly guess those who work together in groups have more success than those who trade on their own. I have discussed benefits of trading groups in the second-to-last paragraph here, the second paragraph here, and here.

One person who responded to my networking e-mail said:

     > I’ve been trading for years, more purchase of securities. But started
     > with options about 1 year ago, it’s not easy. Everything I seem to select
     > goes the opposite direction 😫… I try to do it every day. lol, well
     > at least look at it to select something.

Do I think she could be taught to approach this in a more disciplined, systematic way? Yes! Does she have the necessary commitment to learn, practice, and develop? I would have to know her better to answer that.

If you believe that trading groups are correlated with greater success and if trader networking can lead to the creation of trading groups, then trader networking can definitely be correlated with trading success.

Trader Networking, Trading Success? (Part 1)

This will be another (e.g. see here, here, and here) post about trader networking. Submitted for your approval is the question of whether effective networking has anything to do with trader success?

To understand where this comes from, I am new to the Sunshine State and trying to network with other traders. My hope is to meet people and possibly further my trading at the very same time. My preference would be to meet as a group.

Our old friend Meetup.com is my primary source for potential leads. I have joined a few trading- and investment-related meetups in the area. Only one has actually had an [online] event thus far. I have messaged a number of people through the site in an effort to reach out.

My opening salvo is rather benign:

      > Hi! I am new to the area and looking to network with other traders.
      > Let me know if you would like to chat. Thanks!

I think my bio (introduction) is relatively benign as well:

      > Full-time, independent option trader looking to network with other
      > like-minded individuals. I’m always interested in the possibility
      > for collaborative projects.

I’m a friendly guy. I’m pretty easy going. I’m a good listener. I’m interested in your story and what you have to say. Hopefully I check any ego at the door. Let’s talk, shall we? Sure, why not!*

I approach this in an organized fashion so as not to offend anyone or inadvertently cross boundaries. This means keeping track with a networking spreadsheet (at the risk of becoming a “uses-a-spreadsheet-for-everything” person). If anyone tells me “no,” then I certainly do not want to bother them again. If anyone doesn’t answer then it could be a fake account, a spammer, or someone not real. The notification message could have gone to their spam box, though, or it could just be an oversight in which case a follow-up might be advised. It could also be someone not very consistent with e-mails.

E-mail inconsistency is what really makes me wonder. I used to hear people say things like “I’m not very good with e-mail.” Is that still a thing? As the years go by, smartphone technology has progressed where more and more apps have been created for this, that, and everything else. How many people are away from their phones for lengthy periods of time? I have often considered myself lagging behind on technology but even I am connected most of the time now. I rarely go more than several hours between e-mail checks.

Spotty e-mail response is my biggest problem in these initial networking stages and I debate whether this should be a deal-breaker. I’ve said traders are a fickle lot (e.g. see here, here, and here). I will lose interest if I schedule some small group meetings only to see them canceled because a few people call out sick or [even worse] pull a “no call, no show.”

It’s probably a case of “no risk, no reward,” though, and “you don’t know if you never try.” I’m trying!

I will continue next time.

*—This is the image I’m trying to convey along with the desired outcome.

Networking Call (Part 3)

Today I conclude summary of my recent networking call with GP: a self-proclaimed delta-neutral trader.

I asked GP why he is not trading full-time. He said he has an excellent job.

Wondering if this was a deflection I asked, “would you rather be trading full-time?”

“Yes, but I am building up my account for now. I’ve had an excellent last year and I continue on with a very delta- and vega-neutral butterfly position.”

I was not intending to discuss trading strategy, but since he volunteered I felt compelled to comment. I have seen greek-neutral strategies presented over the years and I am repeatedly unconvinced because they get sufficiently neutral to have little profit potential. Something with little gamma is going to have little theta. Something delta neutral will have to rely on theta or vega but with theta comes gamma, which will soon turn into delta—and it all falls apart.

In other words, “no risk, no reward” conundrum. He uh-huh’d me all the way to the bank on this point that he couldn’t be making much bank doing it. How ironic.

I explained that while I fall shy of MSFE in terms of academic skill, I have 12 years of extensive trading experience that few in the MSFE program are likely to match. I think I could be dangerous with an MSFE. Even without it, though, I do analysis all day long with strategy development, investigative writing, dissection of trade presentations and webinars, etc. I wouldn’t mind getting some gig as a consultant or junior financial analyst. The trading-related expertise I have accrued to date must be of some use for some clients somewhere.

Again, GP uh-huh’d a lot but really had nothing to add. He mumbled something about just having to call around to different firms, which seems like an obvious step I have begun to take.

I talked about spending thousands of hours doing manual backtesting over my first several years as a full-time trader and how I exhausted myself doing that.

I then discussed how I have interest in building an automated option backtester because those I have seen on the market lack the functionality I seek (more uh-huh’s as I went on). OptionStack looked promising but I think $200/month is far overpriced for an individual, retail trader. I said I am a green, newbie Python programmer thinking he might take the bait and suggest something about building software together. That was not forthcoming.

In fact, he said absolutely nothing about any sort of collaboration and asked nothing that might possibly help better even his situation. It was a very one-sided, closed conversation: closed in terms of opportunity.

When traders come together—even on a phone call like this—some effort should be made to see if we can help each other. No holy grail exists and what works one year may certainly not work the next. Even if we are performing well at the moment, our heads should always be on a swivel and we should constantly be on the prowl for something better and/or uncorrelated.

GP seemed outmatched when it wasn’t even a competition.

GP seemed quiet when I was looking for an exchange.

GP seemed humiliated, maybe, when I wasn’t posing any threat.

It’s almost hard to believe the person I saw represented on the website is the GP I spoke to over the phone. Maybe the website is stale and hardly used. The consulting services, now, seem quite hollow and bogus to me.

Onwards and upwards!

Networking Call (Part 2)

Today I continue presentation of my networking call with GP: a self-proclaimed delta-neutral trader with a business website advertising consulting services.

After he figured out who I was, we offered introductory greetings and I quickly ventured into what would be the meat of the conversation: “so I browsed your website and I see that you’re a full-time trader and trader consultant…”

“Actually I’m a software engineer. Trading is more like my side hustle.”

Say what?

His story begins with professional trading experience working for a firm. He then left to start a fund of his own. He took out a bank loan, which would constitute 50% of his trading capital, and used personal savings as the other 50%. He said the pressure of having to profit on a consistent basis was too great and the fund eventually failed. He didn’t say specifically how much he was trading, how much he lost, over what period of time, or any other details—just that things didn’t work out. He then got an “offer I couldn’t refuse” and went back to work as a software engineer.

I said that I have been a full-time option trader for the last 12 years, which he called the “perfect gig.” I said it was much better than being put through the pharmacy wringer every day working 8-12-hour shifts on my feet continuously for 50-60 hours/week. I faced relentless phone calls, being constantly pulled in multiple directions at once, no breaks for bathroom or food, and limited time to exercise.

I told him while I love what I’m doing now, I still seek something more.

He mentioned starting a fund, but I am not currently thinking about going in that direction because I know little about sales or how to proceed with marketing the fund.

“Just start with friends and family,” he said. “You can raise money from them and then solicit outside investors as you grow. It’s not really worthwhile to get $5M-$10M. You really want at least $50M to start, and then you can hire a sales person and someone to help with accounting.”

He didn’t realize raising money amounts to sales. “You still have to create a pitch book, present it, and sell it,” I said.

“Oh right, righttttt…” he said, and he uh-huh’d me the rest of the way. Perhaps this is something he went through before settling on the bank loan. I don’t know. I had lots of unanswered questions and was finding little new information from him to be of any use. Some of what he did say didn’t even make complete sense for someone with his alleged experience.

I will conclude next time.

Planning My Next Meetup [hopefully not MIS] Adventure (Part 10)

I’ve been getting more organized this year by converting incomplete drafts into finished blog posts. This was the start of a nine-part mini-series. Not all of this makes sense to me now but just in case someone out there can possibly benefit, what follows is Part 10 from June 2017.

—————————

Last time, I restructured the Meetup pitch to focus on the research rather than the actual backtesting. Along these lines, I have one more idea that will conclude this mini-series of ideas (for the time being, at least).

I am a full-time, independent trader who is looking for collaboration. I am looking for someone to work with me on building an automated backtester and conducting option research. I have already done a lot of work in designing the research plan.*

Retirement savings: what are you going to do about it? Many people think “financial advisor” as a first response. When it comes to honesty in the workplace, though, some professions have a better reputation than others. Surveys over the last couple years have seen “stockbrokers” and “bankers” near the bottom (health care practitioners and grade school teachers near the top). What about financial advisors? A 2018 Harvard study found one in 12 financial advisors have been disciplined for serious misconduct with the bad apples rarely punished. You probably don’t have to ask around for long to find a salty taste in the mouth of someone who feels taken advantage of or defrauded by such deceptive promises at one time or another.

Personally, I think financial advisors can do a lot of good and deserve proper compensation. I am not convinced that they should manage your investments. For the self-starters out there, I think you can do better.

I am a Doctor of Pharmacy, but for the last 11 years I have worked for myself trading for a living.

One thing I find sorely missing from the financial industry is hardcore research and testing of investment strategies. The healthcare equivalent would be “evidence-based medicine.” I want to trade strategies that have worked in the past when I think they have reason to continue working in the future.

With regard to investing, why hire a financial advisor and pay 1-2% of your assets under management for strategies they have not personally backtested and studied? Without the data, recommendations are nothing more than hollow promises, sales, and marketing. I see a lot of this being presented.

I have spent thousands of manual hours backtesting trading strategies. With much more left to study, I seek a quicker solution: an automated backtesting app. I suggest a collaboration: you bring the programming muscle and statistics/data science background and I bring the trading know-how and experience. Let’s find out how the data suggest we invest.

While the exact percentage and time frame varies, numerous writings cite ~90% of all traders fail in their first couple years. I bring an alternative approach, though—one that may raise some eyebrows if your investment education is based on guru talk, financial media, or classic books.

Let’s work together: I help teach you about trading and you help build the app, which will benefit us both. This is your chance to get a fresh take from an industry outsider who ironically has more trading experience than the vast majority of financial professionals. Let’s do the work, make some money, and have a good time establishing Meetup community along the way!

* — I haven’t written in detail about why automated backtesting,
       but the second paragraph here probably explains it.

Networking Call (Part 1)

I came across GP on a trading forum where he shared some free trader tools. I viewed his website to find:

      > GP is an engineer with a deep passion for the financial markets….

Me too!

      > He loves playing with numbers and got hooked onto derivative trading
      > in his final years of grad school.

I got hooked a bit later but otherwise, me too!

      > Over the years he has traded as a Series-7 licensed… trader…

Unlike me, he has actual experience working in the industry.

      > …He also briefly served in a market data and analytics consulting
      > role… advising various clients including hedge funds, commodity
      > trading firms and exchanges…

This sounds great because I have thought about pursuing some sort of consulting role where I work with portfolio managers to design and/or teach trading strategies, etc.

      > GP received… MS in Computer Networking and Telecommunications…
      > and an inter-disciplinary Ph.D in Computer Science and

Unlike me, it sounds like he has extensive programming experience.

      > Telecommunications… where he found a deep interest in probability
      > theory while working on sample path analysis of stochastic processes
      > using linear algebraic queueing theory as the main analytical tool.

Sounds like he has some additional financial engineering (see second-to-last paragraph here) expertise.

      > He has traded extensively in Stocks, Options, Futures, Options on
      > Futures and has even dabbled into Bonds and Commodties – trading
      > them using various technical and fundamental models. Currently he
      > mostly trades index and stock options using delta neutral strategies.

Sounds like he has extensive trading experience!

In a nutshell, then, he sounds like a full-time trader with actual industry experience: something I periodically consider. He seems to have more advanced analytical knowledge to get the job done (I have considered going back to pursue an MSFE or computer science degree). He markets himself as a consultant and has apparently worked as an industry strategy consultant.

GP sounds like a good person with whom to speak. He can probably identify with much of my experience and he may have some ideas how to get around road blocks that I have encountered (i.e. here and fourth-to-last paragraph here).

In combination with my experience, I thought we could have a good networking call. I have an advanced trading background along with at least five years spent probing the industry for potential entry points. Maybe I could help him, too.

I contacted him via e-mail through his website and we scheduled a call for last night at 5:00 PM.

I called promptly at 5 PM only to be greeted by someone who had no idea who I was. It took a good 20 seconds of silence before he said “did you find me through [the online forum]?”

“Yes.” In other words, yes that’s me… who else would it be when you agreed to schedule a call for this exact time?

Hopefully he just had a rough day.

I will continue next time.