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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.

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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.

SysCW: Fraud or Failsafe? (Part 1)

The time has arrived to gradually transition away from covered calls and cash secured puts and to focus specifically on “Systematic Covered Writing.”

Is SysCW a viable trading system or is it a Rich MacDuff fraud?

In the last post I provided a partial listing of Rich MacDuff catch phrases taken from his e-mails to subscribers. The underlying tone is one of arrogance, of simplicity, of sarcasm to emphasize outsized returns… he makes SysCW sound like an ATM machine. Hardly ever a mention of anything negative and certainly little to nothing about risk or losing.

The most infamous money manager to never post a losing month was arguably Bernie Madoff. He is now serving a 150-year prison sentence for fraud (among other things).

I believe there is no such thing as a money machine in the world of trading. As a trader, I will have good times and I will have losses. If I never have a big loss then I am extremely lucky. If I never have a big loss then I may also be trading as a hobby rather than trading full-time for a living where I must trade in larger size and risk more money to pay the monthly bills.

Despite what some people say, never expect a “money machine” in the world of trading. Such a false expectation encourages trading too large and putting oneself at great risk for catastrophic loss.

When you see blatant arrogance like this surrounding anything financial, the best course of action is probably to turn the other way and run as fast as you can without ever stopping to look back.

Few things scream “OPTIONSCAM.COM!!!!!” any louder than this.

Covered Calls and Cash Secured Puts (Part 41)

I am winding up this blog series with concerns about Systematic Covered Writing (SysCW) as a viable trading system.

Directly or indirectly, Rich MacDuff often refers to SysCW as a “money machine.” When you order his book Systematic Covered Writing (2011), he offers a free one-month trial to his service. I maintained a collection of “catch phrases” from his e-mails:

> It always boils down to the math… since November 18th, this CLF
> investment has generated cash at 60.43% when annualized… what if
> we end the year with only half that return… would it really
> matter what the stock is trading for at the time?

> We know that we will not go broke establishing positions that generate
> cash at an annualized rate 52.61%, which is exactly what we did. Wahoo.

> We will be playing this bad boy again!

> Some returns are ridiculous!… I hope you don’t blame me…

> This will be a one word commentary …SWEET!

> …we elected to allow an ‘interim call’ to be exercised because there is
> nothing wrong with a position that ends with an annualized gain of 70.80%.
> (Duh!) … It was not a hard decision to make.

> We are being paid for owning stock even though we were ‘wrong’ at the time
> of purchase. It’s all good. Kind of like the Seahawks! (I spend the bulk
> of my adult life in the Seattle area … what fun!)

> Such is the nature of the Weekly Strategy. We have to trade more often,
> but we are rewarded with more control and more cash. Got to love it.

> …options all expire this Friday. This means we will have an opportunity
> next Monday to either write calls against stock that is assigned, or
> establish new csp positions. Over and over … we generate cash.

Take a good look at the underlying tone here. I will continue discussion on this matter in my next post.

Covered Calls and Cash Secured Puts (Part 40)

To implement DCA in a market crash, spare cash would be required. The 15% annualized return MacDuff advertises with the Math Exercise would no longer apply because the deleveraged portfolio would be making less. How does this add up?

More recently, MacDuff has advised being fully invested. This eliminates the possibility of DCA and potentially resolves the discrepancy described above.

What happens when stocks tank?

On the call side I can sell premium at near-the-money strikes, which will enable me to continue generating cash.

What happens when a V-bottom prints (e.g. March 10, 2009) and stocks catapult higher through my lowered strikes?

MacDuff argues we are now better prepared for this situation thanks to narrower strike availability and weekly options that offer the potential for supercharged annualized returns.

What happens when I have to look months to years out in time to roll for a credit? Neither weeklies nor narrower strikes are going to save me.

In some cases, no available options will provide for a credit roll. I cannot take assignment at the [substantially] lowered strike because that would lock in a big loss. In 2009, I suspect this might have described most [if not all] of my positions.

My only other option would be to roll for a debit and hope the market cooperates and allows me to escape whole. “Hope is not a trading strategy” and I cannot begin to imagine my degree of insomnia if most of my positions were in that boat.

Until and unless MacDuff can give me some response to these difficult issues, I will have significant doubts about SysCW. One may argue “no trading system is perfect and losses are a part of the game” but MacDuff never shows any losses in his book nor in his tutorials.

How Madoff-esque is that?

Furthermore, what I have described here is more than “occasional losses.” What I have described is catastrophic loss running rampant across most of the portfolio. This is a risk that deserves a response and a remedy before SysCW qualifies as a viable trading system.

Covered Calls and Cash Secured Puts (Part 39)

Once upon a time (one month ago), this space focused specifically about CCs and CSPs. My last post waxed eloquent about some optionScam.com aspects of the industry. Next I want to combine these two branches of inquiry and focus specifically on Rich MacDuff’s SysCW.

One of the biggest problems I have with SysCW is the exclusion of portfolio considerations. The SysCW tutorials and book include tens to hundreds of examples of successful positions.

Some were easy.

Some required more management.

Some involved dollar cost averaging (DCA).

Taken one at a time, MacDuff found a way to make every single position go back to cash profitably. For me, this was the primary appeal of SysCW: management strategies exist to handle most any situation imaginable.

Indeed, SysCW does offer tools to successfully manage most any situation… when looking at positions one at a time.

This is not the case when full attention is paid to portfolio considerations and that, in my opinion, is where SysCW begins to break down. What happens when another 2008-like crash occurs and all positions lose significant value? MacDuff has argued I can close profitable positions and use that money to aid losing ones. By definition, though, correlation goes to one in a severe market crash. No profitable positions are likely to exist in a violent bear market.

In Systematic Covered Writing (2011), MacDuff introduces DCA as a position management tool. Perhaps a market crash will require DCA and to do this I need significant cash on the sidelines. If I have significant cash on the sidelines then I will not realize 15%+ on my entire portfolio, which is what MacDuff repeatedly insists to be possible with the SysCW.

Something just doesn’t add up [yet].

I will continue this discussion in the next post.

Portfolio Considerations of a Trading Strategy (Part 8)

Over the last few posts, I’ve been making the point that portfolio considerations, or “money management,” is an integral component of trading system development. Without these details, a viable business plan cannot properly exist. I’ve suggested these details to be frequently overlooked because discussion of one’s personal wealth is very limited in Western culture.

Discussion of wealth is not suitable for strangers, friends, or even the closest of family (if that) in many cases. This leaves only one’s financial advisor or personal attorney as potential confidants.

Whenever discussion is taken out of the public domain and packed into isolation between a select few (or less), the medium suddenly becomes ripe for coercion and chicanery to proliferate.

Understanding this is why I encourage traders or anyone associated with Finance to watch the CNBC television series American Greed. Innocent people are repeatedly usurped by sketchy characters posing as investment advisors or lawyers who offer a cut of “special opportunities.” So often, the directive becomes something like:

“…but don’t tell anyone else. I’m making this special deal
available to only a select few. Give me your money and I’ll
invest it. You will receive monthly statements and be able to
track its growth. Just keep this between us.”

Because I hope to make loads of money, I heed your demands. If you can swear me to secrecy then you don’t have to worry about the authorities knocking down your door. You are free to steal my money and to find more victims.

Catastrophic loss in the stock market has a similar feel. The discussion is just between me and the market through my stock broker or brokerage. Things might be going fine for months to years as I receive monthly statements showing a steadily increasing account value. Suddenly a bear market hits and I’m stripped of much wealth.

I don’t even know what hit me. I am decimated.

Without meaning to be insensitive, I would argue the feeling to be comparable whether raped by the financial markets or by the neighborhood con-artist.

Portfolio Considerations of a Trading Strategy (Part 7)

I concluded the last post by claiming portfolio considerations are often overlooked because discussion of trading strategies is much “sexier.”

To evaluate this claim, I should first address whether it is even true. Ryan Jones writes in The Trading Game (1999):

> Money management is thought by many to rival only accounting in its boredom.

At least I am not the only one who perceives traders to preferentially enjoy discussion of other topics like trading strategy. Jones continues on to say money management is misunderstood. Money management is truly exciting.

In most contexts, “money management” can be substituted for what I have been calling “portfolio considerations.” Some believe that strategy (e.g. position setups, adjustment guidelines, and stop-losses) and money management (e.g. position sizing, portfolio risk management) are two different components of trading.

This traditional, almost intuitive division between trading strategy and money management enables commercial interests and fellow traders to focus on the former while overlooking the latter. While they may be separate, a successful business plan cannot exist without both!

Jones argues that $1,000,000 in profit may be generated using a conservative money management approach by earning $100,000 trading a single unit, contract, or option. This can be done in five years by:

–Making $20,000 profit per year
–Making $1,667 profit/month
–Making $384 profit/week
–Making $75 profit/day

What would it take to make seventy five bucks per day?

–Three ticks in the S&P 500
–Less than three ticks in bonds
–Seventy five cents on 100 shares
–Six pips in a currency market

None of these seem to be altogether too much, do they?

Ryan Jones has presented an example where “money management” is responsible for $900,000 of $1,000,000 total profit.

What is dull and boring about that?

Could the true power of money management just be misunderstood and/or unknown?

Portfolio Considerations of a Trading Strategy (Part 6)

In the last post I left off by planning for the cash position ($12,000) along with the iron condor position ($8,000). This makes for multiple simultaneous positions. I can imagine a trading group discussing this. However, other portfolio considerations must be made to evaluate this trading strategy that probably are not appropriate for public discussion.

For example, I may not feel comfortable discussing the need to pay a $1,500 mortgage every month on top of $5,000 in living expenses. Suppose the backtest showed this position to average $150 profit per week, which is $7,800 per year. Am I comfortable increasing this position 10-fold to potentially make $78,000 per year? I would need $200,000 in the account for this purpose. This is a portfolio consideration.

Rather than scale up this particular position, perhaps I seek other trading strategies for diversification or hedging. How much can I expect to make from those strategies? How much cash do I need on the sidelines for those strategies? Am I able to fund all of them? These are portfolio considerations.

Zooming out even further, how much of my total net worth do I feel comfortable having in my trading account? Perhaps I only feel comfortable allocating 70% of my net worth to trading and the other 30% to bonds, real estate, etc. I should also probably have a small checking account readily liquid in case of emergency.

All the portfolio considerations described in the last three paragraphs are probably not appropriate for public disclosure because they involve matters of wealth. They certainly should be carefully thought through, however. Just how beneficial can a trading group be for the most-involved participants who trade for a living?

If all group members make a concerted effort then I think portfolio considerations can be discussed to some extent. If the common goal is trading for a living then these details affect everyone. One problem is that despite being the “elephant in the room,” in many instances portfolio considerations are not even acknowledged. Part of this is probably due to a second problem: discussion of trading strategies is much sexier than discussion of portfolio management.

I don’t know why. It just is.

Portfolio Considerations of a Trading Strategy (Part 5)

Recent discussion has labeled investment newsletters, trader education firms, and even informal conversation with other traders as different venues where portfolio considerations are overlooked. Today I begin to illustrate exactly where these portfolio considerations might apply when evaluating a trading strategy.

Suppose we participate in a weekly trading group and today is my turn to present. I show a 10-contract weekly iron condor position with a margin requirement of $8,000. My profit target is 10% or $800. I detail the trading strategy with position setup and risk management [adjustment] guidelines. I show last month’s successful trade and everyone is all smiles. Right?

Because one trade never makes a trading system, I need to zoom out to determine whether this trading strategy is for me.

Suppose I show three years of backtesting results and the worst year-to-date drawdown is $8,000. Does this suggest I need $8,000 to implement this strategy?

No!

First, I would likely bankrupt the account or come pretty close. People generally become concerned once drawdown exceeds 10%. In 2008-2009, the stock market fell 50-60% and people were completely devastated from that. I can hardly imagine a drawdown approaching 100%

Second, some trading guru once said “your worst drawdown is ahead of you.” In general, the longer the time interval the greater the variety of market environments available to test a strategy. Three years is a very limited backtest. In some future year, this trading strategy is very likely to post a drawdown [much?] greater than $8,000. I will arbitrarily deem $20,000 (2.5 times) as necessary to implement this trade: $8,000 for the iron condor and $12,000 as supplemental cash in the account.

If I am being entirely honest when discussing this trade then I should also realize my weekly profit target is now 4% rather than 10%. The margin requirement of the trade might be $8,000 but I have now set $20,000 aside for the trade.

Further calculations will be more about gross dollars. I will continue with these details in the next post.