Business as usual....

[wayneL]

Hi folks,

It is well known that I'm a bear and the very last thing I want to do is to appear to gloat over this selloff.

But I think it's a fantastic illustration of the usefullness of strategies other than buying all the time.

Options and commodity futures (including options on same) are fantastic instruments for generating non-correlated returns from the financial markets.

For me, although it is vindicating to see this selloff, in actual fact, i don't really care.

I have had an EXCELLENT month, and yes it has been due to being short the indexes, gold and stock, but there was some very lucky timing which worked my way... pure @rse.

However, it really is business as usual... just trying to pick which way its going (or not going in the case of theta positive option strategies).

This is just a friendly prod for people to look seriously at other ways of playing markets rather than just going long stocks all the time.

Cheers and good luck in your endeavours.

 

[Milk Man]

This is why im trading forex (or at least trying to).

You should change your signature to 'Eat my shorts!" hey wayne?

 

[mit]

WayneL,

I hear what you are saying. However, just running my long only system is about all of the time I can spend on research (I'm happy about it long term and it is performing better than the market but still any drawdown is a pain). I'm thinking of taking 6 months off work (Long service leave yah!) and am going to study this stuff deeper. In the past when I have tried to do discretionary short trades I have come undone.

MIT

 

[cuttlefish]

I've been pretty lucky as well - value investing is my normal mode of operating but have always wanted to capitalise on an overbought market so took a bit of a punt shorting a commodity stock the past month. Still realising I've got a lot to learn about options though and even if you get things fairly right its still easy to go wrong.

 

[Sean K]

Good advice if you are a trader and have the time to do it.

Perhaps another option is to have an 'investment' portfolio of good ASX200 stocks that are paying a good dividend and stick to it for the long term, rebalancing as you go according to the business cycle. Then, have a proportion of your portfolio for 'trading' and using other financial instaments to outdo the indexes. If you have time.

I'm an unemployed bum so I have time at the moment. Must learn about shorting so I'm prepared for the next downturn. In Sep 07.

 

[GreatPig]

Wayne,

it has been due to being short the indexes, gold and stock, but there was some very lucky timing which worked my way... pure @rse.

Do you try and anticipate falls to get in before they happen, or wait till they start then get in?

If the former, how long were you short before this correction started, and how long would you have stayed short if the correction hadn't happened?

I remember Nick's post about being short the index with CFDs based on his analysis on a day when it pushed up a significant amount instead. Knowing my luck, the correction would start the moment I exited the position at a loss.

Cheers,
GP

 

[wayneL]

Wayne,


Do you try and anticipate falls to get in before they happen, or wait till they start then get in?

If the former, how long were you short before this correction started, and how long would you have stayed short if the correction hadn't happened?

I remember Nick's post about being short the index with CFDs based on his analysis on a day when it pushed up a significant amount instead. Knowing my luck, the correction would start the moment I exited the position at a loss.

Cheers,
GP

Hey GP,

Diofferent strategies for different markets.

Indexes

10 May I took an OTM bear call spread on IWM (Russel2000 ETF as it had the IV I was looking for) with the intention of legging into an iron condor at some later stage (I took this a bit earlier in the cycle because of indicator diver and the apparent swing high).

I take the spreads on ETFs to reduce margin. If it was the futures I would have just written calls.

The market tanked from that point so passed on the bull put. The bear call maxed out very quickly and I've written two more sets of calls on the futures, which expire on thursday. So three paydays where I normally only get one.

Already have the next set of calls on the futures written for next expiry...with the view of constructing a delta neutral christmas tree spread IF the market finds support, otherwise they max out pretty quickly as well.

Gold

Took an intraday trade up near the top that I let swing for a few days down to ~650. Took a long that was stopped. Then took the short the next day... still in that one and its making me very happy. Straight futures trades here.

Stocks and other commodities

Just try to construct option strategies to suit my view. This last 4-5 weeks has been mostly classic swing patterns, which is nice when the textbook patterns show up.

But to answer your question about anticipating... when a possible swing shows up and she starts going whre I think it going to go, I'm all over it like a rash, but I don't chase... If it's too obvious, it's already all over and i look for something else.

That way the chart doesn't have to move against you very much to prove you wrong... and your out. Low risk entries.

Hope that makes sense I've just been rambling on a bit.

Cheers

 

[wayneL]

BTW

It doesn't always go that well

 

[GreatPig]

Thanks, Wayne.

Sounds like options & futures have as many fancy names for things as candlestick charting.

Perhaps the creators spent too much time watching old Chinese kung-fu movies.

Cheers,
GP

 

[wayneL]

Thanks, Wayne.

Sounds like options & futures have as many fancy names for things as candlestick charting.

Perhaps the creators spent too much time watching old Chinese kung-fu movies.

Cheers,
GP

hehehe you could be right GP

Then there's Albatrosses, Pteratactyls and Jumbo Jets ( all versions of the condor basically)

My favourite name is coined in Stue Johnstons book... The Martian Ratio Spread!

That one made me ROFL

 

[suhm]

I like to think I'm reasonably intelligent but for me just finding the companies to go long is enough effort already. Maybe when I retire I'll look at different strategies but it just seems a bit time consuming and far to easy to get burned badly by the market makers and other traders because those that do it for living screw up royally. For me I think the only way to beat the system is to be luckier than the pros or reduce your costs unless your extremely savvy.

 

[MichaelD]

Wayne,

I'm interested in your opinion (or for that matter anyone else's opinion) on where I should concentrate my further investigation of the market. (Perhaps many others will be in the same boat as I).

I have a long term trading methodology with positive expectancy and what I consider to be a few decent edges.

Obviously, this isn't going to do much for me during bear markets.

Having looked at various bear market strategies, none of them particularly gel with my psychology. I certainly haven't stopped looking or thinking, but now I'm thinking outside of the square a little. I do, however, like things to be rule-based and mechanical.

Perhaps trading the system on decorrelated markets may be a better option for me - this presumes that somewhere on this planet in some trading instrument at any given time there is a bull market which I can profit from.

Do you (or any other experienced trend traders out there) have any comments on this?

Commodities? Forex?

If either of the above, any good texts to start reading?

 

[wayneL]

Wayne,

I'm interested in your opinion (or for that matter anyone else's opinion) on where I should concentrate my further investigation of the market. (Perhaps many others will be in the same boat as I).

I have a long term trading methodology with positive expectancy and what I consider to be a few decent edges.

Obviously, this isn't going to do much for me during bear markets.

Having looked at various bear market strategies, none of them particularly gel with my psychology. I certainly haven't stopped looking or thinking, but now I'm thinking outside of the square a little. I do, however, like things to be rule-based and mechanical.

Perhaps trading the system on decorrelated markets may be a better option for me - this presumes that somewhere on this planet in some trading instrument at any given time there is a bull market which I can profit from.

Do you (or any other experienced trend traders out there) have any comments on this?

Commodities? Forex?

If either of the above, any good texts to start reading?

Hi Micheal

The long term mechanical do very well with long systems. They work because you end up collecting a few outperformers, stocks that have gone up 100%, 200% 500%... heck even 3000% as detailed in the biggest winners thread.

On the short side, you are restricted to 100% gains (assuming unleveraged positions here) because the bloody 0 gets in the way... even then the company has to go broke to realise a 100% gain.

So long tem trend following shorts is going to underperform.

My personal answer to that is to take swings on stocks and commodities... just classical swing trading using options to reduce risk increase leverage a little bit and to benefit from either buying or selling premium where I see an advantage. Short term stuff basically.

That may not suit your psychology.

Commodity futures could be an answer. Currencies too, depending on how deep your pockets are, in the context of long term trend following.

Options can be a good answer as well. Options aren't necessarily all short term Che Guevara trading. They can be used in a more long term fashion, but certainly do require much more attention and adjusting than a straight stock position.

Just a few ideas


Cheers

 

[It's Snake Pliskin]

Wayne,

I'm interested in your opinion (or for that matter anyone else's opinion) on where I should concentrate my further investigation of the market. (Perhaps many others will be in the same boat as I).

I have a long term trading methodology with positive expectancy and what I consider to be a few decent edges.

Obviously, this isn't going to do much for me during bear markets.

Having looked at various bear market strategies, none of them particularly gel with my psychology. I certainly haven't stopped looking or thinking, but now I'm thinking outside of the square a little. I do, however, like things to be rule-based and mechanical.

Perhaps trading the system on decorrelated markets may be a better option for me - this presumes that somewhere on this planet in some trading instrument at any given time there is a bull market which I can profit from.

Do you (or any other experienced trend traders out there) have any comments on this?

Commodities? Forex?

If either of the above, any good texts to start reading?

Michael,

I see you refer to the system. Have you thought about multiple systems for all conditions?

Wayne,

My personal answer to that is to take swings on stocks and commodities

Music to my ears.

 

[GreatPig]

Wayne,

On the short side, you are restricted to 100% gains

That depends on how you define gain - in particular, what you use as the denominator.

Generally it is defined as profit divided by capital outlay. With a short position, the capital outlay is at the end, and that should be the denominator, not the revenue received at the start.

So if you received $10K and then spent $5K to buy back, the gain should be calculated relative to the $5K, not the $10K (ie. 100%, not 50%). This then gives exactly the same return as if the reverse had occurred as a long position, and could potentially lead to infinite gains (if the stock went to zero).

Cheers,
GP

 

[wayneL]

Wayne,


That depends on how you define gain - in particular, what you use as the denominator.

Generally it is defined as profit divided by capital outlay. With a short position, the capital outlay is at the end, and that should be the denominator, not the revenue received at the start.

So if you received $10K and then spent $5K to buy back, the gain should be calculated relative to the $5K, not the $10K (ie. 100%, not 50%). This then gives exactly the same return as if the reverse had occurred as a long position, and could potentially lead to infinite gains (if the stock went to zero).

Cheers,
GP

Not really GP. The capital outlay will in fact be the margin you have to deposit to maintain the position. In the US this is 50% whether the position is short or long.

Another way to look at it, to use muliples of risk. If the risk in the position is 10% (of the position) , then profit is restricted to 10 x risk, if the stock goes to 0. Long position can go many multiples of this.

Again, looking at it as you have put it. Then the capital outlay as defined by the buy price in the winning trade is depreciated to the point of being diminutive. In other words our best short winners are the smallest position size.

Either way you look at it, trend trading short will not yield anything near trend trading long, if at all.

Cheers

 

[GreatPig]

Wayne,

The capital outlay will in fact be the margin you have to deposit to maintain the position. In the US this is 50% whether the position is short or long.

Are you saying that if you go short and receive $10K, you have to pay $5K of that as a margin deposit? And do you actually get the $10K at the time of going short, or not until the trade has been closed out? (I've never done shorting, so I'm not sure how it works)

So would the following be possible: you start with $0, short sell $10K worth of stock, then use $5K of the proceeds to take a $10K long position in some other stock on 50% margin?

Cheers,
GP

 

[Magdoran]

BP,

Just a quick summation...


Short selling can get quite complex - different exchanges have rules, so do different brokers, as do different countries.

Some brokers require different levels of margin, and for some, the way that the underlying moves can increase and decrease the margin, for others it’s a fixed amount.

Also, the time you can be short can be different (the ASX rules require shorted stock via its registers to be returned in 3 days for instance).

You usually have to post a margin even though you have a credit position, because the broker requires some protection if the stock rallies, and you have to wind out at a loss. They are exposed to the upside risk, hence they require you to post some collateral. These levels vary considerably, and some brokers have different levels for some stocks (or at least they used to a few years back).

So it is highly unlikely that you could start with $0, nor could you take the credit and use it as collateral for another position. I have heard of other shares being used as collateral though. If these are on margin, then there are equations to deal with this – but this is a really risky approach I would be hard put to recommend.

There are real risks with shorting without hedging, so please be careful. The risk is theoretically unlimited – i.e. not capped, and it has been known to wipe out traders.

I remember an apocryphal story about a trader who shorted ALL, and it rallied hard the next day (I think this might have been 23/24 August 2004). In trying to cover his major short position, it caused an intraday spike on the day while he fought with bulls to cover his short. Apparently he went broke to the tune of several million in the process... have a look at the chart, and the big volume spikes – it was a broker that told me that, so I can’t testify to it’s veracity. But it makes for a good fairytale about what not to do and illustrates the point!


Regards,


Magdoran

 

[GreatPig]

Magdoran,

Thanks for the explanation

Cheers,
GP

 

[MichaelD]

I see you refer to the system. Have you thought about multiple systems for all conditions?

I have indeed thought of this and tested many, many potential systems to date. So far, I have not been able to come up with a positive expectancy short system. As Wayne points out, the 0 at the bottom gets in the way. It doesn't mean I'll stop looking, but I haven't worked one out yet - hence my query re simply applying the one thing I do have that does work to other markets to even out my equity curve.