Saturday, November 01, 2014
Seminar report: TDAmeritrade Marketdrive
I attend a day long stock market seminar sponsored by TD Ameritrade, CBOE and the CME. The presenters include Don Kaufman and John "The Geek" from ThinkorSwim, Tom Sosnoff from Tastytrade, education guys Russell Rhoades from CBOE and Pete Mulmat from CME.
Some might ask why attend a seminar when I've been trading for decades. Well, I am always open to learning something new, and I often get anecdotes about the mood of market participants. Also at this event there was a free lunch (Turkey sandwich and more).Unlike some similar events there was no hard sell, just a few minutes of information from CME and CBOE.
Don Kaufman leads off. He says the #1 reason beginners blow up their accounts is they trade too many contracts. Most people are going to be wrong some percentage of the time. Being wrong in options with a large position and the account gets blown up. Next is a discussion of theta neutral trades. The example given is TWTR vertical call spreads. With TWTR near $41.50, the $41/$42 call vertical prices out near the same 6 days out, a month out and three months out. I would have never guessed that.
Kaufman says he is terrible at predicting market direction, but decent at risk management. The golden traders are good at both. The ones that lose all their money tend to be bad at both, risk management and direction. I am so-so on direction, a bit better at risk management.
Kaufman talks about his last trade on AAPL, a vertical call spread sold for a credit. He sold the 200/210 call spread with AAPL around 203 and watched it go to 243, maxxing out his loss. AAPL is now one of his "nemesis stocks," stocks that he no longer trades. I have a similar list, though after a year or more I might try again.
Kaufman says that most traders are either buyers of premium or sellers, that it is a rare trader that can be successful at both. I've never had much luck buying premium. I am only so-so at selling premium, but at least I make something. Kaufman is not big on back testing for finding strategies. He prefers looking at current pricing and extrapolating. For example, looking at the price of a January spread, and then a December, to perhaps get an idea of what the spread might price out at in a month with no price change.
Kaufman asks the 500 or so attendees, how many watch CNBC, only a very few hands go up. He says it is mostly noise now. He goes on to show the high correlation with SPY. 362 out 500 S&P stocks had an 80%+ correlation the past 10 days. This despite earnings season which some might think would create more dispersion.
The free lunch is decent (Turkey sandwich and more). After the end of the seminar, there is free beer and wine, and more snacks. During the break I notice a local guy and chat with him while we eat lunch. A third guy joins us. The first guy has mostly done stocks only, and very little with options. The third guy is three years in, and with the help of the many ThinkorSwim educational tools seems to know quite a bit. The catch is that brokers love option traders. The average option trader might be 10x as active as a stock trader and the commissions pile up for the broker.
Russell Rhoades, CFA from the CBOE wrote a book called VIX. Not very many people talk to him during the breaks, so I don't get a good vibe from him. He does mention the launch of the new VXST (a nine-day VIX type instrument) and VXTYN a bond market volatility instrument.
The CME education guy, Pete Mulmat mostly focuses on how trading futures is much more capital efficient, because of the lower margin requirements. For example to buy or sell one /GC (gold 100 ounces), the opening margin is a mere $6600 or so to control about $120,000 worth of gold. Of course that 20x leverage can get a person in a lot of trouble. The recent tumble in gold would have wiped out all that equity for a long positon and resulted in a quick margin call if the full leverage was used.
The keynote speaker is Tom Sosnoff, founder of ThinkorSwim, now with Tastytrade and Dough.com. As always, Tom has an interesting perspective. He mentions lecturing 100 USC finance majors the night before. He came away disappointed that they seemed to know so little.
One question for the finance majors was about the Friday market event. "What do you do" in response to the Bank of Japan news that they are selling yen to buy dollars? None of the USC students came up with a decent answer. Two people in the audience answer. One says he would buy the Nikkei. Another says he would buy yen. A third says to buy S&Ps. My gut response is "fade the move," which is what Tom Sosnoff did. He sold S&P sold Nasdaq and bought Euros. All three were green by the end of Friday. My observation is that it isn't always a good idea to fade the news, but in this instance it was the correct call.
Sosnoff presents a lot of evidence in favor of selling options, naked strangles. I remembered Don Kaufman's scold against back testing. I keep in mind that the last five years have been mostly good for option sellers. However, as my recent few weeks of trading have shown in a most painful way, the losses can be quite large from selling naked strangles, while the profits are capped at the premium collected.
I recall a similar seminar event a few years ago, where selling covered calls was the "in thing to do." Of course, the huge market rally made that only a so-so strategy going forward. Another big thing was selling iron condors relatively close in. Again, the big market rally would have made that strategy so-so going forward. So the caution is, that if they are telling 500 retail traders that selling strangles is a good idea, it might not work out so well going forward. This is from my perspective as someone that sells naked strangles quite often.
There is more. There is a demonstration of Trade Architect, a new part of the TD Ameritrade website. A question on high frequency trading, and a lengthy answer. Some I am going to leave some out as this post is getting rather lengthy.