Do Good Programmers Make Good Traders ??

Lets Trade !!

Scorecard:

Returns last month: +0.99%

Returns since August 2002: + 47%

About this page: (or just skip to the tables)

One of the things most often heard when people say "Hey, my product is great, try it." is the response "if its so great why don't you trade it instead of trying to sell it?". We can do both. We can sell our software and use it for trading, and we have done just that. Starting with the August (2002) expiration, we are journalling the trades we have made. The vast majority will be time spreads. 100% of these trades are verifiable trades discovered with the OptionBrowser and cleared through an (heretofore sacked) account at Interactive Brokers, LLC. The version of OptionBrowser that we use will be V4.0-11 or better. We have only cheated to the extent that we started using this version before we released it to the general public. The new features in this version over V4.0-10 are a straddle/strangle decay calculator for the short gamma crowd and the ability to more easily scan for diagonal time spreads. You could do it with the older versions, now its much easier. The latest OptionBrowser was released to the general public is V5.0-4 and was made available 3/19/2003.

Another thing you hear alot is "Those who can do and those who can't, teach, and those who can't teach, teach teachers". Its entirely possible that we'll have a case of "Those who can do and those who can't will write code for those who can.". The first month returns were in the 50% area but after that things went down hill. If you read through all the commentary you'll find that alot of my best trades - best exits actually - are prefaced with the words "I happened to be sitting there when ...". These statements usually finish with "XYZ broke through" or "XYZ fell apart" and I was able to capitalize on these moves. Alot of my losing trades come from the fact that I was NOT sitting there when... This leads me into another point. I don't have the time or inclination to watch the markets all day long.

I am now very busy in other areas of my life including coding a new version of the OptionBrowser as well as attempting to relocate and all the hassles that are involved with that and I often am away from the markets. What I've noticed is that all front month trades that are going have me constantly worried yet those trades that are several months away from expiration concern me not at all. What you'll see is beginning with the November 2002 expiration period is that my trades will take a different approach much biased to longer playing slower moving trades. Another thing I've noticed about myself is that I'm prone to panic and make bad decisions in the heat of battle. Longer playing trades give you much more time to think. This is not to say that I'll ignore opportunities that come up but just that I'm switching focus a little. Some people are great at making snap decisions with their money on the line. I'm not one of them.

Why Time Spreads ? :

Strictly speaking, a time spread is the purchase of an option with any expiration and the near simultaneous sale of an identical option that expires sooner than the option purchased. In other words, you buy more time than you sell. All else is equal including the stock chosen, the type of option (puts or calls) and the strike price. Time spreads are also known as calendar spreads and horizontal spreads. The far month that you purchase is called the "back month" and the closer one that you sell is called the "front month".

There are a number of reasons that one might consider a time spread. The first one that comes to mind is that they are delta neutral trades. When you are long a time spread you don't really care if the stock moves. It can go up a little, it can go down a little or it can sit there and not go anywhere and you make money. The key phrase here is "a little". If the stock moves too far in either direction then you can lose money. The amount of tolerable movement in a spread is dictated by volatility, strike and debit parameters and calculated, tabulated and graphed very nicely by the OptionBrowser and takes all the number crunching out of it. The second cool thing about time spreads that comes to mind is the edge you get in time decay.

Options are a wasting asset. All other things being equal, the value of an option decreases (decays) with each passing day. The amount of decay accelerates as the option nears its expiration date. With a time spread you will buy the back month and sell the front month. All else being equal the front month loses value faster than the back month. Lets use a really simplistic example:

Suppose on february 3rd I tell you to buy the XYZ february//march $20 call time spread for a $1 debit. This might mean that you can buy the XYZ march $20 call for $3 and sell the XYZ february $20 call for $2 leaving you a $1 debit to achieve the spread. Assume that XYZ stays at $20. As february expiration approaches the call that you sold for $2 will approach a value of zero (worthless) while the march call will also be decaying but at a slower rate. Lets say that as february expiration approaches that march call is only worth $1.50 now. You just earned 50% on your $1 investment because the february option expired worthless and you sold your march option for $1.50.

More often than not you will have to buy back the short option. Lets say that XYZ was $20.75 on expiration day. You would definitely want to buy it back or end up being assigned and having to deliver 100 shares of XYZ. You might have to buy it back for 75 cents + something to the market maker and may end up paying 80, 90, even 95 cents. Were XYZ at 20.75 on expiration day your march call could conceivably be worth $2.25 or even more. What you do is buy back the option you sold. It costs you $90. Then you sell the march option for $2.25. The net result is $135 to your account. Since you initiated the spread for $1 you have earned 35% on your investment.

Remember when I said "a little movement" was a key phrase ? Here's how you can lose money: What if XYZ soars to $26 at February expiration. The Feb $20 call will probably cost you $6.50 to buy back and the march $20 call would conceivably be worth $7.00. In this case you would lose 50% of your $1 investment because $700 - $650 - $100 = ($50). Conversly, if XYZ tanks to $14 during february the february $20 call will expire worthless and your march $20 call could be worth 50 cents or even less. A little movement is OK, lots of movement is bad. This brings up the next cool thing about time spreads.

Time spreads are relatively easy trades to hedge [!]. Entire books and level 4 and 500 classes are taught about hedging and NOTHING is easy but lets continue with the example. If you ran the XYZ spread through the OptionBrowser you know that the trade is profitable anywhere between $18.50 and $21.50 at expiration. Using the $26 dollar example where you lost $50 bucks, what if you bought 25 shares of XYZ when it hit $22 ? From 22 to 26 is 4 points and 25 shares x 4 points = $100. You will lose $50 on the spread but earn $100 on your hedge and net a $50 profit which is still 50% no matter how you look at it. The same is true if the stock tanks to $14. What if you sold short (shorted) 25 shares when it fell to $18 ? From $18 to 14 is also 4 points and since you were short 25 shares you earn $100 on the hedge and lose $50 on the spread. You still end up with $150 or a 50% total gain on the trade. If XYZ tanks from $18 down to $1 (ala Enron, Worldcom, UAL, etc) you would lose your entire $100 debit on the spread but earn 17 points times 25 shares = $425 on your hedge. Total profit in that case would be $325. When hedging, the number of shares bought or sold has to do with adjusting your deltas. Remember that time spreads are delta neutral, at least most of them are, at least at the start. As the spread moves into and out of the money it will not remain delta neutral. To stay delta neutral you would calculate the number of deltas needed to be bought or sold and buy or sell that many deltas. Stock has a delta of 1. In the XYZ at $22 -> $26 dollar example, at $22 the delta on the february call might be .79 (just say 79) and the delta on the march call might be .65 (just say 65). What this means is that you are short 14 deltas (79 minus 65) and to get back to delta neutral you would have to buy 14 deltas. The easiest way to accomplish this is to buy 14 shares of the stock. There, thats 25 words or less on the science of hedging. The ART of hedging is in deciding how many shares (deltas) to buy. If you were still bearish on a stock that made a sudden move from $20 to $22 you might only buy 10 deltas thinking that the move is an abberation and the stock will shortly fall back to your comfort zone, but if it continues at least you're earning $10 a point on the move up. If this move caused you to be bullish you might buy 28 deltas. As you'll see in the trades below I got REAL bullish on SIVB and I exchanged a 20 delta hedge for about 120 deltas using the options themselves. Note that the exact same (and opposite) is true of hedging to the downside. As the spread falls out of the money you end up long deltas and have to sell some to get neutral or achieve whatever positioning you want. From the last couple sentences you should understand that you can hedge with shares of the stock OR options or combinations of options or options and stock. If I were long 5 options with a delta of .50 (just say 50) and short 5 options with a delta of .60 (just say 60) I am also said to be "short 50 deltas" (long 250 deltas and short 300 deltas). If I were aiming at neutrality I would either buy 50 shares of the stock or simply buy an ATM option because ATM options typically have a delta of 50 or so. Another way to achieve neutrality is to sell one of my long options causing me to be 200 deltas long, 300 deltas short and then buy a deep ITM option with a delta approaching 1.00 (just say "a hundred").

A perfect world, eh ?

Knowing that nothing is ever perfect lets look at what can go wrong with hedges. What happens if you buy in 28 deltas with XYZ at $22 and XYZ immediately falls back to $20 ? You are out $56. What happens if XYZ waits until you close the hedge and rockets back up to $24 ? Now you're out the $56 on the hedge and will lose on the time spread too if the trend continues. Beware of being whipsawed around on your hedges. When hedging take your time and think through how you would respond to such a situation. Try not to hedge for profit. If a hedge ever profits to the point where the hedged trade is free then close the hedge immediately and let the trade run its course. Try not to churn your hedges too much. Those little losses can add up. Enough about hedging. On the surface its easy enough but its rocket science if you try to think too hard. I'd hurt myself. Go read a book.

When trading options, you gotta have an edge. We've already looked at two: delta & theta. Delta, or the fact of being delta neutral pertains to movement of the shares and theta is option-speak for "time decay". When you are long a time spread you are "delta neutral and long theta". People who just buy a put or a call make a decisive directional bet and are "long delta and short theta". You will also be "short gamma and long vega" and I'll only write a couple words about those in here. Technically speaking, delta is "the amount by which an option price moves in response to a movement in the underlying stock price" and Gamma is "the amount by which the delta moves in response to a move in the underlying shares". All you need to know about Gamma is that in a time spread you are "short gamma" and don't want the stock to move. The plain option buyer that buys a put or a call is "long gamma" and wants it to move (but only one way). He is also "short theta" because that move has to happen quick enough that the value of the option doesn't decay away to nothing. You also like being "long vega". Vega is the amount by which an option price moves in response to a movement in the IMPLIED VOLATILITY of an option. I haven't mentioned implied volatility (IV) yet, but its a very important edge you can get so I'll discuss that below. From here, suffice it to say that IV is what drives options prices. Here's an example: with XYZ at 20 the $20 call option with 30 days until expiration and the risk free interest rate at 3.25% and a IV of 50 is worth roughly $1.17. Leave everything else and double the IV to 100 and the option is worth roughly $2.30. Simply put higher IV means higher option prices. Being "long vega" means you bought more vega than you sold so you will benefit more from a rise in the implieds than the short option that you sold would. A simple rise of implieds would make you money. Conversly, if the implieds in the short front month crashed while your long back month's implieds stayed the same or rose then you would make money and that is the edge you can get. A volatility edge, also known as a "volatility skew". I have to digress again before getting to what this means to the time spread trader.

I've given a couple words on delta, gamma, theta, and vega. These are commonly known as "the greeks" in option-speak. There's another one called Rho but ignore it. Its simply how the option prices respond to changes in the risk free interest rate and in these days of 3% t-bills it is completely irrelevant. Go read another book. I recommend "Option Volatility and Pricing" by Natenberg. Anyway, option prices come from various models but they all center around a common set of data. For any given option we know the following: What the stock price is, what the option strike price is, what the risk free interest rate is as well as how many days until expiration. The missing data point is VOLATILITY. Nobody knows how volatile a particular stock will be in the future. Nobody knows how far up or down its going to travel during the life of the option. This is a crucial point and I cannot stress enough. Nobody knows the future! All that can be known is the past, which provides historical volatility. The other thing we know about any given option is the PRICE (bid and ask). Here's what happens. We take the stock price, the strike price, the interest rate, the days until expiration and the price of the option itself and solve for implied volatility. For any given set of data when we know the 5 parts we solve for the 6th (IV). It is therefore implied by the option price and thus termed implied volatility. Once you understand this then its all a matter of supply and demand. When speculation on a stock is rampant and people are buying puts and calls like mad there's alot of demand for those options so the market maker charges higher prices, which in turn causes the implied volatility to rise. When there's no speculation at all on a stock, say a utility that spends its entire life trading between $20 and $25 all year long, nobody is speculating and the market maker has to lower their prices to generate any interest in the options at all. Lower prices means lower implied volatility. Here is the option pricing formula from one type of model, Black-Scholes, used for determining what the option price (OP) should be. Please forgive the graphics.

Where:

And the variables are:

S = stock price

X = strike price

t = time until expiration as a percentage of a year

r = current continuously compounded risk free interest rate

v = annual volatility of the stock expressed as standard deviation over a year

ln = natural logarithm

N(x) = standard normal cumulative distribution function

e = exponential function

Armed with the above formula, all you have to do is plug in all the values and solve backwards for implied volatility. Easy huh ? You don't have to worry about anything because the OptionBrowser calculates IV for you, as well as Delta, Gamma, Theta and Vega. Remember to forget about Rho. End of digression. What does all this mean ? To me, not a thing. I'm just a programmer. The guys who invented this formula (Black & Scholes) got a Nobel prize in 1976 for figuring this out. Do you understand all this stuff intuitively ? I sure don't. You know what else ? Neither do most market makers. In fact, I know and very much respect a particular professional trader who at his more faceatious moments has referred to the market makers as "sheet monkeys" :) They're only following preprogrammed instructions from the brains in their outfit so lets go back to the practical uses of implied volatility. You already know that when speculation is rampant people are buying lots of options. If "everybody" thinks the stock is going to rise they buy calls. If "everybody" thinks the stock is going to fall they buy puts. Either way, when something is in high demand the people selling that thing raise the prices as high as they can get away with. Thus raising implied volatility. This introduces that volatility skew I mentioned because the speculators don't want to spend alot of money therefore they buy the least amount of time they can, almost always the current month which becomes the front month of your time spreads. Here is the IV edge. When speculation in the front month option gets really going those IVs reach for the sky. Higher prices for the market maker ALSO means higher prices for you, but you won't be buying the higher prices you'll be selling them. Lets go back to XYZ, due to report their earnings after the close today. They are expected to post a rather nice profit and speculation in the front month calls is rampant. Here are some examples. Its February 1st and the Feb $20 calls are running with an IV of 100 while the March calls still have an IV of 68. That is 32points of IV skew. Jump all over this one! Here are the numbers. XYZ is sitting at $20 and the Feb $20 call with an IV of 100 and 16 days until expiration and a 3.25% risk free interest rate is trading at $1.70 and $2.00 asked. The March $20 call with an IV of 68 and 44 days until expiration and the same 3.25% risk free rate is trading at $1.90 bid and $2.10 asked. What you do is BUY the march call for $2.10 and immediately sell the February call for $1.70. Your net cost $40. Now earnings come out and there's no big surprises in there after all. The very next day everybody is selling their February $20 calls. The market maker is paying them bottom dollar and the IV drops to 75. The stock price hasn't moved but with the IV crash the february $20 calls are now $1.10 bid and $1.30 asked. Since there wasn't any excitement about the march calls the IV hasn't done anything. With (on this next day) 43 days to go theta hasn't hurt very much so the march $20 call is now $1.85 bid and $2.00 asked. You buy in your short front month for $1.30 and sell your long back month for $1.85 netting $55 or a profit of $15 or 37% overnite and nothing material has happened to the stock. This is what IV edge is all about. Of course, theta will wreak havoc on your short February call since its expiring in a couple of weeks. If carried all the way to expiration day and the stock ends up at $20.00 then February isn't worth anything but your march call will still have 28 days on it and be worth around $1.50. Since you don't have to buy back the february call simply sell your march call for $1.50 and net a profit of $150 - $40 = $110 or 275% in 16 days, which incidentally annualizes to a 6,273% return on your $40. Lets say you get suddenly bullish on XYZ and choose to NOT sell your march call. If it then rallied to $30 over the next 28 days your march $20 call will be worth $1,000. Whats the annual return THEN ? Remember though, once you buy in your short call or it expires you are no longer delta neutral, long theta and short gamma. You are now long delta, short theta and long gamma. Use extreme caution on any directional bets and manage them carefully.

Wrapping it up:

This is why I've chosen time spreads. Delta neutral, long theta, long vega and I only buy those with a decent volatility skew. How do I know all these prices and greeks and numbers and stuff ? Mostly I just use the OptionBrowser to calculate them. Makes life easier and saves lots of time. I scan all the stocks I care to and rank the time spreads by IV skew and debit to back month ratios and pick the best of the best. Any expiration day is generally a crappy day to initiate a new time spread but lets just include one in here so you can see what I'm working with. I just did a quick scan and picked one I thought was better than the others. Here's the output I got from the OptionBrowser by double-clicking on this particular trade:

Details on PPD Sep//Feb  Call Time Spread using the 22.50 Strike

Buy  1 PPD 03 Feb 22.50 Call (PPD BX-P) at 5.500 (+1.95) for a debit  of $551.95
Sell 1 PPD 02 Sep 22.50 Call (PPD IX-E) at 2.700 (-1.95) for a credit of $268.05
Your net debit for this spread is $283.90
With PPD at 22.23, the odds that it reaches 22.50 in 36 days are 57% (based on delta)
With PPD at 22.23, the odds that it reaches 22.50 in 190 days are 63% (based on delta)

Profit & Loss table in 36 days (at expiration of the front month)

        Front   Back                 Spread(s)
Stock   Month   Month     Implied    Net       Returned Percents
Price   Costs   Worth   Probables    Value     Raw (Annualized)

17.00   0.00    219.17         4%    -64.73    -22.80% (-231.31%)
18.00   0.00    263.59        13%    -20.31     -7.15% (-72.57%)
19.00   0.00    311.93        22%    28.03       9.87% (100.16%)
20.00   0.00    363.99        30%    80.09      28.21% (286.22%)
21.00   0.00    419.57        39%    135.67     47.79% (484.86%)
22.00   0.00    478.48        48%    194.58     68.54% (695.36%)
23.00   51.95   540.49        43%    204.64     72.08% (731.31%)
24.00   151.95  605.40        34%    169.55     59.72% (605.92%)
25.00   251.95  673.01        26%    137.16     48.31% (490.18%)
26.00   351.95  743.13        17%    107.28     37.79% (383.41%)
27.00   451.95  815.58         8%    79.73      28.09% (284.95%)
28.00   551.95  890.19         0%    54.34      19.14% (194.18%)

*** Pricing based on theoretical implieds that change with price & time
*** All calculations use the commissions you have set in OptionBrowser
*** Assumes buying/selling to close rather than exercise & assignment
*** The implied probables are EXPERIMENTAL and should be treated as such

*** Current Implieds:

              ImpVol    Delta   Gamma   Theta   Vega

Back Month:   +86.746   +0.626  +0.027  -0.015  +6.076
Front Month:  +129.548  +0.572  +0.043  -0.050  +2.739
Position Net: -42.802   +0.054  -0.016  +0.036  +3.337

No 2nd opinions were requested so the analysis ends here.

Some of the note-worthy things about this spread are the huge IV skew of almost 43 points. That makes the September option much more expensive for the amount of time you're selling relative to the February option that you're buying. Another thing to note is that this is a September//February time spread and if PPD happens to go to September expiration 36 days away and ends up close to 22.50 you can either buy it back for pennies or let it expire worthless if its below 22.50 by enough that you don't get surprised on expiration day, then you can sell the October option and reduce your debit (increase your potential profit) even further. Ditto November, December and January. Turning to the other implieds you can see that, as of the moment I printed this trade, it was 5 deltas long which is pretty close to neutral. It is short gamma but thats life when you're long theta. The two go hand in hand. This trade is showing you that the theta of -0.05 means that as of today the front month is decaying at $5 per day while the back month is only decaying at $1.50 per day. Overall the spread is gaining $3.50 per day (3.5 pennies times the standard option multiplier of 100). Don't forget that I said theta accelerates as the option approaches expiration. You can also see that this spread is long vega and that the back month benefits twice as much from a rise in the implieds as the short month does.

And let me tell you about diagonal time spreads, but some other time. For now have a look at my CBH trade that I initiated in August. Its a diagonal time spread made up of buying the March $40 call and selling the September $45 call. Read on to see how I've done.

August 2002 Expiration Period. Beginning NetLiq as reported by IB: $1,105. You may also skip to September 2002.

*** NOT SHOWN THIS MONTH: Winner of the financial dummy award for this month has to be USB. Because I had my trading screen setup wrong I thought I was seeing long time spreads AT A CREDIT (a holy grail!). They really weren't at a credit and I was out $20 plus an additional $6 worth of commissions to unwind the inadvertant short time spreads that I created. ***

Notes 8/14:

The diagonal functionality added to the OptionBrowser has already proven itself big time with the CBH trade. Since the initial debit was $3.50 against a $5 vertical spread there is no hedging necessary to the upside. If the shares explode the March03 $40 call will always be worth at least $5 more than the September02 $45 call. Then add in the time value and things look pretty good. Then when you can consider that if the short call expires worthless I can sell October and reduce my debit even more. Ditto November, December, January and Februrary. This is already a killer trade since as of the close today the spread is $5.10 bid. Put another way, this already has a profit of $1.60 or 45% in 9days. Thats an annualized return of over 1,850%. Nice...

On the topic of returns, have a look at the LTRE trade closed today. I discovered this one during a routine OptionBrowser scan on 8/6 and the implieds were looking decent enough to add the proposed trade to my IB TWS screen. While I was sitting there doing other things the implieds on the front month went completely through the roof. This happens often when a company is reporting their earnings. People start buying calls (or puts) that are at or near the money and this drives up the implieds. The more buying interest there is the higher the implieds and the higher the prices go. The implieds on the front month exploded to the point where the debit was $25.00 per spread and I couldn't resist. Of course I modelled the trade with OptionBrowser and knew the profit zone too. Don't get sucked into just any cheap debit, make sure you can have a reasonable chance of making money. In this case its the collapse of the implieds that you look for. When all those disappointed call buyers start selling their calls the market likes to pay them bottom dollar which drives the implieds back down with the price. Summary: $50 for two spreads 9 days ago sold today for $125 or a profit of $75. Thats 150% in 9 days or an obscene 6,000% annualized. Whew !! Heady stuff...

On the topic of cheap debits and implieds, SIVB was also going through the roof. At an average debit of $22.50 per spread, this was going to be my home run of the month. At one point early in the trade I was already at a double when the spread was $50.00 bid but I got greedy and hung in there. Then the shares ran up from 19s to the 22s. Big (relatively) moves aren't nice to time spreads and this collapsed to like $20.00 bid before I added that symbolic hedge of 20 shares. The spread was unlikely to collapse much further, no matter how high the shares (could reasonably) go. At this rate I was losing $2.50 per spread so I added the hedge. Each additional dollar up would bring me a $20 bill or $3.33 per contract and put me back in the plus column. An equally large move back down to the 20something area would cost me a $20 bill per point down on my hedge but would be VERY generously paid back by the widening spread.

An awesome turnaround day today ! The SPX was down about 8 points before soaring 43 points to close +35. The dow and naz put in a similar performance. At it's trough, the dow was down -126 points and then rallied 390 points to close up +260 points. The naz was never down that far - maybe 7 points or so before rocketing northward +65 points and closing just .01 points off its high for the day. All indexes/exchanges NYSE, NASDAQ, SPX, DJIA, whatever started near their lows of the day around 1:30 EST and charged into the close.

I happened to be sitting around for that turnaround today and have already noted that SIVB is a "strong stock" right now. It hasn't fallen very far when the market has tanked and has generally risen nicely on up days. I immediately sold my hedge and bought in two of the short calls at $240 each for a total of $480. At the time the spread was $30 bid so the long options were bid $2.70. This move, at least right now, today, this particular minute, seems to have been somewhat prophetic as SIVB enjoyed a nice pop to the upside and the long calls are now $3.50 bid. This means that I could sell two of them and in effect close out 2 of the 6 time spreads completely for $1.10 ($3.50 - $2.40) or a profit of $87.50 each or 388% (annualize THAT!). I didn't close them though. The steep dive and equally impressive turnaround bodes well for equities tomorrow and since I'm now long 6 septembers and short 4 august calls, I can benefit even further should SIVB continue its advance. Were I ambivelent I would have sold those two calls for a total of $175 and shown a $40 profit overall against the original entire debit of $135 and owned the remaining 4 long time spreads at a credit. Call me greedy but at least right now thats the plan. Expiration is two days away so I want to take it easy and not do anything dumb.

Also released OB V4.0-11(4) to the general public. Notified M.I.O. and customer mailing list of availability.

8/15:

Had to spend the entire day in Denver today and didn't get back until 10 minutes before the close. Although the markets held up with the dow +75 and the ndx +13 and the spx +10 SIVB didn't fare so well. A quick peek at the day chart showed that it was recovering from a low of 22.39 when it was over 23.00 the day before. Not wanting to look a gift horse in the mouth and not wanting to carry 2 purely long calls into X, I sold 2 of them off at $3.40 each. Hindsight teaches that I should have taken the $3.50 yesterday - oh well. 2x $3.40 is still $680 against a total debit of $615. Thats $65 profit in 23 days or 10% or a measly 386% annualized but thats on the WHOLE trade. I still have those other 4 SIVB time spreads included in the total debit price of $615. As of the close they were worth another $30 each which brings the offset to $800 (30% or 477%) had I done them today.

The CBH spread is currently bid $5.60 against an initial debit of $3.50 10 days ago. With the shares trading for $47.85 (46.00 yesterday) the spread is still widening as we move up. This has been quite a run for CBH. 10 days ago they closed around $40.00. No magic on my part. They received an upgrade from merril lynch on 8/13. The technicians would point out the extreme double bottom and classic flying W the chart pattern makes today.

While building my ticker lists by date of who is reporting earnings each day for September expiration I note that we're entering a very quiet period. The end of August and first weeks of September have hardly any recognizable names reporting... Something to ponder in light of whatever the markets do. From here I guess I predict that they'll be primarily news driven and with the markets very low and no reason not to rally they just might. In any event, have to remember to stay delta neutral or maybe just slightly long delta and ready to hedge things to the downside. September X period is 5 weeks long and I doubt there's 100 companies reporting the whole time.

8/16:

Expiration Day !! I bought in all four of the remaining short SIVB Aug02 $20 calls at a cost of $2.65 each and sold off 3 of the long Sep02 $20 calls at $3.00 each. I remain long 1 Sep02 $20 calls. The profit on the 3 fully closed trades is $300 - $265 - $22.50 * 3 = $37.50 against a total debit on three of them of $67.50 or 55%. I left the long call dangling hoping for a nice and violent last hour X day rally. The rally didn't materialize in time for me and not wanting to carry this strictly long call over the weekend I offed it at $3.00 so this one also is $300 - $265 - $22.50 = $12.50 profit. Not stellar but considering all 6 contracts at once we have $340 total credits (2x $100 and 4x $35) less the initial spread debits of $135 (6x 22.50) for 151%. I'll take it.

After the close on X day:

IB reports netliq on this account at $1666 so we're up 50% X to X. I have two open positions at the moment. The HRH spread which is bid at $20 and giving me heartburn since I paid $40 for this Sep//Oct $40 call spread. Currently at $43.74 (-1.02) this issue falls nicely when the dow/spx do and with the spread bid at 5.40 x 5.20 there's still 1.46 in decay at static pricing levels so I'm reluctant to book a loss on this one with so much time value still built in and lots of possibility for a decline in the shares. The other position is the CBH spread currently bid at $560 and doing nicely. The shares are at $46.38 (-1.47) and the spread is at 9.00 x 3.40. I remain bullish on CBH.

I'm feeling generally very fortunate this month. With the notable exception of USB which I'm not counting :) I didn't have to book a single loss. The only draw was RYL. Look at the chart and news since 7/24. Another of those bullish flying Ws. My winners were SIVB, LAVA, AFFX, IRF, ANF, and LTRE. HRH is pending but hopeful and CBH is pending and holding up well. Oh ya, I also lost $6 on the SIVB symbolic hedge but thats what hedges are for. If you make money on a hedge its only because your trade went bad.

September 2002 Expiration Period. Beginning NetLiq as reported by IB: $1,666. You may also skip to October 2002.

8/20:

The drying up of earnings season is making it tough to find a decent timespread this early in the month. Picked up the CBRL spread just to stay sharp. At a $40 debit this one is a triple at the strike at X. Also picked up a perpetual favorite of mine. PPD always runs crazy implieds. Its a short target and really hard to hedge by selling shares and its illiquid to boot yet I have a certain fondness for PPD even though I know its going to get me one day. At a $220 debit the Feb $20 call is as of this moment $315 in-the-money with PPD at 23.15. If it turns profitable earlier I'll take it but come November expiration if I still have the position I can sell either 20 or 22.50 strikes as well as the December or January months. The leftover HRH spread has widened to $30 with HRH at 43.00 (-0.30) and the CBH spread is hanging in there at $560 bid with CBH at 45.85 (-0.60).

8/22:

Still slim pickins out there. Added the MRVL trade today which is better than a double at many prices around the strike. Also added the SIAL trade which is a double across $5 worth of expiration closes and more than a triple-and-a-half at the strike (265%). I now have half a dozen trades going and have managed to remain pretty closed to neutral by being just 8 deltas long across all the trades. All trades are holding up well. In fact I'm sitting here afterhours and watching MRVL pop from under 19 to 20.22. Checking the earnings news I see that they reported a narrower loss than expected and beat the street by 1 penny.

8/23:

In the premarket MRVL is +3.00 in the $22 area and CNBC is reporting that they beat by 2 pennies not one. Not sure what all the excitement is about but as soon as I achieved full consciousness I bought in the short MRVL call at 3.10 and let the long side ride until the afternoon. Sold it for $4.40. Its been a down day all day and I was hoping for some buying action in the markets to help boost MRVL further. No luck there. I figure that if the markets haven't rallied by 230 est on a Friday they probably won't. After the close it turns out that they didn't. Everybody's moving in the right direction:

HRH is 42.50 (-0.38) and 4.20x4.10 ... Although the entire spread has fallen $1 since the 16th when HRH was 43.74 and 5.40x5.20 they've propped up the implieds on the front month. Getting less ITM and closer to ATM the spread should widen. Several times over the last few days I've seen this thing bid at $40 so it has widened considerably - they just felt like playing with the implieds going into the weekend. Raising the prices a little prevents anybody from wanting to buy them and thus reducing the MM's gamma exposure. They should fall nicely on Monday. CBH is 45.42 (-0.94) and at 8.00x1.90 the spread is bid $610. The vols have actually inverted on CBH with the back month (03 Mar) pricier than the front month at 34x31. CBRL is 26.94 (-0.26) and at 1.30x1.00 the spread is bid $30. Its just drifting around with the markets. Next comes PPD at 21.95 (-0.86) and with the spread sitting at 5.70x4.10 its only bid $160. This trade is going to go on forever and knowing PPD the wacked out implieds are normal. Last on my list is SIAL who fell nicely down to ATM at 50.60 (-1.91) and with the spread bid at $25 (2.85 x 2.50) and IVs of 41x48 this one looks like its being propped up as well. All in all, a good week considering how difficult its been to find the spreads.

8/26:

Didn't do anything much today. Picked up the HCA long term spread. Was watching it most of the day at $40 offered and when the implieds momentarily dipped it down to $30 offer I picked it up. Mostly because I was bored to tears and felt the need to do something, anything, and try to avoid being stupid. Hanging on until expiration means sitting on the trade for months and months so its one of those piggy bank trades. At 5.20x4.90 = $30 this is more than a home run (north of 300%) at the strike at X. HRH has rallied too much to crash the implieds as I thought it would but the exact opposite happened with CBH. At 870x245 (CBH 46.40 +0.98) the spread is now bid at $625.

8/27:

Gosh... Whoever coined the phrase "dog days of summer" wasn't trying to find any timespreads coming into September X. Picked up a DJX spread just to capture some decay for the month in case the market stays quiet.

8/28:

Closed out the CBH spread today. Its been up a few points and down a few points -- mostly down -- these last few days and the spread hasn't done alot so unless I want to hang around with a 350 debit at risk of a meltdown in the shares I figured I'd better bail. Also picked up a SMTC put spread on the cheap by legging into it over the course of the day. Noticed on CNBC in the premarket that SMTC was getting whacked down over $3 so as soon as I could get my trading app running I bought the October $15 put for 2.45. By the afternoon the September $15 put was bid at 2.25 so I sold one to complete the spread which is bid $40 for a double already. Of course at that very moment I could have simply sold the long put and made $40 in a day but at a $20 debit this thing is almost 700% at the strike at X. The wait throughout the day really proves that I'm not cutout for long gamma trades as I was a basket-case all day long when holding a simple long put. On the other trades; HRH has fallen nicely to 41.49 and the spread is bid $40 for a break-even but at 340x300 there's lots of decay left in there. Likewise CBRL has fallen nicely to 25.51 and the spread is bid $55 at 175x120 or 37% to the good side of the sheet. Since this is a $25 put spread its still OTM and that entire 120 is up for grabs in decay. SIAL has tanked -1.75 to land at 49.19 and with 300x275 or bid $25 this spread is still underwater. Its only ITM by 81 cents so there's still 2.00 or so of decay in there at static pricing levels. PPD at 20.80 (-1.06) is still way underwater and not expected to change much until November approaches. Keep in mind this is the 20.00//22.50 diagonal done at 220 and at 510x340 that 340 is now pure decay-bait. The HCA (go ahead and laugh!) is offered at 40 and bid at $10 already. That DJX spread was neutral at dow 8900 and skewed against me. Now with dow 8700 the implieds have flipped to 28x26 and are skewed in my favor. The spread is still underwater and expected to remain so for a week or two yet since the market was very wide when I bought the spread.

8/29:

Quiet day today. Saw that XLNX was trying to move up ahead of earnings but an $85 debit was way too much to pay. Tried to leg into it and it looked good for awhile but the implieds flipped (october higher than september) and the stock got soft. Sold the call off for a $5 profit which nets $3 after commissions - think I'll go and buy a happy meal.

8/31:

By now any interested readers should be getting the idea that I hate being long gamma for very long. My plan going into today was to see if I could catch hold of some late day buying -- mostly because "everybody" was predicting late day selling. Its 90 minutes to the close and I tried to leg into an OEX 490/495/500 call fly for a $0 debit. I bought the wings and immediately placed my order to sell the body (times 2, thats how call or put flys work, iron flies are different). I only needed a few points on the OEX to make the fly a reality but instead the indexes all drifted lower as soon as my order went in and now I'm stuck holding two OTM calls on the OEX over a long weekend and eating all of that decay. Only next week will tell how painful this move will turn out to be. As of the close, those prognosticating selling turned out to be right after all and I'm out $200 were I to close the thing down now. Today's subtitle should read: Programmer shoots self in foot !

9/3:

Mugged! By the time I got out of those OEX calls I was down 61% on one and 59% on the other. Didn't help that in my panic instead of cancelling the order to sell the flies, a market sell order got transmitted instead leaving me short the 595. That cost me $25 by the time I was cleaned up. All in all, a painful experience. Blew my foot clean off. Such legging exercises are best left for the AM when you suspect a strong, if temporary move, either that or at the very close when it seems like the day held up well enough for a little follow through the next day. Today was probably the worst day of the year to attempt this - the nikkei hit a 20 year low and the dow was down -350 odd points by the end of the day. The talking heads were all saying that september is historically the weakest month of the year for stocks and I guess it sure started out that way.

9/4:

Nothing much happening today. I noticed at the open that BGEN was looking strong and wanted to leg into a spread so I bought the OTM OCT $35 call for $2.00 and kept an eye on the September $35. Even with the strong move on BGEN (+1.50 and more) nobody got interested enough in the Sep $35's to make it a good spread. Closed my position an hour before the close at $2.50. A last minute scan turn up KLAC $30 put spread at a debit of $1.05. Not a super spread but a double across several strikes and the news today is full of warnings not to get excited about the chips. Since "everybody knows" that september is the worst month of the year I've been eyeing those cubes. They held up with the rest of the market so I BOT the QQQ Sep $21 call and the $25 call for a total debit of 265 and immediately placed an order to sell two Sep $23 calls for 135. Since ATM options have a delta of .50 and the $23s are bid 90 cents I need 45 more cents or a 90 cent rally in the cubes to pull this off.

9/5:

Mugged again. At this point in time one might gather that my accumen at calling specific market directions is less than ideal. The numbers speak for themselves. Also tried to leg into a put fly on the cubes but nobody got excited about the body puts so I flipped a $24 put from 200 to 215 and pocketed the 7.5% and was happy to get it. Also picked up the adrx put spread. Those two failed attempts at a free fly are going to cost me. There are other ways to get a free fly but that requires higher margin - we'll look at those in a few months (if this account survives my stupidity :)

9/6:

Picked up the MXIM call spread today. It was up strongly near $30 in the face of a brokerage downgrade. That kind of confusion bodes well for an issue to remain mostly flat for a time.

9/10:

Deals are starting to show themselves everywhere again. Picked up the AIG spread for $140. An easy double anywhere near the strike. HRH remains my problem child being so far ITM but all other spreads are doing nicely. The DJX was causing me some heartburn but the recent rally in the DOW has made the pain much more bearable.

9/11:

Got out of CBRL today ahead of earnings for flat. My execution here was pretty crappy but thats the cost of trying to get cute. I saw CBRL drop rapidly from the 25.50 area down to 24.50 pretty quick so I bought back the short put for 135 hoping to leg out of the spread if CBRL continued to tank. Not only did it not continue but it almost immediately reversed itself and headed back toward 25. Since I was already committed I just bailed the trade for even. Also just got my weekly "Zacks Profit From The Pros" mail and ran the list of "Stocks to Sell Now" through the OptionBrowser. It went off and found me the CL spread for $30. Another piggy bank trade. When I caught HCA offered at $30 it was bid at $0. Over the past few days I have routlinely caught it bid at $20 and offered at $50 or $60. These long term decay plays have awesome potential and hardly any risk at all due to the tiny debits involved.

Also released a new version of the OptionBrowser containing a couple bugfixes.

9/16:

Closed out SIAL for a double. Closed out AIG for 25% (still 300% annualized on a 12 month basis). Took the hit on HRH figuring that a $20 bill is better than nothing and an exercise. I remain ITM on DJX and SMTC but SMTC with a $20 debit is currently bid at $0 so this one will probably go to exercise if there's no rally in the shares forthcoming. DJX cannot be exercised until Friday because its a Euro style option so no worries there. MXIM, KLAC and ADRX are all comfortably OTM -- MXIM too far OTM at the moment. I'm out of all in danger positions and the others can ride for awhile since today is Yom Kippur and there's not alot going on to move the markets.

9/17:

Closed out MXIM for a -30 loss. Its so far OTM and the iraq induced rally fizzled so fast I didn't want to keep holding it. ADRX worked out much better at 50%. KLAC is hovering tantalizingly close to the strike and sitting at 50-60% profit. I think I'm going to try something new in the coming months, and I started it with KLAC. In the final hour of trading KLAC fell quite hard -- along with everybody else -- and went ITM on me by almost a buck so I bought back the short side immediately for 1.40. At this point I would usually sell off the long side, currently bid at 3.00, and book the 50% profit but this time what I did was set a "sell stop" to unload the long put if it trades to 2.70. This will lock in 23-24% or so if the shares come back but if something happens and they continue their decline the profit widens. Might make a handy new rule of thumb: If you can close out for a 50% gain and the option goes ITM, buy back the short side and set a stop for 25% profit but let it run and see where it goes. Of course this requires that you keep a reserve of cash handy for just such an eventuality. What you want to avoid is the situation where you can be whipsawed from a profit to a loss.

9/18:

Got stopped out of KLAC today at 23% profit. With the exception of the DJX & SMTC spreads that are going to die horribly, all September spreads are now off the table. Performance this month was dismal and looking like its going to come in around 1350. One needs only look at the -450 or so frittered away in the ill fated attempts at zero debit flys to see that even with the bad spreads we would have had an up month of 8% so so instead of the -19% it looks like we're going to book. Don't dwell on the loss as those are inevitable. What I will be dwelling on is how those losses could be reduced or minimized and this month the answer is clear. Stay away from directional bets as much as possible! They'll always get you in trouble.

Added the KMI spread at the open for 45. It is currently bid 40, offered 75. Wow. Nice execution on that one.

9/19:

Programmer mugs himself then throws the body under a bus. Of anything I've written, today's summary will probably be the most important. Its not everyday that somebody teaches you, the reader, something for free and asks absolutely nothing in return. Here are some of the things I've learned over the past trading period. Obvious in retrospect, they will still require ongoing discipline and periodic reminders to be sure, but here they are:

1) Never take a pure directional bet unless you are prepared to sit right there and monitor it, especially never let one go overnight. Just my two attempts alone at trying to leg into some zero debit flys have done -450 worth of damage to my account.

2) Never let your spread run too far ITM that you can't buy it back. Partly a problem of the small capitalization that I'm using and partly a failure of discipline, I was over-extended last month with too many irons in the fire and when things got out of hand there was nothing I could do about it until my good spreads made enough profit. While the good spreads were working great the bad ones were working worse. Be quick to close out an ITM spread. Witness the SMTC put spread that I allowed to run $5 ITM on a $15 spread ! The debit was "only" $20 but today I sit here with that $20 bill gone forever and angry about it. There's a sidebar to this one as well: When a spread moves violently in your favor AND IF AND ONLY IF you have a profit on it, buy in the short side, set a stop on the long side, mental if you have to, to preserve some profit and let the long side run.

3) Avoid the indexes like the plague. Although history has shown that most times you will profit because over time they generally go nowhere with a slight upwards bias you can be subjected to very violent moves. Witness the 900 point drop I've taken on the dow spreads from 8900 to the 8000 level. While single issues can make just as violent a move it is my belief that they are much less prone to do so. As above, the AND IF AND ONLY IF part should be noted. Already a loser, I bought in my short DJX put and let the long side run -- backwards -- good grief ! At least I had the mental stop set to preserve the loss and not let it get any worse. Another -200 of my account down the tubes never to return.

4) Be quick to take the loss ! If you ever find yourself hoping for a turnaround then the trade is no good and you should hit the EJECT button and move on.

5) Be CHEAP !! If you ever find yourself thinking "only $20" then go to the nearest downtown and give a bum $20 bucks. You'll feel better that way and help somebody else who needs it rather than the anonymous entity of the markets that swallowed your $20 bill without so much as a thank you.

Tomorrow I will officially report a huge loss and while my account still remains up since the start of the great experiment I have some work to do to get back to where I was. I am more experienced now and like the quote says "Experience is what you get when you didn't get what you wanted". To you, my friends, I give you this experience for free.

Now that the crying is over its time to go shopping. After closing out the ill fated DJX and SMTC spreads I added AIG and FITB to the stable. I could have simply let everything against me exercise but wanted to put this behind me and get started on doing things right. The KMI spread is already bid at 60 for a 25% profit over night. This is doing it right. The AIG spread bought not an hour ago at 95 is currently offered at 105. This is also doing it right. FITB has yet to get with the program. I also have in my possession the PPD diagonal which is sitting at 220 bid so I'm exactly flat on that one with the spread remaining OTM and 275/300 market on the short side yet to decay. This is a feb//nov spread so decay is a long time coming but decay is on my side here and if PPD behaves this one could be a real winner. Lets also not forget the other piggy bank trades of HCA and CL that are feb//jan spreads. The HCA spread is bid 10, offered 60 so its still underwater for me but selling for twice what I paid for it. CL is currently bid 30 ask 60 so its already flat and also selling for twice what I paid.

This should be enough for today. As of monday a whole new batch of October options will become available and with earnings season getting underway there should be lots of good volatility trades on the way. Unless something extraordinary presents itself tomorrow I plan on doing nothing except watching the triple witching expiration from afar.

9/20:

Okay Okay. I have proven that I have all the discipline of a jelly fish and one day after spelling out rule #2 I've broken it. Today AIG plunged down to 55.50 on heavy volume (75% of average volume 33% (90 minutes or so) into the day) where I bought in the short october put for 3.30 and remain long the november put and I offer the following:

- The plunge produced whats called a "double bottom break down" by the techies, meaning that AIG broke through what should have been double bottom support.

- Earlier in the month I was trading the 60 spread which was ATM at the time, here at the end of the month 60 is very ITM and 55 was OTM by several points originally and it came very close to ATM (at 55.39 low of the day).

- Looking at a monthly chart AIG has been trending steadily down on increasing volume - especially over the last 6 weeks or so.

- Looking at a ten day chart I can see that it sold off on volume LAST friday as well. Selling program in place ?

- In fact, after the close the final volume figures were known: 10,475,600 against an average volume of 7,095,090 over the last few months so that puts us at 148% of the average volume(as reported by yahoo).

Final liq reported by IB was 1194. Down bad on the last month but still ahead some. Better figure this thing out quick and avoid those flys like they carry the West Nile virus.

October 2002 Expiration Period. Beginning NetLiq as reported by IB: $1,194. You may also skip to November 2002.

9/24:

Closed out the AIG long put. Even with the dow & Sp500 down bunches over the last few days this issue seems reluctant to fall through the mid 54s and every down day that goes by increases the chance of an even mild oversold rally which would kill the put quickly. I don't have the guts to just sit there and watch a long position evaporate so best to just move on.

9/27:

Bot in the short HCA call at 540 today when HCA was bouncing its head off of 48.00. DJX currently down 245 and the spoos are down 22 yet this thing continues to want to advance. When I got in the office and read about the dividend I decided to close the short half of the spread and see if the long half would run some for me -- at 3 points ITM I didn't want to let this one get so far away I couldn't close it out.

9/30:

Today marks the close of one of theugliest quarters in the last 50 years. Didn't do much of anything today. The KMI spread sat teasing me with an easy double inside the spread but the market makers didn't want to play so I left it on. HCA continues to impress. On a day when the DJ was down -240 at one point and closed at -100+ HCA managed a positive close at +50 cents or so to 47.61. A nice performance when the indexes are spending days at a time in the red big and the DJ has curbs in for what seems like a couple days straight. To add more to my bullish outlook for HCA I noticed the following: The P/C ratio on HCA is 0.241 (calls outnumber puts 3:1) and the P/C Volume ratio today alone was 0.016 (20 puts traded and 1280 calls traded). Seems I am trading with the herd on this one but who knows... The trend is your friend and all that... The chart on HCA sure looks good. Tenet reports in a couple of days and what it does, HCA will do until it reports on the 21st.

I have this data available to me and hope to have more in the future. I am enhancing a test copy of OB to track data from all scans and remember this stuff on a daily basis. Later I'll add some code to analyze it all so we can see whats moving.

10/1:

Closed out the PPD trade this morning for a $10 bill. There are rumblings about accounting practices, etc., and if that picks up steam the stock will tank.

10/2:

Nice day today. Tenet Health Care (THC) reported happy numbers and raised guidance and sent HCA upto 49.00 on the news allowing me to leg out of the other half of the spread at 640 or more than a triple. I also happened to be sitting there when KMI started diving with the rest of the market and legged out of it for 225&330 or +105 which is easily more than a double. At this time I'm down to the FITB spread and the CL spread and will be looking for something else over the next couple of days. CL is feb//jan so no worries there but FITB is front month and sitting at 61.70 -2.40 and another day like today will send it ITM. Its only bid 70 or 80 depending on when you look so I'm either underwater a little or flat. Another drop will pop the implieds and send me further underwater so it will be touch and go if I decide to simply go long the put.

10/3:

Warnings from bank of new york and comerica put a real damper on the banking sector and FITB traded down to as low as 58.79 on heavier than average volume. Its about 3:01 EST as I write this note to myself and FITB has traded 167% of its average volume and about 84% of the day has elapsed. The drop also took out my mental buy stop of the short $60 put at $2.70. For the moment I remain long the put given the recent warnings and fear in the banking sector along with the fact that we're coming into Friday in the hight of warning season and I'm thinking that there won't be many people making big bets on this Thursday afternoon or tomorrow and any rallies will be met with selling. In fact the dow has dropped from +50 to -11 in the minutes I've taking to write this note. Time is now 3:23 EST. FITB is trading at 59.50 -2.20 with the long put b/a 360/380. Just to update this note after the close FITB closed at 59.10 -2.60 on strong volume of 207% of normal. It was on track to do about 199% of normal so you can see that the selling accelerated into the close. That missing 8% accounts for about 250,000 shares so at this point I'm not sure how much to read into the prospects for the morning. I wasn't around to see the b/a on the put but the last sale was 400 so I'll assume its 390/410.

10/4:

Some decent unemployment data came out today that had the dow +50 or so in the early going but within the hour it was -75 and even more later. FITB also cooperated nicely and I sold the long put for 540 or more than a triple. Nothing left in the stable but the feb//jan CL trade - need to go shopping - picked up the MMM $110 nov//oct put spread for a debit of 240. The debit was a bit more than I like but I think its a good spread for alot of reasons: Its been very reluctant to break down below 110 for most of this calendar year and just now its sitting at 114.25 -0.77 with the dow down close to 200 points. The spread has good decay (almost $6), good vega (6+) and even a little vol skew (-2). If we do trade down a little the implieds will rally and the spread will benefit from the boost. If we trade down alot then I'll have chance at pulling off another long play because I consider 110 to be some fairly significant support. Just yesterday MMM reaffirmed its 3rd quarter numbers so the chances for a surprise downturn are minimized. Coupling all of that good news with the generally crappy conditions in the market leads me to believe MMM will hang out in the sweet spot for quite awhile. All things considered, its been an awesome week.

10/8:

Picked up the ABT nov//oct 37.50 put spread for 90 today. Earnings discussion is tomorrow. A nice rally seems to have developed on hopes that the longshoreman lockout going on out west will end soon. Funny how that causes a pop in the retailers on the same day that the numbers come out and show that retail spending was really soft last month. Just goes to show that directional bias is a good thing to be without if you can. In any event I find the rally somewhat welcome as MMM was getting close to ATM and ABT was started very close to ATM already. Both are now comfortably out of early exercise territory.

10/9:

Dow down big today at -215 to close at 7286 or so. The talking heads on CNBC were saying that a close below 7400 would spell trouble so one has to wonder what they think of a close under 7300 as well. Last night I heard on the news that the western ports were back in business and predicted a big rally -- displaying my directional prowess again -- good thing I didn't bet on it. MMM is still hovering in the sweet spot at 112.32 and ABT reported in line and that they layed off a bunch of people and the stock popped upto 40.30 +0.83. Was much higher at 41.85 earlier in the day and I'm thinking (hoping?) that this was due to the naturally negative beta of drug stocks & such as a safe haven.

10/10:

Nice rally going on today. Its 230 est and the dow is +185, spx +20, oex +9.55, ndx +38.60. Talking heads are crediting the huge drop in unemployment claims of 385k or so when 420 was expected and in the same sentence say not to read anything into these numbers as they are seasonal and expect next week to be much higher. Also several companies blew out earnings such as AET, YHOO, COST, etc plus we were already way oversold. ABT is at least for today proving its negative beta as its down -0.50 at this moment with a party going on everywhere else. Not that my directional calls are worth a nickel but I expect the rally to fizzle out shortly with most traders not wanting to go long into another weekend. This will be a long weekend for some as Monday is Columbus day in the US. GE has been downgraded by lots of brokers and could cause a surprise with their earnings tomorrow. Looking ahead to next week - expiration week - there is absolutely no big economic reports due until midweek and a slew of companies reporting that could pull the markets either way.

10/15:

Been away from my notes for awhile... When I last wrote I predicted that we'd watch the rally fizzle out immediately. A sure buy signal to those who know me from my writing! The Dow is up almost 1000 points since 10/9 and people are saying its for real. Then they point to the seasonal bias of October/November being the bottom of the year for the markets then we get some earnings surprises and before you know it we have a week long rally on our hands. All the armor has been completely shot off my MMM put spread and I rolled into a vertical by offing the short October 110 put and shorting the November 105 put. This allows me to stay bearish on MMM in the face of all sanity. The armor is likewise gone from ABT. As a hedge to this rally I picked up 3x the XLK November 11 calls at the open this AM. XLK is a technology ETF. Those are up +15 each on the day as far as I can tell which helped some against the damage inflicted by MMM rising to 125.

10/16:

The market reversed itself last night after INTC disappointed the analysts and when I review my account I figure I should've just taken the last couple weeks off. Rather than be +30% where I was before MMM & ABT I am now roughly flat with a ton of risk. I learned something else today - my decision making abilities in the heat of battle really stink. I just happened to go and review the CL trade done on 9/11 and the thing was bid at 45 or a 50% gain. Its been all over the map and I've never really cared about it since it has so much time to go but this trade was done something like 5 weeks ago and would annualize nicely were I to close it now. This has me thinking that I personally should look to longer term strategies and remove all of that heat of the battle psychology. I'm now in the position of "hoping" and in disgust went back to mostly cash although I remain long the MMM november put and the ABT november PUT along with the CL spread. The techies tell you that gaps must be filled and the recent rally left a few and I'm "hoping" (there's that word again) that we fill those gaps as well as the gap I created in my account.

10/17:

The final capitulation day for me. Can't fight the trend and all that so I removed the put positions on MMM and ABT and went shopping for some more long term spreads. Forget the hope. When the market reacts so hugely in either direction any long bets are just a gamble and I've proven my directional skills over and over. The lesson of CL should be a strong one for me. Each time I've tried to ride the wave I drowned but this trade has just plodded along 4-6 points OTM for a month and still collects pennies everyday. Yesterday CL was down over a point and the spread was worth a 50% gain and today its up over a point and still worth a 50% gain.

Picked up 5 feb//jan spreads on the downtrodden AEP utility for a number of reasons. 1) the tiny debit of $20 each, 2) a little vol skew of 10 points always helps, 3) its profitable anywhere from 16 to 25 or so and from looking at a chart it sure doesn't look like its going to head north anytime soon, 4) this spread is worth about 600% at the strike at X and 300% if the stocks goes absolutely nowhere. Its unlikely I'll hold it for this long but its always good to do a little modelling. Lastly I hedged the trade with some bear delta by purchasing the november 12.50 put for $60 just incase the stock melts down completely.

November 2002 Expiration Period. Beginning NetLiq as reported by IB: $1,097. You may also skip to December 2002.

10/22:

AEP rallied above the $22 mark so I bought in 1 of the short calls leaving me long 5 febs, short 4 januarys along with the long put for enron protection if AEP happens to completely fall apart in November.

10/24:

AEP has been acting really strong these last few days. Its run up into the 22s on heavy volume a couple of times and then sags into the close but always puts in a good showing compared to the rest of the market. It was holding positive all day long today until the dow dipped -170 points where AEP was finally dragged into the red. About 2 minutes before the close the dow is -191 and AEP is off 6 cents. It tagged a high of 22.45 earlier in the day. A final note, some late day buying pushed AEP back into the green at 21.85 +0.07. They report earnings tomorrow and given whats been happening in the energy sector lately its encouraging to see such optimism.

10/25:

AEP reported some good numbers of $1.21 vs expectations of $1.05 as well as reaffirming their full year outlook and the stock enjoyed a nice pop up to close at 24.65 (+2.78).

10/28:

Sold off one of the long calls for 700 which basically means I now own 4 of these spreads at a $110 credit. At 26.41 and with the bid on the spread sitting at 700/730 it would actually COST me $30 each to offset them. At this point the 68% profit is already built-in and ultimately the spreads can only cost me a few exercises plus I can always hope that AEP calms down and allows the spreads to also turn a profit for me.

11/8:

Entered into 4x the TDS feb//jan $45 put spreads today at $25 each or a total debit of $100. TDS is trading in the 51 area which means the stock has fall roughly 12% to get ATM. Also hedged a little to the upside by purchasing the december $60 call. These trades were proving more and more difficult to pull off. The offer on the spread was like 290/265. Clicking the buy sides (one at a time) brought instant gratification while clicking the sell sides took 30 seconds, then a minute, then two minutes, then two or three minutes followed by an immediate widening of the offer to 290/240. I would have bought more had they allowed it. A debit//back month ratio of $25//290 is roughly 8% and ridiculously cheap. Even factoring in the upside hedge brings me to a debit of $42.50 per spread or a DBM of roughly 14%. Still cheap by any standards. I also put in a standing (GTC) order to buy in one of the short puts if it trades to 4.00.

I've also been thinking about those 4 dead spreads on AEP. It occurs to me that they need not be dead -- they can be used as a hedge on other AEP spreads. For example, the $25 put spread, if I bought some of those and they fell ITM (a bad thing with spreads) they would be heading for the sweet spot on the remaining $20 call spreads. The debits for the 25's are too high at the moment but it doesn't hurt to keep an eye on them. Likewise the 30's.

11/13:

While doing something else today I managed to catch the AEP feb//jan $30 call spreads offered at $20. Thats a DBM ratio of 20% but the premium is worth it since this trade has a built in hedge in the form of the $20 call spreads. With AEP at $26 the loss range is VERY narrow. A decent drop into the low 20's will kill the $30 spreads but breath some life into the $20s. A run upto the (very!) low $30s will be good for the $30 spreads. Only an explosion in the shares would bring disaster to the trade. As always, I have a GTC order in place to buy in one of the short calls if it trades to 2.00, the thinking with these standing orders is that if the underlying moves far enough fast enough then there is some momentum there so you buy in some of the short side and let the long side run a little. This increases the debit required far beyond sanity but at the moment I can't think of another way to catch some of the move with an equal amount of delta for LESS risk.

A noteworthy milestone on the CL trade. I saw it bid at 265/205 for several minutes today or $60 or a 100% gain since 9/11. Call it two months for 600% annualized. Just reenforces the fact that you don't need sexy high flying companies to make money.

11/15:

Happy Expiration Day !! Alot of decent action took place in the last couple of days. NetLiq reported exactly at the close today was 1330 or an increase of 21% on the month. Wow. Those AEP spreads that I just bought two days ago have not only turned positive but have turned *profitable* by 25% which is practically unheard of in a time spread. Some patience is usually required as most time spreads with a teensy debit start out with a negative bid. These not only turned positive but I could actually off them for a fast 25% gain. Not too shabby for such a low octane spread. The TDS spreads entered into exactly one week ago have also turned a positive bid. The CL trade has been hovering between $50 and $60 bid for the last couple of days. All in all a very profitable and ultra low stress month.

A couple of the lessons that I've learned over the past trading period(s) are; 1) I like low stress trading. The heat of battle is not for me. Another very important lesson is that 2) once you have a free trade in place don't just let it sit there, use it as a hedge against another trade! I need to make a habit out of always trying to get more leverage out of a trade already in place.

December 2002 Expiration Period. Beginning NetLiq as reported by IB: $1,330. You may also skip to January 2003.

12/9:

Writing the 11/25 entry way after the fact. On that particular day I was burying my father and have been totally out of touch with what the markets were doing. Apparently AEP headed north for Thanksgiving and triggered one of my buy-stops. Now that I'm back in action AEP has pulled off this short term high significantly leaving me long x5 and short x4 in the feb//jan $30 calls. Just getting back into trading the best thing to do IMO is just sit tight and see where things want to go. CL and TDS spreads seem to be holding up OK.

12/16:

Maybe the start of the santa claus rally. DJ,SPX,NAZ all up anywhere from 2.24% to 2.53%... AEP is +4.28% on the day. In retrospect, having those automatic buy stops in place while I was at the funeral was a dumb idea because the trend in AEP didn't continue. It hit into the $31 area and my buy stop kicked in, then the issues promptly fell back to the $25 area all while I was away. This one will probably bite me on the butt sometime soon although its encouraging to see it up +4% on a 2% day. AEP is currently at 26.74 and I'm (now) unabashedly long AEP at a 5:4 ratio. I am also bearish on TDS and CL so its nice to see those issues down on such a strong up day.

12/18:

So much for the Santa rally... after a nice day on the 16th, things are down enough to erase all of that gain and then some. AEP has remained strong and roughly an hour before the close is sitting at 27.61. The TDS spread is sitting at 180//125 or $55. Considering that this spread was initiated for $42.50 each it is up 29% after 6 weeks or 176% annualized conservatively. At 155//85, the CL spread is $70. Purchased at $30, this spread is up 133%. This is all very good news since I'll be needing it to bail out the automated buy idea that put me long the AEP call.

12/20:

Not alot has changed over the last couple of days. Its been a very quiet month for me with only one (automated) trade taking place. As I wrote before I am pretty sure thats gonna cost me at some point in the future. Even with that one against me I managed to pick up a couple of bucks this month and will report a gain $21 or 1.57% on the month. On an annual basis that is something north of 18%. Not bad (and possibly quite lucky) for a totally ignored options account.

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January 2003 Expiration Period. Beginning NetLiq as reported by IB: $1,351. You may also skip to February 2003.

1/2/2003:

Closed out the TDS today for $100 each. I remain net long on AEP given that the market has been down sharply into Christmas and a nice rally going on today I'm hoping that the rally will extend itself a day or three and that AEP can participate. Also closed out the single CL trade as it was also a put spread and sitting at +100%. This was the original proof of concept trade so many months ago. I think we'll rally for the next few sessions after so much end of year selling.

1/6/2003:

A nice rally in the market to the tune of +2% today saw the AEP shares rally +4% as well. I managed to buy in the remaining 4 shorts at 85 cents and sell of the 5 longs at 1.45. Were I not lopsided at +5 vs -4 profit would have been a triple or 200% - as it was I was ecstatic to close the position for a total net of +385 and subtracting out the total net paid of 315 (5x20 = 100 on the original plus the 215 automated buy-back when I was out of town) means a profit of 385 - 315 = 70 or 70 / 315 = 22%.

1/21/2003:

Writing on the first trading day after January X instead of the prior Friday and for a reason. Going into January X I was still long the 4 AEP Feb//Jan $20 call spreads and unable to get out of them so I was forced to go through exercise. Going into the weekend I had a cash balance of $1,470.47 in addition to the spreads that had already done their duty. I could never find a way out of them for less than $10 each and didn't want to spend the money. Here's what happened instead. The short Jan $20 calls were exercised because AEP closed at 26.81. What I found in my statement was that I now had a cash balance of $9,470.47 and was now short 400 shares of AEP. They delivered the full $8,000 for the exercise and didn't even charge a commision. I also had a stock value of -$10,724 reflecting the short 400 shares at 26.81. That left a deficit of $2,724. Taking my cash balance into the equation the real deficit was $1470 - $2724 = -$1254. The 4 long feb calls were worth (bid) just around parity and fluctuating a few pennies on either side as the stock moved a few pennies either way. For example with the stock at 27.02 the calls were worth $7.10 but with the stock at 26.95 the calls were worth $6.90. So taking the long calls into account I was about flat but IB doesn't count those positions as equity so as far as they were concerned my margin was in trouble to the tune of over ten thousand dollars. Their rules state that you have the first 10 minutes of the first trading day after an exercise to handle it your way, after those 10 minutes are up they handle it their way, via liquidating you. I was figuring that after everything got cleaned up I would be sitting at $1462.47 (or $8 bucks total costs to repurchase the stock and sell the calls). Since I was in margin trouble IB would not let me initiate ANY trades whatsoever so I had to let them liquidate me which cost me $10.77 instead of the $8. The extra couple bucks was due to slippage. Could have worked out in my favor if the stock was priced "right" relative to the calls sold. Either way it was relatively painless and left me with a cash balance of $1459.77 and that will be used as the starting figure for the month. This is even more accurate than the usual NetLiq's since those are calculated by averaging the bid//ask spread to value the positions rather than using the -ASK for short positions and the +BID for long positions.

February 2003 Expiration Period. Beginning NetLiq as reported by IB: $1,459. You may also skip to March 2003.

1/22/2003:

Picked up the FO spreads today for $90 each at 380//290. Today FO reported record quarter and full year results and met the street as well as saying they see a good 2003. Looking at the charts support at $45 has been tested 4 times in the last seven months including today's low of 45.50 and hasn't broken down through that level to any meaningful extent -- it might have spent a day or two at 44.50 or something. The stock closed the day at 46.00 +0.44 on a day when the dow closed -128 and the SPX closed down -9.24...A debit//back month ratio of 24% puts this trade higher than I like however I think its justified by the fact that the spread is NOT for consecutive months. If I'm still in the trade after June X, I can conceivably sell the July and then the August months to lower the overall debit required. Looking to www.ivolatility.com (great site, btw) I see that with the implieds at 31 and a low//high of 15 and 50ish they are in the midpoint of their typical range. Falling IVs will hurt me and rising IVs will be beneficial. If they reported earnings today I imagine the IV will spike, if its going to, sometime leading upto earnings reported in April.

1/29/03:

Picked up the FO JUN $40p//$50c strangle today when FO gapped down on the open to 43.35 completely taking out all of the support that it had around the 44.50 level. Have now completely reversed myself from delta neutral to loooong gamma. If I don't get movement then I expect the time spreads to pay for the strangle but big movement will also show some benefit. At 255 the put was by far the most expensive leg and if I'm going to reverse my outlook I might as well add the call for another 65. I could have just bought in one of the short puts but at 450 I felt better with the strangle. Makes an interesting W shape when modelled out to june X. With a 40% rise in the implied this position only loses between 35-40. With a 20% rise in the implieds it loses 32-42 and with flat implieds I'm gonna get killed unless we X right in the vicinity of 45 (say 43-47). FO closed the day at 42.85 which is down -0.99 and well below any support.

March 2003 Expiration Period. Beginning NetLiq as reported by IB: $1,388. You may also skip to April 2003.

2/25/03:

Been away from this page for awhile. Nothing much happening here. Liq is down somewhat from last month but thats no biggie as you wait for these trades to decay. As I write today FO is sitting at 43.06. The offer on the spreads is $1.20 and the bid has been fluctuating anywhere from $60 to $90 depending on when you look. Iraq is still a huge problem for the markets making it difficult to get any traction and the bargain hunters are propping things up every time the dow gets down around 7700-7800.

3/4/03:

Still busy coding V6. Have V5 on the launch pad and am readying for release. Just had to pop in and journal the fact that the dow is not sitting just above its october lows with a close of 7704. The actual low close in october was 75xx so this is where the bulls and bargain hunters have their chance to push it back up a little bit. Also wanted to note that FO put in a fresh 52 week low yesterday of 41.62 and closed at 41.66.

3/5/03: Dow managed to tack on 66 points but FO slid another dime to a new 52 week low at 41.57.

3/13/03:

Am switching bias here to long. Started yesterday when I sold off the FO put hedge - 40 seems a new base and there's no sense just letting time decay kill me off on that long put. Also picked up the OEX spread.

3/21/03:

Quadruple witching expiration day today !! What a finish with the dow up +235 points to 8521, the SPX +20 to 895, the OEX +10 to 456. The dow has rallied 8 days in a row and that hasn't happened in years. People are getting war crazy. The more bombs we drop on saddam the more the markets go up up up. Fundamentally the markets still stink so everybody is wondering how long the rally will go.

FO is +1.97 today to close at 44.76 or back in the sweet spot. I remain long the three spreads with an additional call at the 50 strike for June. The spread is currently bid//ask at 80//145 so its moving in the right direction albeit very slowly. That OEX spread has turned into a real winner during the recent rally. It is current bid//ask at 320//500 and since I paid 240 for it the paper profit is 33% at the moment. There were many times I wanted to grab the cash and had to remind myself that the decay is only going to accellerate from here. Still 14 points out of the money with the short side wanting 850 to buy back. Here are the greeks for this position:

What you should be reading into this is that a continued bull run on the OEX will eventually have the deltas on the APR call overtake the deltas on the MAY call. As things stand right now each 1 point rise in the OEX will add 0.036 deltas (.167 - .131) to the APR option. If we start getting deep into April and people start buying the MAY calls then the IV of those will go up and since this position is long vega it will benefit. Meanwhile the APRs are losing value faster than the MAYs. This trade is a money-maker as long as the OEX stays below 480 or so. I'm not sure another 10% rally is in the cards for this market.

Anyways, its been a real nice expiration !!

April 2003 Expiration Period. Beginning NetLiq as reported by IB: $1,615. You may also skip to May 2003.

4/7/2003:

With 100+ tanks rolling around in baghdad, 2 stashes of chemical weapons chemicals found, plus what they think is the body of "Chemical Ali" I'm not sure what more war-driven news can be good for the markets here. Closed out the OEX spread and felt happy to get what I got. The dow was up over 200 points when I started my day with some demanding errands and by the time I was able to close out the trade I was 45 minutes from the close and the dow up a measly 80 points. Time to revise myself back to neutral / bearish as the only war thing that can propell the markets higher now is video of the military dragging saddam out of a bunker. The economic data out last week mostly stunk and I think the market levels are unjustified from here.

4/10/2003:

Opened the MMM (bullish) call spread today. Even though I am neutral-to-negative on the markets MMM has been riding a rocket and currently sits at 133.00 +1.39 at a time when all the indexes are holding the unchanged line and the day is mostly a yawn. I offer the following additional reasons for this call spread: 1) Sitting near all time high that it set during the war rally a couple weeks ago, 2) The board of directors raised the CEOs bonus from 2.4M to 3.3M, 3) The put players are adding to the PUTS (contrarian signal), 4) Short interest is sitting near an annual high (another contrarian signal). 5) MMM reports on April 21st and the last two quarters have both been positive surprises and 6) Since the spread is July//May the potential for selling a JUNE call if May fizzles out is also there.

Tried things a little differently today with TWS and IB. Instead of legging into the spread I purchased it as a combination through the ISE. It was priced at 1.80//2.15. I placed an order to buy at 2.00 and was surprised at the immediate fill.

I remain long the 3 FO Sep//Jun put spreads and long the FO Jun call as well. FO is sitting right around 45.00 flat and doing exactly what I want it to. Having it run upto and through the $50 mark wouldn't bug me much either.

4/18/2003:

I didn't realize that good friday was a market holiday and neglected to watch the close yesterday and get a true IB netliq reading so I had to resort to my statement for the 17th. I generally don't like to do this because it seems to report values based on the closes and not on the current b/a spread the way you see it while the markets are open. I was guessing I was going to come in a little flat to slightly negative but it looks like I managed a $16 gain for the month.