Chicago Urban Planners: Time to Switch to Eastern Time Zone

Maybe its the cool, rainy weather of the last couple days here in Chicago. I know the calendar says August 28... but it feels like the middle of fall. And the sun sets tonight at 7:31pm! What???? Where is my evening sunshine? Where did summer go?

I've lived in Chicago for over 6 years now, and I have a growing distaste for the Central Time Zone. Well, to be precise, I have an issue with Chicago's place within it.

For those who are geographically challenged, Chicago sits on the extreme eastern edge of the central time zone along the southwestern edge of Lake Michigan (you can view the above map). As such, Chicago enjoys early mornings, but then suffers from early evenings. This is frustrating in the summer, and damn shitty in the winter!

At some point in history, some city or state fathers got together and decided that the residents of northwestern Indiana who work in Chicago are inconvenienced by the fact that they live in one time zone, but work in another - even though their commute to work was only a 45 minute drive - and therefore something must be done about this. So the masterminds decided to amend the time zone line (previously the Illinois - Indiana state borders) and move the line east approximately 25 miles to accommodate the Indiana suburbs that service Chicago (again, see above map). Seems reasonable enough.

However, why keep it like that? Instead of moving the line 25 miles to the east to accommodate Indiana, why don't we instead shift the line about 25 - 50 miles WEST of the state line around Chicago's suburbs and exurbs and then put us ALL in the eastern time zone?

A small list of the benefits:

• Later daylight which everyone enjoys. No more leaving work in January at 5pm to a PITCH BLACK night.
• Greater energy efficiency - less time at night for appliances (lights, TVs, air conditioners, etc) to be running.
• Chicago's financial markets which are synced to New York and Boston markets will be on par working hours.
• Television listings would be less confusing.
• More daylight means sunnier dispositions (I'm sure a psychologist more qualified than me can substantiate this somehow).

The two biggest arguments I hear against this idea are these:

• Waking up to a darker morning is hard
• I don't want my children waiting for a school bus in the dark
• Nighttime sporting events will be on later, and I can't stay up!

These are valid arguments I suppose, but here are my thoughts on that:

Yes, waking up in the dark kinda sucks. But I think its a small price to pay for more daylight hours to enjoy your evening with.

Parents don't want their children going to school in the dark for fear of their safety. Valid concern. However, my argument to them would be: Is your child safer in the dark at 6am or 6pm? The criminal element is far less likely to be active at 6am than at 6pm. So, if we can keep the sun shining a little later in the day, my guess is crime might actually decrease (wild assumption, I'm sure. But the point is, you'll feel safer knowing your kids are coming home from school and soccer practice while the sun is still shining).

As far as the television argument, there used to be a time when this held water. However, in today's TiVo time shifting world, the actual timing of television broadcasts is far less important. I can only speak for myself, but 95% of the television I watch now are programs (shows, sporting events) which I recorded and am watching at a far more convenient time for me.

I'm sure I'm missing some other important reasons that support keeping the zone as is. I'd love to hear what they are. Please feel free to comment below what some of these issues are. I'd like to compile a real list of pros and cons for presentation to some deciding body some day.

That reminds me: Who would I even talk to about changing this? Who has the authority to make such a change? Any insight on this would be helpful as well.

Ladies and Gentlemen of Chicago, this would seem to me to require minor and simple change to accomplish - as simple as changing your clocks to daylight savings time...and the benefits would FAR exceed the negatives. Anybody with me?

"This is John Galt speaking..."

"The only proper purpose of a government is to protect man's rights, which means: to protect him from physical violence. A proper government is only a policeman, acting as an agent of man's self-defense, and, as such, may resort to force only against those who start the use of force. The only proper functions of a government are: the police, to protect you from criminals; the army, to protect you from foreign invaders; and the courts, to protect your property and contracts from breach or fraud by others, to settle disputes by rational rules, according to objective law. But a government that initiates the employment of force against men who had forced no one, the employment of armed compulsion against disarmed victims, is a nightmare infernal machine designed to annihilate morality: such a government reverses its only moral purpose and switches from the role of protector to the role of man's deadliest enemy, from the role of policeman to the role of a criminal vested with the right to the wielding of violence against victims deprived of the right of self-defense. Such a government substitutes for morality the following rule of social conduct: you may do whatever you please to your neighbor, provided your gang is bigger than his."

This is a snippet from John Galt's address to the nation, taken from Atlas Shrugged by Ayn Rand. If you haven't yet read this book, I suppose there is no need to anymore - you are living it.

This book should be REQUIRED reading for any human attempting to start a business or hold public office. Most business owners are quite familiar with the concepts expounded in this book, whether they've read it or not. Sadly, it seems none of our elected officials (regardless of political affiliation) seem to have even the slightest grasp of what is important.

This book was written in the 1940s and 1950s. The author's prediction of the future state of the world and the state of this country is frighteningly close to what is happening today in slow motion and what our future holds along our current path.

Call me a "Slow Adopter"

You might also call me "Captain Obvious."

I read newspapers. Specifically: Investors Business Daily, Wall Street Journal, and occasionally the local rag Chicago Tribune. And while I'm sure it hurts them to write it, I've read within their pages over the years about the sad decline of readership which is forcing many long-time newspapers to close up shop. The culprit? The evil free environs of this thing Al Gore invented - the Interweb or Internet or something like that. Something that one disgraced Senator (oxymoron?) once said: "...this internet thingee is all just pipes." Sorry I can't remember the Senator's name or what exactly his quote was - but you get my point.

The internet is making everything free. So why pay for a newspaper subscription when the same newspaper publishes all its content online for free? Perhaps here's another name you can call me: "Nostalgic." Maybe I just like getting ink smeared on my fingers and pants. Or maybe its because me first job as a child was as newspaper delivery boy for the Metro Community News and then The Buffalo News in Buffalo, NY. I dunno.

Well...all that changed today.

Surely, I'm not the first to notice this, in fact - I wouldn't be surprised if I was one of the last remaining holdouts. Yes, its true - everything I've ever needed to know can easily and quickly be found free on the internet! And more importantly, I can only be presented with articles I truly want to read.

I've had some time over the last week to really focus on my Trading business. While doing some online research, I've accidentally stumbled upon some very informative and helpful blogs. Reading these blogs has invigorated me and inspired me to seek out other similar blogs. And with each blog I read, I seem to always be coming across a cross-reference to another blog that I then immediately find useful and interesting. This branching out continues and now I'm finding that I have a pretty impressive stable of blogs that I now read almost religiously.

Its gotten to a point where I've now organized my blogs into 4 categories: Trading Blogs, Policy Blogs (politics), Business Blogs, and Thinking/Educational Blogs.

And I've noticed that in spending 30 minutes each morning parsing through this treasure trove of opinions, advice, strategy, and information - I find myself FAR more informed of the world around me than I would spending 2 hours with my newspapers. In addition to being better informed, I also feel like I'm getting EDUCATED each day as well - which I'm sad to say is a rarer occurrence when reading newspapers these days.

Yes, I'm a slow adopter. I know there are millions of "netizens" out there who have smugly known this for years. Sadly, this is just example #185 of how Sean is a slow learner. While I consider myself relatively smart as compared to the average American... my curse is that I learn slowly. Sometimes VERY FRUSTRATINGLY SLOWLY, as my nearly 12 year trading career can certainly stand as example #1.

My IBD subscription ends this week. The WSJ subscription will be ending within a month or two. I don't plan on renewing. Sorry editors - you warned me this day would come.

And finally, here is the site that finally put me over the edge: www.khanacademy.org. This site has the very real possibility of literally changing the way the world educates its citizens. I am BLOWN AWAY. Thanks Sal!!

PS....in a future post, I'll give a list of all the blogs I follow if anyone is interested.

Is the stock market a dead asset class?

It should be no surprise to anyone that I do not consider myself a genius market prognosticator. Many people could have made small fortunes taking the opposite bet against my market predictions in the past - which makes me think: Why make predictions? Why take a bullish or bearish stance?

The real truth of the matter is, the majority of the time, markets are just going sideways. And in fact the stock market is only up or down a single-digit percentage (as measured by the S&P 500) for this entire decade!

Say what you will about the current statists, er politicians, in charge in congress and in the oval office... the way gov't is forcing itself further and further into our everyday lives and stifling business with new regulation upon new regulation and choking its citizens and businesses with inevitably more taxes and higher inflation...the future looks pretty bleak for American business and the stock market to make any more significant advances than it already has off of the March 2009 lows.

As such, it would appear to me that investing directly in the stock market right now would be a suckers' bet. The only strategies that would seem to make any sense are ones that trade for small swings within a range.

This is a major reason why I've adopted my latest approach to trading the markets. My options strategies are designed to be market-neutral. As long as the market doesn't move either up or down a significant percentage from month to month, my positions will achieve maximum profit. If, however, the market makes a significant move in either direction (it inevitably will from time to time), my positions can still profit with proper timely adjustments.

Think of me as an insurance company. I'm taking in premiums from others who are protecting themselves against the risk that the market will have violent swings in either direction. As long as I manage my risk appropriately and take in the proper premiums - in the long-run I should net a nice positive return.

There will still be innovation in America, and the next Google or Intel or Microsoft will most certainly hit the market soon and make fantastic gains for its early investors. But this money will go to the stock pickers - not to the indexers and mutual fund investors. There will always be money to be made for smart hard working stock pickers. As long as there is a market, there is opportunity. It's the buy-and-hold mutual fundies and index investors that will be frustrated by permanently lower rates of return.

Have I given up on America? Emphatically no! However, the reality is we are headed to a permanently slower GDP growth rate and we are at serious risk - long term - of losing our world leadership position as the home of innovation and freedom due to over-regulation and over-taxation.

Until America realizes it IS NOT infallible, this situation will not change. Many of the socialism-inspired ideas being bandied about in Washington have been tried in countries all around the world throughout history. And EVERY TIME it has failed. This is no accident. The mistake I fear America is making is that we think that because we are America - we will not fail. People believe we are the greatest country in the world with the greatest freedoms afforded to its citizens - therefore it is impossible for us to fail. Well, people seem to forget this isn't something we are entitled to. And it isn't something we should take for granted. It is hard work to maintain what made America great. We are slowing chipping away from its greatness.

The people of ancient Rome thought they had the greatest, most enlightened civilization in history. Then they took that for granted and destroyed themselves.

History repeats itself.

Current open positions

According to my plan (as described in the previous post), these are the positions I've established over the past week:

• 3-month Calendar in QQQQ: bought Dec/Sept 39 call spread @ 1.17
• Iron Condor in SPY: sold Sept 90/92/110/112 @ .35
• Butterfly in DIA: bought Sept 88/93/98 calls @ 1.65
• Double Diagonal in SPY: Oct/Sept 94/95/106/107 @ 1.18
• 1-month Calender in QQQQ: bought Oct/Sept 40 put spread @ .49

As adjustment are (inevitably) made, I will list them here.

My New Trading Plan

The purpose of this post is two-fold:

• I'd like any options traders out there to view this and assist me in poking holes in it. I'm certain it isn't perfect, but its close. I could use your help.
• I'd like to find a financial backer for this Plan. What better way to attract potential backers than to broadcast to the world?

So here goes. Please feel free to post comments here, or to send me an email directly (seangmclaughlin@gmail.com)

*******************

Options Trading Plan - August 10, 2009

Objective

The goal of this trading plan is to generate consistent monthly income utilizing risk-defined options trading strategies with high estimated probabilities of success that profit with the passage of time.

Portfolio Construction by Strategy

Double Diagonal SPY	Butterfly DIA
Iron Condor SPY	Calendar Spreads QQQQ

Asset Allocation

Approximately 10% of Portfolio Value shall be risked and allocated to each of the 4 trading strategies for each expiration month. Each trade is independent from each other - with its own plan for implementation and maintenance to be described below. Three products tied directly to the U.S. Stock Market have been chosen so as to adequately diversify risks across strategies to the same or similar market (SPY - S&P 500 ETF, DIA - Dow Jones ETF, and QQQQ - Nasdaq ETF).

Strategy Diversification

These four strategies have been chosen for their ability - when combined - to limit the damaging effects of swings in volatility. Each benefits from time decay and favorable probabilities. While Iron Condor and Butterfly spreads are negatively affected by increases in volatility, they are balanced by Double Diagonal and Calendar spreads which both benefit from increases in volatility (and vice versa).

Implementation

Care shall be taken to maintain an open position in each Strategy Category at all times. Whenever a particular trade has been closed at a profit or a loss (or after expiring) - a new position will be implemented to maintain strategy diversification and protection from changes in volatility.

Strategy 1: Double Diagonal

A Double Diagonal is typically a debit spread. Short options will be entered a distance away from current market prices, and will be hedged with long options that are both one strike further out and one month further out. This construction makes the position favorable to increases in volatility as the long, longer dated options will increase in value faster than the short, near-term options. The goal of this position is to roll into an Iron Condor when the short options are only retaining 15 cents or less of time-premium.

Characteristics:

Double diagonals reach the maximum values at the short strikes at expiration at either end of the profit spectrum. These positions will be constructed in such a way that shall yield a greater than 60% probability of profit if held to expiration of short options. Due to the longer dated long options acting as hedges, this position reacts favorably to increases in volatility and vice versa. This is in direct contrast to Iron Condors, and therefore serves as a nice counterbalance to minimize the effect of changes in volatility.

Implementation:

Short option strike prices shall be determined so as to place the two breakeven points (upside and downside) just beyond one standard deviation from current market prices (as measured to the short strike expiration). This puts the odds of success in our favor. The short strikes will be near-term options, while the long strikes will be one month further out. For example, a double diagonal might be formed by selling an Aug 95 put and an Aug 105 call, and hedged by a long Sept 90 put and a long Sept 110 call.

Double Diagonals will be entered with a minimum of 25 days until expiration of the short options.

Maintenance:

Action shall be taken if the underlying trades to the mid-point between the short strike and the break-even point. Depending on market conditions, this position will either be closed and re-established at new strikes, or only the effected side of the position will be adjusted to new strikes.

Ultimately, the short strikes shall be rolled into the next month to form an Iron Condor when the short options are priced at 15 cents or less (or are maintaining less than 15 cents of time premium). The resulting Iron Condor will be covered for a profit when each short option can be covered for 5 cents each. The remaining long options will be held to expiration as free lottery tickets.

Strategy 2: IRON CONDOR

The Iron Condor is a risk-defined options credit spread consisting of an out-of-the-money (OTM) Call Credit Spread and an OTM Put Credit Spread. This trade is most profitable if the underlying closes between the short call and put strikes, rendering them worthless at expiration. However, if the underlying closes beyond the short strikes, the risk is limited due to the protective long call or put. The goal of this position is to hold near to expiration and cover the short options for around a nickel each.

Characteristics:

The risk-reward for an IC is typically very unfavorable (5:1 or worse). However, since we've started these positions out as DD's first (see above), the resultant risk-reward scenario should in most cases be more favorable. These positions must be monitored carefully and consistently adjusted when necessary. The profitability of ICs is inversely affected by changes in volatility.

Implementation:

Our Iron Condors will initially be constructed as Double Diagonals and then rolled into an IC. If an IC must be created from scratch, it shall be constructed by placing the short strikes just beyond one standard deviation (to expiration) of the current market price. For example, if the underlying is currently trading at 100, the short call might be placed at 109 and the short put might be placed at 92. The appropriate hedges will be determined by how much risk is to be assumed (err on conservative side) - with the goal being to minimize the amount of contracts traded to limit commissions incurred.

Maintenance:

If open profit/loss in an IC position ever becomes negative equal to the amount of the credit received (excluding commissions), the position should be closed and a new position of twice the original size should be entered using the same parameters as described above in Implementation. An exception exists within two weeks to expiration. During this time, if the total position (including adjustments) becomes negative as above, exit the position completely.

Strategy 3: Butterfly

The Butterfly is a debit spread where At-The-Money calls or puts are shorted in an effort to collect time premium and are simultaneously hedged by long options of the same class both above and below the short strikes. The position achieves its maximum value if the underlying closes equal to the short strike's price at expiration. The goal of this position is to sell it when it has achieved a 30% gain (after commissions) over the debit incurred to initiate the position.

Characteristics:

Butterflies are constructed such that the position shall be profitable as long as the underlying stays close to the price at inception - or doesn't move a significant percentage in either direction, thus putting probabilities in our favor. Butterflies benefit from the passage of time due to the decaying short position. Butterflies' profitability is inversely related to changes in volatility.

Implementation:

A butterfly position shall be implemented by shorting two options at the ATM strike, and purchasing long options at an appropriate distance both above and below the current ATM strike in order to achieve the objective risk tolerance while minimizing the amount of contracts traded. This will limit the burden of commissions. Target a probability of profit of 35% - 45%. For example, if the underlying is trading at 100.27, a butterfly trade can be established by selling two 100 Calls and purchasing for protection one 95 call and one 105 call for an overall debit.

Maintenance:

If the underlying should violate its upside or downside breakeven points, purchase an additional butterfly position as above. This should be done a maximum of two times. If the total position should ever be down more than or equal to 25% of the total debit paid to initiate this position, take the loss and close the position. Exit the position with a standing order for a profit equal to a 30% gain from initial debit (after commissions). Also keep standing orders to exit each vertical leg at 20 cents of time premium remaining. In the above example, cover the short 100/105 vertical at .20 and sell the long 95/100 vertical at 4.80. Once one leg is exited, adjust the open order on the remaining leg to achieve the original profit target. This should improve the odds of achieving the target. Once one butterfly position is completely closed, another shall be entered with a minimum of 25 days until expiration.

Strategy 4: Calendar Spreads

A Calendar is a debit spread. It is the simultaneous selling of a near-term option and hedging it with a purchased option with the same strike but a further out expiration month. We will employ two types of calendar spreads: "1-month" and "3-month campaign". The goal of the 1-month trade is to capture a 40% profit over the debit incurred to initiate the trade. The goal of the 3-month campaign is to capture 3 rolling opportunities to smooth out returns. The profit in these calendar spreads is made possible by the faster decaying time premium of the near term option as compared to the longer-dated long option.

Characteristics:

Calendar spreads are similar to butterflies in that they achieve their maximum profitability at the short strike. However, the key difference is that calendar spreads react favorable to increases in volatility, and therefore act as a good counterbalance to butterflies.

Implementation:

The 1-month calendar spread shall be purchased with ATM options. The nearest month (with a minimum of 25 days to expiration) will be shorted and a same strike will be purchased one month beyond the short month expiration (for example: short Sept 50 call/long Oct 50 call). Care will be taken to keep purchases under a .50 debit. Implied volatilities should be between 14-27 and skew should be limited to <2.>

The 3-month campaign calendar spread shall be purchased with ATM options. However, the long option shall be three months beyond the short options (For example: short sept 50 call/long Dec 50 call). Implied volatilities and skew should be observed as above.

Maintenance:

In both positions, if the underlying shall trade to or beyond a breakeven point, establish another position at the current ATM strike. However, only do this twice (for a total of 3 unique spreads). If the total position is ever down more than 25% of the debit incurred to build the position, close it.

For the 1-month spread: Target a 40% net gain (after commissions) of the original debit incurred.

For the 3-month spread: When the short options are only retaining 15-20 cents of time premium (or less), then roll out to the next month. If it the last month of the campaign, exit when there is less than 20 cents time premium in the short option.

Other notes:

· All positions will originally be initiated with at least 25 days until expiration so as to capture the maximum amount of time decay.

· No adjustments shall be made in the final two weeks to expiration. If a position hits an adjustment point, the trade shall be exited and a new trade in the next expiration month will be initiated.

· All attempts will be made to maintain representation of all five strategies in the portfolio at all times.

·

Checklist:

Implementation: Double Diagonal · select short strikes just inside 1 st. dev. Hedge 1 strike out. · move strikes in to minimize "sag" in profit profile, if necessary · long options maximum 1.5 price of shorts Iron Condor · roll DD into IC. · if creating new one, set short strikes beyond 1 st dev. Guerilla Calendar · ATM strike · pay 50 cents or less for the spread · IVs for each option between 14-27 · keep long option <> · short option > 30 cents Campaign Calendar · ATM strike · negative skew <> · confirm probability of success greater than 35% Butterfly · select short strike nearest to market price · select long strikes to achieve minimum contracts and target 10% portfolio risk · confirm probability of success greater than 35%

Maintenance: Double Diagonal · Take action at mid-point between short strike and break-even · If down 25% of maximum loss, bail · Roll short options when trading at 15 cents time premium (into IC) Iron Condor · If position is ever down equal to the credit received to implement the position, close and re-enter new position - twice the size · Cover short options at 5 cents Guerilla Calendar · When trades to Breakeven, add another spread (no more than 2 times) · If down more than 25% of total debit, exit · cover each spread when time premium of short option =<> · Take profit at 40% net gain (after comm) · if in more than one spread, leave resting orders to exit each unique spread at 40% gain. Campaign Calendar · At BE, add another (no more than 2 times) · exit if down > 25% of total debit · roll when premium <> Butterfly: · set standing orders to exit position at net 30% gain, and orders to exit each leg when .20 of time premium remains. · If either breakeven point is violated, add another butterfly position. Only 2 new positions may be added (total of 3) · If the position is showing a loss greater than 25% of the total debit paid to establish this position, close out.

Oops! I did it again!

May 10th is the last time I posted? I did it again. I promised I would continue to update this blog, and yet I continued to be inconsistent.

I hit another rough patch and unconsciously avoided updating this blog. However, this time, the rough patch wasn't related to the markets or my trading - though my trading certainly suffered.

I've spent the better part of the last month trying to get everything back on track, and this certainly applies to my Trading life. Due to the realities of my situation, I've decided to put together a trading plan that is more suitable to my lifestyle. A trading plan that doesn't necessarily require me to be sitting at my computer watching the market during trading hours. This way, I can focus my creative energies on other pursuits that will complement my strengths and skills and also offer some more stable and consisent income to supplement my trading gains - in other words, a J.O.B.

I will highlight my trading plan in the next post.

Meanwhile, if anybody knows of any non-trading jobs that a Trader like me would enjoy and excel at - one where we get to talk markets, trading, and strategies all day, please let me know. I'm looking in Chicago.