Tao People Never Try, They Do

My beautiful wife has pleasantly insisted for some time now that I read "The Tao of Inner Peace," by Diane Dreher.

The book has sat next to my desk for two months now, collecting dust as I've given all my reading time to other books that I had urgently wanted to finish. Today, as I finished a book and was contemplating another visit to the local library, there was the "Tao" book staring me in the face. I finally had no viable reason to resist picking it up and starting page 1.

I've only made it to page 24 and I'm very happy that I've begun reading it. It dovetails nicely into certain things I am currently trying to accomplish with my life. The most important item on the "to-do" list is to discover a spiritual way to view and live my life. For people who are believers in some kind of religion this is usually relatively easy - they can just give themselves and their lives over to God. However, anybody who has ever engaged me on this topic knows very well that I am a fervent opponent of all forms of religion and generally scoff at the notion of "God." So, as you can imagine, my personal search for some kind of spirituality has been challenging. This new book of Tao has given me hope that perhaps I'm on to something good...

Meanwhile, two important quotes from the very front of the book have taken root in my thoughts this afternoon:

"Tao people never try, they do"

"Live with commitment"

When people say they'll "try," it means they'll go only as far as they can until they meet even the slightest resistance, then they'll give up. There is no commitment there. I am as guilty of this cop-out as much, if not more, than anybody I know.

In trading, as well as in all areas of my life, I continually use the word "try." Subconsciously, it leaves me with an out. It allows me to show people that I gave some effort, however is just didn't work out for me. It wasn't meant to be. And then I walk away whistling, never realizing that once again I've accomplished nothing. Time wasted.

For those of you who follow me on twitter, today I tweeted my "Quote of the Day" that reads:

"You can always earn more money, but you can never earn more time"

As I'm becoming more aware of this fact, I'm realizing that to "try" is to continue to waste my time. With this in mind, I've decided to "DO" something:

I've read a lot recently about entrepreneurs who have started successful businesses with less than $500. Granted, few (if any) of these companies went on to become Fortune 500 enterprises. However, many have been successful and have earned substantial incomes (if not fortunes) for the individuals who started them. There is also a famous story about a Trader named Richard Dennis who allegedly turned $400 into $200 million in the span of a decade.

Inspired by these stories, as well as my newfound appreciation of the difference between "trying" and "doing," I've decided to start my own little "enterprise." And I'm doing it with $200.

I have been trading calendar spreads in my trading account for some time now, and I am growing fond of the risk/reward balance of these trades as well as the relatively high probabilities for success. Earlier this week, I got to thinking: "What if somebody 'tried' to trade calendar spreads with all available cash, targeted 10% gains per trade, and cut losses at no more than 10%, how quickly could a Trader grow that account and could he turn $200 into $2 million?"

Contemplating this question for a good 48 hours, I decided that the only way to find out is to DO IT!! Start with $200, aggressively trade it...and see what happens. The worst thing that can happen? I lose my entire investment of $200. Big deal.

While this may not be a "business" in the traditional sense of the word, in my world - it is. In addition to simply trading my idea, I have created a blog entitled "$200 to $2 million" to document, step-by-step, each trade I make, and will list all profits and losses and cash balances as I test my hypothesis is the real world, in real time. If you are a Trader as well, feel free to trade along with me if you'd like (however, remember my trades are NOT recommendations - trade at your own risk). The site is still a work in progress (and I have no web-design skills whatsoever), so expect its look and format to change as we go along.

Wish me luck. However, don't feel bad for me if it doesn't work out. Even if I lose my entire investment ($200, and a little bit of time), I no doubt will have gained some valuable experience along the way.

Live with Commitment.

Adjustment Thursday!

So, yesterday's huge rally required adjustments on four of my open trades. All in the same day.

Today, I decided to close three of the offending positions entirely for small losses and wait. Sometimes when you're confused or perplexed, that is the right course of action. Keep it simple, stupid.

I've kept the open calendar spreads on. As the rally continues, volatility similarly continues to shrink. In fact, volatility (as measured by the VIX) is at yearly lows. Shrinking volatility has been good for Butterfly spreads and Iron Condors. However, with the market continuing to head seemingly forever higher, the odds favor the market taking a breather. And if the market should choose to make a significant retracement, this could result in a pop in volatility. This would be good for calendar spreads.

For the remainder of this month, I'm examining whether to just stay with the calendar spreads (gaining theta, and long Vega). The odds would seem to be in favor of this. Of course, I can still be wrong and have a chance to make money.

The Market Moves to Make It Most Painful for Most Participants

Another day, another positive gain for the markets (as of 11am Chicago time).

It is getting to an almost comical point listening to all the market pundits and expert traders say the "market is overdue for a correction." They've been saying that since early May. Yet, the market clearly has a sense of humor and likes to inflict the most pain against most "prevailing wisdom." It just keeps chugging higher and higher.

The shorts keep providing fuel to push the market higher as they continue to throw their hands up and cover their positions.

If the experts can't pick the direction of the market, what makes me think I can do any better? This is all further validation to me that I have no business predicting which way the market will go. Glad I gave that up to focus on income strategies in the options market that are market neutral. Sure, when the market has a large one-way trend it requires more work on my part to adjust my positions to stay as close to neutral as possible. But there is a liberating feeling in being able to "react" to the market as opposed to attempting to "predict" it. And with the strategies that I practice, I don't have to be right.... I can still be wrong and make money. There is a nice margin for error. See this post for info on my strategy. I've made some minor adjustments to it, but the basic principles are the same.

I have no doubt (but of course I can be wrong) that this market will end its rally with a final blast to the upside which will exhaust all the shorts, and trick the remaining public holdouts into believing its safe to plow their 401(k) back into stocks. And the final insult will be the cautious speculators who have been waiting for a pullback in which to load the boat, but now fear they've missed the ride and scream "let me board!!" and throw all their cash at the high-flying stocks that have already bounced 50% or more off their lows. God help them.

History repeats itself. We've seen this before. If you have been fully invested for a while now, I hope you're being prudent and selling into strength.

Meanwhile, I'll just stay market neutral and adjust when necessary, and not stress too much whichever direction the stock market decides to head.

Now off on a bike ride to Northwestern University. Its a beautiful fall day here in Chicago. I'm gonna go read a book by the water on campus and try to obtain the knowledge of Kellogg MBA students via osmosis.

October Positions

I finally got my last October spread to open executed today. So here are my positions for October expiry:

9/11 Sold $SPY Iron Condor 99/101/107/109 @ 1.07 credit

9/3 Bought $SPY Double Diagonal Oct/Nov 92/93/106/107 @ 1.74 debit

9/16 Bought $QQQQ 1-month Calendar Oct/Nov 42 Puts @ .60 debit

9/3 Bought $DIA Butterfly 87/93/99 Calls @ 1.91 debit

I'm still maintaining a 3-month campaign calendar (Sep/Dec 39 calls) initiated on August 10 @ 1.17, which will be counted towards November expiry. I've already rolled the short sept options into Oct for a .52 credit. On 9/16, I made an adjustment, adding an Oct/Dec 42 Call spread @ .93 debit.

On Sept. 15, I entered into a 3-month campaign calender (Oct/Jan Puts) @ 1.30 debit, which will be counted towards December expiry.

Thoughts:

This month, I've already made one adjustment, and as the market continues to rally, more adjustments will be necessary. It is becoming obvious to me that this month will be nothing like the last, where NO adjustments were necessary. Will be interesting to see how it plays out.

September Results

This morning, I closed my final September options position. See this post for info on when I entered.

Here is a list of the results and some commentary on each:

$SPY Long Double Diagonal (sept/oct 94/95/106/107)

entered on 8/12 @ 1.18 debit

risked 11% of my portfolio

closed on 9/2 @ 1.65 credit

Net result after commissions: 17% profit on risk capital, 21 days held.

Notes: No adjustments were made.

$DIA Long Butterfly (Sept 88/93/98)

entered on 8/12 @ 1.65 debit

risked 8.5% of my portfolio

closed on 9/2 @ 2.25 credit

Net result after commissions: 29% profit on risk capital, 21 days held.

Notes: No adjustments were made.

$SPY Short Iron Condor (Sept 90/92/110/112)

entered on 8/11 @ .35 credit

risked 8.5% of my portfolio

covered short call option on 9/2 @ .04 debit

covered short put option on 9/10 @ .05 debit

Net result after commissions: 12% profit on risk capital, 30 days held.

Notes: only the short options were exited. I still maintain long Sept 90 puts and long Sept 112 calls at zero cost basis. These are essentially free lottery tickets in case the market makes an EXTREME move between now and September expiration (7 days from now).

$QQQQ Long 1-month Calendar (Sept/Oct 40 puts)

entered on 8/12 @ .49 debit

risked 5% of my portfolio

closed on 9/11 @ .56 credit

Net result after commissions: 4% profit on risk capital, held 30 days.

Notes: no adjustments were made.

Summary:

The returns on these four positions averaged 15.5% each and the average hold period was 26 days. As a whole, their gains represented a 5.6% return for my portfolio.

None of these positions required any adjustments, owing to the fact that the stock indexes mostly traded in a range during this time period. A strong move up in the 5 most recent trading days negatively effected the calendar spread in $QQQQ, but thankfully we were still able to exit at a small profit.

One position that was entered in August, but still on the books is a 3-month calendar spread. The september short strike was rolled into October for a .52 credit. This position -when closed - will be counted towards November results.

PS. Still waiting on a calender spread for October to be executed. Once this gets done, I'll publish my open positions for October expiry.

Activity =/= Profitability =/= Success

A lesson I've learned repeatedly throughout my trading career is: Do not confuse Activity or Action with Profitability.

Too many times in the past when I've struggled, my natural response was to DO MORE: More action. More activity. More analysis. More study. More volume. More more more....

And while perhaps short term the results were favorable or encouraging, long-term the results would inevitably be the same: FAIL - back to the drawing board.

Recently, I found myself defending against my natural impulses again to DO MORE. Nearly all my September options positions have drawn to a close - with good results. (As soon as my last September positions are closed, I will post the results). But I find myself trying to tweak my well designed system.

I see that I have had great results in the past 6 weeks, but I worry that perhaps I'm tricking myself because the market pretty much fell asleep (which is good for options income strategies that maximize profit when the market goes nowhere). I've had great success targeting 30 - 40% gains in my positions. But I'm asking myself: "Did I get lucky?" "Am I being too greedy?" "Should I target 10% position gains instead - aiming for a high percentage of wins?"

To this point, I've successfully resisted the urge to tinker with my system. It's worked so far, don't mess with it. Let it prove to me that it needs to be fixed first.

The best way for me to fight these urges is to fill my day with other activities. To this end, I've been pretty successful. The beauty of my trading strategy is that it doesn't require me to monitor the market while it is open. So, I've used this time to immerse myself in the vast interweb of amazing knowledge, education, and insight within the blogosphere. I've also gotten involved with a start-up restaurant here in Chicago, as well as networked with some others in the Chicago trading scene to investigate opening a trading office where I could get involved in trader education, recruiting, risk-management, systems development, and mentorship - something that has always interested me.

I also have been reading books a lot more recently, which is a good escape - especially when the topics being read are educational, personal improvement, or inspirational in nature. It helps keep me focused and grounded.

It has often been said that in trading, the hardest part is "sitting on your hands and doing nothing". And this is in most cases the most profitable approach. I need to remind myself of this, and writing this post is one way I've helped remind myself of it's importance.

Stay focused on the long-term results. If I can continue to earn 5-10% returns each month - does it matter how much activity it required to achieve it? Does it matter how many trades I did, or how many hours I stared at a trading screen? NO.

The only thing that matters is the bottom line.