Documenting a Journey to Prosperity

Endurance: The Cousin to Patience

2009-12-10T19:20:00.000-06:00

I've been putting off writing this post for a couple weeks now. Sometimes, I can be the worst procrastinator I know. It really is frustrating.

In my last post, I wrote about Patience, and how one of my biggest faults as a human being is my lack of said patience. Today, I wish to share with you my thoughts on a closely related topic - endurance.

While the act of patience requires one to go with the flow and to base your actions with the big picture in mind, the struggle you often face is finding the strength to keep moving forward when strong headwinds blow in your face. It sometimes takes every ounce of power you can muster to keep the wheels spinning and the car on the road when the road takes unpredictable turns, ups and downs, and on top of all that, the road is covered in a sheet of black ice! This takes endurance to focus.

I was reminded of endurance since my last post. Since I last checked in with the performance of my trading on October 18, I have realized an 18.1% gain. Not bad for nearly 7 weeks. However, one very important thing you don't see in this number is the fact that my trading account suffered a 17% drawdown from the highs - and it only took 5 trading days to get there. It took me just over a full calendar month to regain my previous high. During the period of recouping my losses, I found solace in knowing that with just a few small tweaks, I'd be able to right this ship and get headed back in the right direction again. I had absolute confidence in my plan and knew that over time, these will just be small bumps in the road. My perseverance paid off, and today we're back at new highs.

The struggle for me is this: Since late this summer, I have completely turned around my trading and have settled into a groove that is yielding spectacular results. We are talking annualized percentage gains that are too embarrassing to publish because they don't look real and you probably wouldn't believe me. This is a good thing, right? Yes and no. The problem is that although I am employing a great strategy that is highly scalable (meaning, any Trader should be able to trade the same way I am regardless of whether he is trading a $1,000 or a $1 million account), I'm still trading with an account that is too small to enjoy the rewards. All the gains that are being achieved must remain in the account so that I can continue to grow it so that it can get to a level where I can then begin regularly withdrawing cash to spend as we please. Its frustrating performing so well, yet still having to live extremely frugal and continuously make "either/or" decisions instead of making "yes/and decisions." Instead of saying: "Yes, lets go to our friends' wedding in Mexico this March AND buy tickets to that concert we want to see next week;" these days, we're always saying: "We can go to this Christmas Party, OR we can watch the game at the bar on Sunday - but not both, we need to buy groceries."

So, I'm faced with the very real situation of having to ENDURE the time it takes to get from Point A to Point B. And the trick to do this is to stay COMPLETELY FOCUSED on the method that has fueled my turnaround, ignore the dollar balance of the accounts, and minimize real-life distractions along the way that inevitably get me thinking about whatever may be wrong outside of work, but not about what is right and working on a daily basis.

The one thing that keeps me motivated is knowing that the in the end, the Journey will have been totally worth it. My line of work is one of the hardest professions to master. The road to Market Wizardry is littered with thousands of well-intentioned (and some VERY well-funded) carcasses of once promising individuals who believed they had what it took to make a living as a Trader or Speculator. But despite the challenges and long odds against the majority, the few who make it are true masters of their universe. I don't mean to imply they are Gods or some kind of superhuman. I mean that the ones who truly make their living in the markets have the best jobs in the world. In fact - to them (dare I say "us"?) - trading or speculating isn't even a job. It's something they love to do. And nobody can take their job away from them. They are their own boss. They can trade any market in any country they want. They can trade in boom times and in recessions. They can trade whenever they want. They can vacation whenever they want.

This is true freedom.

Patience

2009-10-29T14:57:00.000-05:00

Patience has always been one of my biggest problems...especially when it comes to trading.

It takes patience to let what's working, work. I've always had trouble balancing my long-term goals of "trading success" with my very real short-term needs to make money to pay bills.

Recently, I've had success in the markets. I am earning very respectable percentage gains that if left to continue compounding, will in the long-run amount to a tremendous fortune. Of course when this happens, my natural tendency is to want the long-run to hurry up and get here as fast as possible. Naturally, this is not possible, and this is where I usually run into problems.

They say the first step is "admitting I have a problem." So this blog post is my effort to throw my recognition and acceptance of this problem out to the universe. Now, the next step is to learn to practice patience. Keep my head down. Keep plugging away and duplicating what I know is working. Make it as automatic as possible. Focus on the process, not the results. The results must take care of themselves.

The other tactic I am beginning to practice is visioning that I've already achieved my goals. Allowing myself to experience what it would feel like to already be there. In which positive ways would my life be different? Imagine it. Feel it. One amazing result I've had during these mind games is to realize that in a lot of ways, I'm already living it. Maybe my money clip doesn't reflect it. But my attitude, and the way I spend my time does.

In two completely unrelated notes: I recently joined Toastmasters International, a public speaking and leadership development program. I give my first speech tonight. Basically, just a 4-5 minute introduction to who I am and what I hope to accomplish in the program. I'm nervous, but also strangely very confident.

The other note is that the little contest I'm having with myself is off to a great start so far. You can read about it here.

October Results

2009-10-18T22:20:00.000-05:00

When you are rigid and unchanging, you are lifeless. When you are flexible, you are alive.

Flexible is the theme word of this post. And flexibility is probably what helped me eke out a small gain in my portfolio since my last post on September 11th.

That's right, since September 11th (a period of 38 days) my account realized a 1% gain. But this 1% was anything but uneventful.

The iron condor, double diagonal, and butterfly positions entered into for this month quickly turned into losers as the markets continued their northward march. Each position contributed to nearly 5% unique losses to my portfolio.

Rather than adjusting these positions, I straight up closed them out, took the lumps, and focused on calendar spreads to ride the wave. It appeared to be the right decision, as my portfolio roared back to new highs with a 12% gain since exiting the offending positions.

My growing experience with calendar spreads is beginning to convince me to focus on them exclusively. Here's what I like about calendar spreads:

Defined risk debit spread
Relatively cheap to put on
Are commission-advantaged (less options per trade equals less commission cost)
Easier to manage
The ability to roll positions offers multiple opportunities to lower risk and increase profitable outcomes.

I'm clearly tinkering with my plan. My goal is always to simplify everything. The simpler the better. In life and in trading.

While the steps to achieve my end results may be changing, the overall premise remains the same: attempt to achieve 5-10% monthly returns in risk-defined income trades with favorable odds that benefit from the passage of time. As long as the market doesn't move too far in any one direction too fast, these trades - as a whole - should profit.

The question I am wrestling with is the degree to which I should be aggressive. I'm tempted to go guns ablazing while my account is still small. This way, if I take a large percentage lump, it won't be a debilitating loss in real dollar terms.

Another thing I've realized, I need to focus on reporting returns in a consistent manner. I've begun to track my equity curve on a daily basis, as well as to maintain a rolling 20-day percentage return (roughly one-month of trading days). Currently, my 20-day rolling return is sitting at 10%. I'd like to keep this line as flat as possible. Stay tuned.

Tao People Never Try, They Do

2009-09-24T16:58:00.001-05:00

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!

2009-09-17T12:29:00.004-05:00

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

2009-09-16T10:48:00.003-05:00

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

2009-09-16T09:59:00.003-05:00

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

2009-09-11T09:26:00.005-05:00

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

2009-09-10T10:42:00.004-05:00

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.

Chicago Urban Planners: Time to Switch to Eastern Time Zone

2009-08-28T08:40:00.006-05:00

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..."

2009-08-24T11:30:00.004-05:00

"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"

2009-08-19T18:19:00.007-05:00

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?

2009-08-18T09:29:00.003-05:00

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

2009-08-17T14:39:00.002-05:00

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

2009-08-17T11:57:00.002-05:00

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!

2009-08-17T11:39:00.002-05:00

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.

Matt McConaughey is my New Idol

2009-05-10T18:31:00.005-05:00

So, Matt McConaughey was on Jimmy Kimmel last week, and he was talking about his Airstreams! He owns three Airstreams.

He was talking about how he must - at a minimum - go on at least one 6-week road trip per year. And his sage advice was:

"...when embarking on a road-trip, when you think you've gone far enough, go just a little bit farther." This is where the true rewards come from.

I felt as though he was literally speaking TO ME. This is a dream of mine. To travel all of North America on an unscripted journey in an RV or similar traveling device. No schedule. No plan.

As a trader with a satellite internet connection, I could work from anywhere. So, it wouldn't even technically be a "vacation", but it would be in so many ways.

I need to make enough money soon so my wife no longer has to work and can therefore travel with me. There's no way she'd let me go alone for 6+ weeks..... though a man can dream :)

and another: http://men.style.com/details/features/landing?id=content_4121

A Political Thought

2009-04-25T10:07:00.003-05:00

As I read the newspapers daily, I am confronted with dread that our country is headed in the wrong direction. Every day its something new: congressional show-trials, divulging CIA interrogation secrets to our enemies, a ballooning spending plan and resultant obscene deficit, a health-care philosophy that will severely limit its effectiveness - yet significantly increase its cost, bailout after bailout, etc etc etc.

It got me thinking back to those heady days before Nov 4, 2008. You know....when the majority of Americans thought Barack Obama was the new Jesus Christ and he was going to save the world. When adoring crowds treated Obama speeches like it was The Beatles at Shea Stadium in 1966.

The Democratic movement - by most accounts - usually represents the young, new, hip generation (think: Bill Clinton on MTV, playing saxaphone on late-night talk shows, banging his subordinates with cigars, etc.). These are the people who generally want "change" and want to do away with the "old way of doing things." We are the "new generation." Etc....

Meanwhile, the Republican movement is generally thought of as the old, out-of-touch, stodgy way of doing things. The media loves to portray Republicans and their ideas as "the old guard" and make fun of their age whenever possible (think John McCain). These old codgers want to return to the glory days of the 1950's, The Greatest Generation folks. yada yada yada.

I've had a thought. There is an old saying that I think most people can agree with:

"EXPERIENCE IS THE BEST TEACHER"

While people who side with Democratic ideals generally don't do so with malice or intent to harm others or their country (though ACORN supporters may have a different take), they unfortunately lack a real perspective of how government affects them personally, and their country as a whole.

The reason Republican supporters tend to be older is because as they've lived and gained experience with the world they live in, they've come to recognize the effect big Government has on their present and on their future - and it scares the hell out of them.

The young Democratic idealists just haven't had much exposure to how big Government can limit their future. This comes with time. Or Education.

P.S. Can anyone please explain to me how divulging our military secrets to the world (and therefore our enemies) will make us safer?

P.P.S. Does anyone really believe that dragging ex-CIA officials and CEOs before congress in an effort to assign blame for things that have gone wrong is in anyway beneficial to our country? Will it fix our problems? The energy that is wasted on Capitol Hill is MIND BLOWING.

My High Cost of Education (What keeps me going)

2009-04-23T16:51:00.004-05:00

This is a blog I've been wanting to write for a while, just couldn't muster up enough energy or sustained concentration to make it happen....

I friend of mine recently was faced with a decision of where to get his MBA. His two choices where both great schools with solid MBA programs, however one has SIGNIFICANTLY higher name recognition than the other.

The lesser of the two was offering a full scholarship for it's 2-year graduate program. Sweet deal. The more "prestigious" school offered no financial assistance, but it is an accelerated program that he would complete in under one year. Long story short, he decided in favor of the "prestigious" school. I probably would have made the same decision.

Anyway, the point of this post is that he got me thinking about my college experience and the tuition I paid back then. I attended four years at a State school, and with room and board, my tuition in total was about $10K per year.

However, due to the career path I've chosen, in many ways - I'm still "at school" and still learning. And most importantly, I'm still "paying tuition."

The financial markets are not easily conquered. And most people who attempt to make a career in this field are washed out relatively quickly - one or two years. In the best case scenario, they just couldn't make any money. In the worst case (and sadly, most common case), they lose a significant amount of money.

I've been at this for 11 years now. And no matter how you measure it...I wouldn't consider myself a success. I've HAD success. But it hasn't translated into sustained and consistent profits. There were periods of time where I was making more money then I ever thought I could spend (but of course, I tried). There have been periods where I could do absolutely nothing right and paid for it with significant financial hardship. But most commonly, I have periods where I make two steps forward, then take two steps back, etc etc....

So what keeps me going? There are many reasons which have been sprinkled throughout previous blog posts, but I think most significantly, it is because I need to earn back the Tuition I've paid to make this work.

When I say "tuition".... I'm not paying tuition in the conventional sense. My tuition is measured in Opportunity Cost. A person with my education and talents (and inflated self-worth) could have been reasonably expected to have earned over $1 million in salary and benefits in the 12 years since I graduated college. When I think of that, it is really staggering to me.

So what keeps me going in rough times? Well.... the sense that I need to at least break even on my investment. Is that to say that as soon as I make $1 million, I'm going to walk away? Hell no. But I certainly can't rest until I've at least built my trading account into this size.

The cost of tuition is skyrocketing all around the country. But I've met few people who can realistically say they've paid as much tuition as I. It is my intention to make the investment worth it. I'm on my way....

I've been cheating on my blog with TWITTER

2009-04-20T19:28:00.004-05:00

Ok, so part of the reason I haven't been keeping current on my blog is because:

a) nobody seems to read it.

b) I've been lazy

c) I've discovered Twitter.

The immediacy and instant gratification of twitter has captivated me and I've thrown most of my market-related input fit for public consumption on twitter.

The cool thing about twitter is being able to share my trades with other Traders, and receive feedback on my existing positions. Meanwhile, I can keep up with market chatter to see what other Traders have their eyes on. I use an application called TweetDeck to manage all the people I follow (so as to separate my market friends from my regular friends, etc). It's really cool.

If anyone is interested in following my market activity in real time, I post my trades on Twitter within minutes of execution. I also occasionally offer my real-time market analysis (if you fade all my prognostications, you'll probably make a tidy income) :)

My handle on Twitter is: chicagosean. Look me up.

For those of you who would rather take a sharp stick in the eye than read about my market exploits, I also comment about all things Chicago, Sports, Music, Politics, and whatever else I feel like. There's a little something for everybody, I guess.

A Belated Performance and Strategy Update

2009-04-20T19:06:00.005-05:00

Well...I did it again. I hit a rough patch, and I shied away from updating my blog. This has happened repeatedly. I really should stop hiding when the shit hits the fan.

Oh well. February and March where ugly and stressful. The market swung WAY down, then swung WAY up - screwing me on both sides. Perfect. At least April expiration finally allowed me to get back on track - earning 13% for the month. That's more like it.

The experience of the past few months exposed some flaws in my approach; However, April's result gives me confidence that my fixes are a step in the right direction.

As the market appears to have formed a bottom (at least in the short term), leading stocks have begun to break out, showing some promise for the market as a whole. While I continue to seek profits from selling out-of-the-money (OTM) options premium on the S&P, I also am now attempting to catch some upside on the aforementioned market leading stocks.

To achieve this, I've begun purchasing bullish call spreads in selected stocks. My risk is limited to the purchase price of the spread, and I'm limiting the amount of positions I hold so as not to exceed the income I receive on selling OTM SPY call options. In otherwords, to offset the outlay of cash to purchase these bullish call positions on market leading stocks, I'm selling OTM call spreads in the S&P (SPY) as a hedge. I'm attempting to convert my SPY trades into a 10% portfolio gain per month. Meanwhile, trying at worst, to break even on my bullish trades.

Each Month:

If the market tanks hard, the worst thing that should happen is all my bullish positions will expire worthless, but I'll keep the entire premium I received on selling SPY call options - and thus earning a modest profit.

If the market rips up, my SPY trades will have to be constantly adjusted, reducing the income from this hedge...meanwhile, many of my bullish stock positions should see impressive gains. This time the result would most likely be a nice profit.

If the market goes sideways, I should make around 10% on my portfolio for the month

I've included the italics because, as I've learned over the years, things don't always work out the way you planned.

All-in-all, this seems like a good proposition. We'll see.

Calendar February Results

2009-03-05T09:15:00.003-06:00

29% LOSS for the period Feb 1-Feb 28. Ouch.

As I mentioned in the previous post, this was an ugly month. The market broke out of its recent range in a decidedly bearish way. Make no mistake about it, The stock market hates the stimulus plan and President Pork Sandwich's plan for inflating the US out of the doldrums.

The bearish breakdown in the market killed my short put verticals. Most notably, I am caught in positions in WFC (a bank), GENZ, AMGN, and UNH (healthcare related) which are getting killed every time Obama opens his mouth.

Hopefully, these losing positions which will be rolled over will be next month's (or the month after that) gains. Only time will tell.

In the meantime, while still adhering to the same overall trading strategy, I've changed the way it's implemented.

Previously, while attempting to construct a portfolio of short spreads to collected time premium, I was entering verticals in various stocks, while attempting to stay as close to delta neutral as possible. And to manage these multiple positions, I beta-weighted the portfolio against SPY. My profit curve took a similar shape to the profile of a cross between a short Iron Condor and a long Butterfly.

Well, besides the profit downside this past month, what I really learned is what it's like to be a Fireman. With between 15-20 different spread positions on at one time, when the market decides to go hard in one direction (in this case, down)... all of a sudden you have multiple positions running against you at the same time that need to be closely monitored and regularly adjusted. I felt like a fireman constantly putting out small fires all over the place.

This led me to change the means by which I aim to achieve the same result: instead of constructing a portfolio of various short vertical spreads, I can much more efficiently achieve similar results by selling Iron Condors on SPY. The SPY is very liquid and therefore I can trade in and out of relatively easily. By selling ICs beyond one standard deviation out at various points as the market moves, it seems to be a less stressful way to achieve similar results - with less risk. Besides, it'll be easier to manage.

I will be exploring taking this one step further beginning with April expiration. When I begin trading April options (in about a week), I will begin trading Double Diagonals (short near month, long back month) in an effort to establish Iron Condors with better risk/reward and hedge against Vega risk.

Let's see if we can turn this ship around and get back on track. I'm mildy confident that within two months, I will have weathered this storm and recouped a majority of losses on current open positions, and then be able to strictly focus on trading double diagonals in SPY.

The End is Nigh

2009-02-27T15:06:00.002-06:00

While the title of this post is inspired by the upcoming theatrical release of WATCHMEN, I can't help but feel the same way about The US Gov't, The Stock Market, and most importantly, my portfolio.

After a smart and promising January, February has handed my portfolio a real stress test. I haven't tallied the results yet...but they won't be pretty. Downright awful, actually. And today, the last day of the month was the icing on the cake.

Short put verticals in some select Health Care related stocks are putting me to the test. Thanks President Pork Sandwich.

The positions I'm currently in will surely test my hypothesis that time, time decay, and patience will yield positive results. I'm fighting several positions (constantly readjusting my spreads) in an effort to scratch out wins. It is my hope (and tepid expectation) that this month's losses will be next month's gains (...and then some).

In the meantime, in an effort to play it safe, I've decided to play Iron Condors in SPY while I let the remaining stock positions play themselves out to a conclusion. Small, slow, and steady. In times of crisis, the best action is to stay small, stay conservative, and stay watchful. This is my gameplan until we come to a final resolution of this 4-alarm fire drill.

February Expiration Results

2009-02-23T12:46:00.002-06:00

February expiration happened on Friday. And the results were mixed. I experimented with hedging via the SPY contract. There is probably some merit in doing this, but I think the strategy I was employing isn't the proper way to do it. The "hedging" provided a significant drag on my results in February options. As such, I will shelve this idea for now.

In closed stock positions, my portfolio gained a robust 27% on equity. However, my hedging ops in SPY cost me an equally robust 16% hit against my equity. Combined then, the total gain in closed positions equals = a shade above 10%.

However, a troubling situation is beginning to brew. I've rolled-over 4 losing positions from February into March positions. And I'm fighting with a couple more March positions. My stance is to stick with these positions (continuing to roll up/down as they move, and/or roll to the next month if necessary) until such time that I can profitably exit these positions.

This would seem to fly in the face of conventional wisdom (cut your losers short, let your winners run). However, considering that each of these positions has a known maximum loss, and time decay is always working in my favor, I figure I should be able to be patient and eventually the position will come to me.

Unfortunately, this mentality forces me to endure some swings in equity which are larger than I originally thought. For now, I'm going to continue to bite the bullet and trust my intuition, while continuing to ruminate on alternatives.

The calendar month of February is almost up, and if it ended today....my account would be down about 10% since January 31. Let's hope this next week repairs some damage.

The Smartest Guys in the Room?

2009-02-10T20:08:00.003-06:00

The market has spoken. A sweet 5% drop in the S&P 500 in one day. All in response to the Government's "stimulus" plan to save the economy.

Say what you will about Wall Street and the shit that has happened in the past year and a half. But if you think for one second that bureaucrats in Washington are better equipped to solve the crisis than the highly educated, highly trained, and highly experienced risk managers at the largest banks, institutional funds, mutual funds, and trading desks in the world - you are absolutely out of your mind.

The more the Gov't gets involved, the more this crisis will perpetuate itself. More damage will be done. More innocent people (rich AND poor) will be hurt. More businesses will fail. And more jobs will be lost. But at least the Obamamaniacs can be happy there will be several billion dollars set aside for their liberal birth control/HIV awareness campaign. God help us.

The Calm Before the Storm?

2009-02-09T14:52:00.002-06:00

The S&P 500 has managed to bounce around between 800 on the low end and 890 on the high end since I began trading February options in the second week of January.

Keeping my portfolio delta-neutral (via some assistance from hedging in SPY) has proven to be relatively uneventful. However, with February expiration a mere 11 days away, 11 open Feb positions, and the ticking time-bomb Federal Stimulus package winding its way through Washington.... these next 11 days may prove to be very interesting.

I don't know which way the market will move once the final stimulus package is decided on...but it'd be a safe bet to assume the market will blow out of it's current range. The delta-neutrality of my portfolio will surely go through a trying test.

As such, I am attempting to reduce risk. Up to this point, each day when I balance the neutrality of my portfolio, I've done so by selling a credit spread in SPY that provides the needed delta to get me back to zero. Today, instead of selling more spreads (and increasing my potential risk), I've begun to buy back "in-the-money" SPY spreads within my portfolio to achieve my delta repositioning.

By buying back spreads that are "in the money", I'm adhering to the principle of "buying intrinsic value and selling extrinsic value". It is smart for any professional options trader to adhere to this adage. In the long run, the statistics work in your favor. In the trading world, this is called EDGE. And no trader should trade without an edge - whether real or perceived. This realization has had a major effect on my trading.

Stay tuned over the next week or so. Should get interesting. Hopefully it doesn't....but if it does, here's hoping my portfolio is constructed as well as I think it is :)

Calendar January Results, Setting goals

2009-02-03T08:56:00.004-06:00

It's probably weird to report monthly results twice a month. How does that make sense?

Well, it's due to the expiration schedule of options. Two weeks ago I reported my January options results. What that is is the percentage gain to my portfolio from trading in options that expired in January (options expire on the third Friday of every month). I want to know how I perform in each option series.

Now, I'll report the traditional monthly gain. The gain in my portfolio from the close of business on December 31 to the close of business on January 31. For the calendar month of January, my net gain was 11.9%. This was achieved through maintaining a delta-neutral portfolio of vertical credit spreads. Toward the end of the month, I also began experimenting with portfolio hedging. I'm achieving this by selling vertical spreads in SPY (S&P 100 ETF, a broad gauge of the stock market as a whole) to bring my delta as close to zero as possible each day. Selling vertical spreads also gives me the opportunity to collect time premium on the hedges, possibly making my hedging operations another source of revenue. Though, as long as I don't lose much money on this, it would be a success.

As stated before, my targeted monthly gain is 10%. So, we are ahead of schedule. Only 58 more months of this to reach my ultimate goal :)

This is probably a good time to mention the importance of setting goals and milestones along the way.

I am finding that it is very advantageous to not only have an end-goal in mind, but to build a road map that guides you strategically to your stated goal. Sure, this isn't groundbreaking news. I'm sure you've been beaten over the head by these platitudes since grade school (or Tony Robbins late night infomercials).

For me, I have what many would perceive to be a very aggressive goal in mind. And it is. However, I've broken down what I need to accomplish on a monthly and weekly basis. And when I take it one week and one month at a time, the aggressive goal doesn't seem so unattainable. I recognize the value in being consistent in hitting my smaller, incremental targets, knowing that the small steps are taking me along the correct path to my ultimate destination.

As elementary as this sounds, this has been a major EUREKA moment for me. I have victimized myself in the past, repeatedly, by swinging for the fences. My impatience tripped me up many times. I would set a goal - and then set about achieving it as quickly as possible. Nevermind that what I was trying to accomplish was statistically improbable. If there was a sliver of a possibility...I went full-steam ahead to get there as quickly as possible. Predictably, the end result was rarely satisfactory.

Now, with the road map I've built for myself, I can visualise my goal as well as see every incremental step along the way that I need to take to get there. It really is a liberating feeling. Trust the plan, stick to the map, be patient. Good things will come.

Working from home is good for my health!!

2009-01-29T09:05:00.003-06:00

For all the complaining I do about working from home (especially in the winter), one fact I realized I'm overlooking is that I am far healthier at home.

I mostly eat lunch at home. Sure, it's often microwave meals, but they are certainly healthier than the fast food variety I used to plow down when I worked at the Chicago Board of Trade. For anyone who has worked in Chicago's Loop, you know the variety of fast food: heart-attack inducing meat sandwiches, grease dripped everything, super-sugary fountain drinks - not to mention the frequent "pop" after (and sometimes during) work.

The occasional trip out for lunch in my neighborhood is still far superior to the fare in the loop. There are plenty of nice cafes and restaurants near my house that serve up healthy and delicious dishes.

In addition to eating far healthier at home, I also have much more freedom to exercise. I have been prescribed a workout routine by my physical therapist which during my 9-5 days was really hard to stay true to. Now, I have plenty of time and no excuses NOT to fulfill my daily duty to myself. And when the weather is warmer (ie, NOT 5 degrees) I also can enjoy walking outside. I know, it makes me sound like an old man. But I much prefer a long brisk walk to running. It's still good exercise, and it allows me to clear my brain and focus on important things.

Never Stop Learning

2009-01-27T10:36:00.002-06:00

I was reminded of this old cliche last night as I attended an options trading discussion group, led by my broker thinkorswim.

I rarely make New Years' resolutions, and this year was no exception. However, I did promise myself that I would spend more energy on becoming an expert in my field of endeavor. I've been a Trader for nearly 11 years now, but I've never truly considered myself an expert. Or for that matter, ever truly competent - as some years' results might suggest.

As such, I've taken to reading more books on strategy, subscribing to other traders' blogs, seeking mentors, and attending free seminars or classes whenever possible. Already, I feel my efforts are slowing beginning to yield positive results.

The discussion group I attended last night was often times tedious due to an over-abundance of amateur traders who are still very new to options trading strategies and risk management (admittedly, the target market for this discussion). However, I'm glad I went because I was able to leave the meeting with a page full of useful notes - and more importantly - a good feeling that the strategies I've undertaken in my trading are a prudent and statistically favorable approach to generating consistent returns. It's one thing to have confidence in what you're doing, but it's even better when your suspicions are confirmed for you by someone else whom has made a very good living over 25 years in the market employing similar strategies. It nothing else, I left the meeting more confident, and more optimistic about the future.

Learning doesn't end when you graduate from school. It should be a lifetime commitment, and I have found that learning in the real world is far more rewarding and satisfying. For me, learning a new trading strategy and being able to immediately apply it to my day-to-day activities is exciting. And how learning should be. College is great, I'm not here to discredit higher learning. But learning theories in classrooms and writing reports about your theoretical finds is an empty exercise. You need to apply what you've learned to the real world to see how it truly functions. And in the trading world, there is no greater measuring stick to determine how smart you are than your ever-fluctuating, real-time, profit or loss. Cash money.

An appropriate letter as America jumps into ObamaNation.

2009-01-23T10:30:00.002-06:00

I didn't write this letter. It was forwarded to me via the usual email mass forwarding. But if you haven't read this, I think It's very appropriate for the times. It is a sobering word of caution to overzealous politicians and a pliable populace that is eager to get snowed by their new Celebrity President....

(A Letter from the "Boss")

To All My Valued Employees,

There have been some rumblings around the office about the future of this company, and more specifically, your job. As you know, the economy has changed for the worse and presents many challenges. However, the good news is this: The economy doesn't pose a threat to your job. What does threaten your job however, is the changing political landscape in this country.

However, let me tell you some little tidbits of fact which might help you decide what is in your best interests.

First, while it is easy to spew rhetoric that casts employers against employees, you have to understand that for every business owner there is a Back Story. This back story is often neglected and overshadowed by what you see and hear. Sure, you see me park my Mercedes outside. You've seen my home at last years Christmas party. I'm sure; all these flashy icons of luxury conjure up some idealized thoughts about my life.

However, what you don't see is the BACK STORY :

I started this company 28 years ago. At that time, I lived in a 300 square foot studio apartment for 3 years. My entire living apartment was converted into an office so I could put forth 100% effort into building a company, which by the way, would eventually employ you.

My diet consisted of Ramen Pride noodles because every dollar I spent went back into this company. I drove a rusty Toyota Corolla with a defective transmission. I didn't have time to date. Often times, I stayed home on weekends, while my friends went out drinking and partying. In fact, I was married to my business -- hard work, discipline, and sacrifice.

Meanwhile, my friends got jobs. They worked 40 hours a week and made a modest $50K a year and spent every dime they earned. They drove flashy cars and lived in expensive homes and wore fancy designer clothes. Instead of hitting the Nordstrom's for the latest hot fashion item, I was trolling through the discount store extracting any clothing item that didn't look like it was birthed in the 70's. My friends refinanced their mortgages and lived a life of luxury. I, however, did not. I put my time, my money, and my life into a business with a vision that eventually, some day, I too, will be able to afford these luxuries my friends supposedly had.

So, while you physically arrive at the office at 9am, mentally check in at about noon, and then leave at 5pm, I don't. There is no "off" button for me. When you leave the office, you are done and you have a weekend all to yourself. I unfortunately do not have the freedom. I eat, and breathe this company every minute of the day. There is no rest. There is no weekend. There is no happy hour. Every day this business is attached to my hip like a 1 year old special-needs child. You, of course, only see the fruits of that garden -- the nice house, the Mercedes, the vacations... you never realize the Back Story and the sacrifices I've made.

Now, the economy is falling apart and I, the guy that made all the right decisions and saved his money, have to bail-out all the people who didn't. The people that overspent their paychecks suddenly feel entitled to the same luxuries that I earned and sacrificed decades of my life for.

Yes, business ownership has its benefits but the price I've paid is steep and not without wounds.

Unfortunately, the cost of running this business, and employing you, is starting to eclipse the threshold of marginal benefit and let me tell you why:

I am being taxed to death and the government thinks I don't pay enough. I have state taxes. Federal taxes. Property taxes. Sales and use taxes. Payroll taxes. Workers compensation taxes. Unemployment taxes. Taxes on taxes. I have to hire a tax man to manage all these taxes and then guess what? I have to pay taxes for employing him. Government mandates and regulations and all the accounting that goes with it, now occupy most of my time. On Oct 15th, I wrote a check to the US Treasury for $288,000 for quarterly taxes. You know what my "stimulus" check was? Zero. Nada. Zilch.

The question I have is this: Who is stimulating the economy? Me, the guy who has provided 23 people good paying jobs and serves over 2,200,000 people per year with a flourishing business? Or, the single mother sitting at home pregnant with her fourth child waiting for her next welfare check? Obviously, government feels the latter is the economic stimulus of this country.

The fact is, if I deducted (Read: Stole) 50% of your paycheck you'd quit and you wouldn't work here. I mean, why should you? That's nuts. Who wants to get rewarded only 50% of their hard work? Well, I agree which is why your job is in jeopardy.

Here is what many of you don't understand ... to stimulate the economy you need to stimulate what runs the economy. Had suddenly government mandated to me that I didn't need to pay taxes, guess what? Instead of depositing that $288,000 into the Washington black-hole, I would have spent it, hired more employees, and generated substantial economic growth. My employees would have enjoyed the wealth of that tax cut in the form of promotions and better salaries. But you can forget it now.

When you have a comatose man on the verge of death, you don't defibrillate and shock his thumb thinking that will bring him back to life, do you? Or, do you defibrillate his heart? Business is at the heart of America and always has been. To restart it, you must stimulate it, not kill it. Suddenly, the power brokers in Washington believe the poor of America are the essential drivers of the American economic engine. Nothing could be further from the truth and this is the type of change you can keep.

So where am I going with all this?

It's quite simple.

If any new taxes are levied on me, or my company, my reaction will be swift and simple. I fire you. I fire your co-workers. You can then plead with the government to pay for your mortgage, your SUV, and your child's future. Frankly, it isn't my problem any more.

Then, I will close this company down, move to another country, and retire. You see, I'm done. I'm done with a country that penalizes the productive and gives to the unproductive. My motivation to work and to provide jobs will be destroyed, and with it, will be my citizenship.

So, if you lose your job, it won't be at the hands of the economy; it will be at the hands of a political hurricane that swept through this country, steamrolled the constitution, and will have changed its landscape forever. If that happens, you can find me sitting on a beach, retired, and with no employees to worry about.

Signed, THE BOSS

What is "Prosperity"?

2009-01-20T14:13:00.002-06:00

Prosperity is commonly associated with vast amounts of money. Wealth.

To me, it is much more than that.

Prosperity is freedom. Freedom to make choices. Freedom to live where you want, when you want. Freedom to act. Freedom from debt. Freedom from regret.

Of course for most people, to achieve the above mentioned freedoms, money is the key ingredient.

My goals are pretty simple, I think. I hope to eventually live a debt free life, beholden to nobody else to provide for our incomes (ie, working for someone else). I'd like to continue living in Chicago, but have a winter residence someplace warm near water. Ideally, I would have several residences, but lets not get ahead of ourselves....

An experience I've been wanting to have for some time now, is to rent a Winnebago and travel around North America for an entire summer. No schedule. No route. No plan. Ideally, I'd hit the road with a few friends. We'd wake up in the morning, look at a map, figure out what looks interesting within a 4-5 hour drive, then set off. We'd arrive in our new destination around lunchtime and we'd spend the entire day in whatever location it is, experiencing whatever it is to experience. If we like it, perhaps we'll stay a second day. Whatever. We have no plan. No schedule. The beauty of my job is I can do it from anywhere. A laptop computer and a wireless internet connection is all that's required. Who wants to join me?

P.S. Today is inauguration day for President Barack Obama. People are celebrating like we just won World War II all over again. It is indeed an exciting time for people in America, if they are willing to, in fact, change their behaviors. But if I put a nickel in a basket every time a politician made a promise to America for "change" or "transparency" or "bipartisanship" or "equal opportunity for all" or "equal access" or "affordable health care" or "fiscal responsibility" or "corporate governance" or "world peace," my basket would have been upgraded to a dumpster, and it'd be overflowing.

I can't help but worry that once the buzz wears off from America's new Celebrity Metrosexual President, that the Prosperity that America expects (and the one I hope for personally) isn't even further away than it is now.

Naturally, as an American, I wish Obama well. I hope he succeeds in his noble goals without sacrificing our security and our future as a nation. And as an ideal.

Barack, you've come a long way since you and I used to trade turns on the bench press machine at East Bank Club. Good luck.

January results are in.

2009-01-20T13:41:00.002-06:00

January expiration took place on Friday, and as such, the net result of all my January options trades resulted in an 11.3% gain in my portfolio. This is in line with what I hope to continue in the months and years ahead. I had one losing bear call spread in Monsanto that I rolled up and forward to February for a credit in an effort to buy myself some more time to turn this into a small winner (so far, so good).

The market has begun a new leg down in this bear market. It started innocently enough just after the new year. However, the downside is accelerating and the previous lows set in November appear set to be violated in the weeks to come. The world is slowly starting to realize how severe the financial crisis REALLY is, how much worse it can get, and how the Obama administration's stated goals and initiatives will lead to vastly increased government spending (translated, MORE DEBT) which will further erode the buying power of the US Dollar. Hardly the stuff that makes investors optimistic.

As you can imagine, the existing February bearish positions in my portfolio are performing quite nicely. The offsetting bullish positions are starting to demand I pay a little more attention to them. JP Morgan's stock is getting hammered today (again) which is causing to me to roll down my bull put spread in that stock. The stock is currently trading around 19.35. I'm currently short the 20/22 put spread which I put on when the stock was at 22.00. I am attempting to roll down to the 17.5/20 put spread to improve my odds of success.

Which reminds me. If there are any other options traders out there who accidentally fall upon this blog who have experience managing a portfolio of vertical spreads, I'd love to bounce ideas of you. Drop me a line.

Let's Try This Again, shall we?

2009-01-19T12:15:00.002-06:00

I've lost count, but I think this about the 6th day in a row of barely leaving the house except for quick little errands or to hop into a car. It is January in Chicago and the temperature hasn't risen above 10 degrees Fahrenheit in over a week. I'm beginning to feel like a hermit. I can go on and on about how much I hate this. But I'm going to focus on the good that's come out of it.

This forced home incarceration has provided ample opportunity for introspection.

One thing that I've centered on and have become consumed with is the building inventory of projects started, but never completed. This blog being at the top of my list. The second blaring example is a bookshelf littered with books that I have made halfway through, but never finished.

I'm reminded of a phrase uttered by coaches in every sport: "...it's not how you start, but how you FINISH."

With this in mind, I am now attempting to finish many of the things I have started - starting with this blog. The paradox with this blog, however, is that you can't "finish" a blog that is supposed to be documenting a journey that theoretically has no finish line. I am attempting to achieve Prosperity. But when you've achieved it, the journey doesn't end. It's a way of life - of living.

During my time of reflection, I've become agitated with myself for not keeping up with this blog. NOT keeping this blog current completely flies in the face of what I was hoping to achieve. As such, in an effort to keep me more interested in keeping this current, I've decided to broaden the focus. This blog will not solely focus on my occupation - Trading - although I suspect it will be heavily peppered with it, as my chosen career is a major part of who I am and is the vehicle that can transport me to the places I want to be.

This being said, I should point out that one major point of attraction to making your living as a self-employed Trader is the ability to change your mind and change your course on a moments' notice. If something isn't working, I don't need to prepare a proposal, run it by a focus-group, get management approval, and beg for funding from the finance department. In my world, I can make a decision and implement my new strategy immediately.

As such, I've changed my trading focus since my last posts back in July.

I essentially manage two trading portfolios. One is my retirement account that exists in a tax-advantaged Roth IRA. In this account, I will be following the same fundamental principles listed in previous posts (see below), however, my positions will be more concentrated. Meaning, I'll only hold up to 5 or 6 stock positions at most - though in the short term, I'll probably focus on one or two positions. And will often be in cash - as I am now until the markets provide a reason to wade back into the waters.

My second account, and the one I spend the most time on, is my "discretionary account." It is in this account that I am trading stock and index options. The strategy that I'm employing is designed to capture option premium (ie, shorting options) in risk-defined trades. My portfolio is designed to minimize market risk as much as possible by staying as close to delta-neutral as possible. Meaning, I have an beta-weighted equal balance of bullish and bearish positions so as to protect myself from a runaway one direction market. Of course, this isn't a fool-proof method, and adjustments have to be made frequently to readjust the portfolio to its neutral stance.

Options are decaying assets - they lose a fraction of their value every day (kinda like a car). They lose their value most rapidly in the final 30 days before their expiration. My strategy is to short out-of-the money options and take advantage of this phenomenon while hedging each position in case I'm wrong.

In this portfolio, my goal is to achieve monthly returns in the neighborhood of 10%. This might sound aggressive - and it is. But through proper risk management and timely adjustments to wayward positions, I believe this is possible. Only time (our friend) will tell.

Ok - for those who couldn't care less about the specifics, thanks for making it this far.

Mark Cuban is a business man whom I greatly admire, and I read his blog (www.blogmaverick.com) religiously. His views of business and achieving success are inspiring and he is living the dream. The man built many businesses from the ground up. One in particular he was able to sell to Yahoo at the height of the internet stock bubble (1999) for a ridiculous amount of money. He could have sailed off into the sunset, but instead he goes and buys his favorite basketball team - the Dallas Mavericks. In doing so, he's made the team into a perennial force. Man...that is living. I hope he can pull that same trick with the Chicago Cubs - if MLB will let him.

Anyway, his blog has inspired me to dust this one off and attempt to keep it current. Hopefully you'll find my posts at least interesting, and at most inspiring and entertaining. Afterall, this post should be a reflection of its author, and I like to tell myself that I am all three of those things :)

Stay tuned for what I hope will be close to daily posts.

Sean
Chicago, IL

Welcome Back to the Markets, Kid......POW!!!

2008-07-04T11:29:00.005-05:00

So, the first week back in the markets is in the books. And I wasn't greeted with a welcome mat.

The overall markets continued their bearish slide to new lows, and finally took the last remaining bright spots in the market with it - and thus my portfolio.

The market began this bearish turn in late May. However, stocks in the energy, drilling, machinery, and agricultural sections of the economy had continued strong and many continued to mark new highs. This was no surprise, considering supply and demand in these sectors.

However, even the market leaders can't fight the trend forever. And true to form, the bear market finally got its claws on the high fliers and is beginning to bring them back to earth.

Having built my portfolio on these aforementioned last remaining leaders, it is no surprise that it took a beating this week. While the S&P 500 lost 1.21% for the week, my portfolio took a 11.08% hit. Ouch. Welcome back, kid.

The carnage: Seven positions were entered and promptly exited this week for losses averaging 9.4% each. The eight remaining positions still on the books are all currently showing losses.

The only position of these that shows real potential for big gains is RBN (Robbins & Myers). To a lesser extent, BABY (Natus Medical) looks promising as well. Hopefully these positions will hang on long enough for the general markets to hit a near-term low. The beginning of a new uptrend in the markets should provide an impetus for these stocks to take off. But, regardless, I won't hesitate to pull the trigger to exit these positions if they hit my stops.

As the markets maintain their bearish tone, it is important to focus on the fact that odds are we are much closer now to a near-term bottom. With the leading stocks in the market finally getting knocked of their perch, the signs of capitulation are starting to pop up. And that's what you need to end a bearish slide. You need investors to finally all throw in the towel in a flurry of high volume panic selling. Until we see that, this bear market will continue wearing us down.

Meanwhile, I'll keep maintaining my watch list of industry leading companies with solid fundamentals. These will be the companies that will eventually lead us out of this bear market and will out-pace gains in the general market.

Positions exited on Thursday:

PBR @ 64.34 for a 9.0% loss
CAM @ 52.36 for a 6.1% loss
NBL @ 94.95 for a 8.7% loss
ARD @ 47.55 for a 13.7% loss

I'm new to this whole "blogging" thing and haven't quite figured out how to make my excel spreadsheets available for people to view on this site. Bear with me as I figure out a way to post this info. In the meantime, I'll just list my existing positions and performance to date:

Portfolio start: Monday, June 30, 2008
S&P 500: -1.21%
Portfolio: -11.08%
Positions:
OXY, RBN, GHM, CNQ, ECA, SWN, BABY, APA.

It's Getting Ugly Out There

2008-07-02T18:54:00.003-05:00

It was interesting to watch the general market throughout the day just keep trending lower and lower. I'm starting to smell the blood in the water.

Meanwhile, politicians keep spinning their wheels with horrible ideas in an effort to appease voters. "Excess Profits Tax"? Sue OPEC? Please.

Yet, some politicians are standing in the way of wind farms being built out west for some reason that just adds up to NIMBY thinking (Not In My Back Yard) and drilling in ANWR because it would be unconscionable to inconvenience a mountain goat or migratory bird. It really is just laughable.

Meanwhile, early in the day as the market was attempting to show signs of life, a few more stocks set of triggers for me to add to the portfolio. Unfortunately, all of these stocks turned tail almost immediately after I entered them.

I should take this quick moment to point out something: It will never be my intention to catch the bottom of a stock before it takes off. Nor will it be my intention to sell the absolute top. It's impossible. I gave up trying that years ago.

I would rather buy a stock at highs and watch it go higher. And I'd rather get out of stock after its already made its high for the move. Prove to me its not going higher, then I'll get out. I will leave lots of profits on the table an infinite number of times. But it is this same philosophy that will keep me in the BIG winners that might double or triple in value. Those trades are the ones I'm in business to catch.

Today's portfolio changes:

Subtractions:

Sold GTI @ 24.74, losing 9.4% on this position
Sold ACI @ 67.69, losing 10.3% on this position

Additions:

APA, Apache Corp @ 144.28
NBL, Noble Energy @ 104.00
ARD, Arena Resources @ 55.11

The markets are down over 20% putting them in BEAR MARKET territory. Eventually, the market will come back. And when it does, it will be led by companies with strong fundamentals, increasing earnings, and positive outlooks. All the world is screaming doom and gloom. It takes a little more work, but if you look closely...there are great young companies flying under the radar getting ready for huge breakouts when the market finally stabilizes. I'm gonna stick to my process with full confidence that I'll catch a handful of those future leaders that will take my portfolio to new heights.

Despite all the politicians attempting to stick their nose into the markets, in the long-run I believe in free market capitalism to fix what ails it. The market is never wrong.

Day 2: Building this portfolio

2008-07-01T17:37:00.002-05:00

Day two was much the same as Monday, continuing to add positions in a flurry as signals were popping off everywhere.

Let's start with the bad news first... in only the second day, a position triggered its stop-loss and was sold. ANSS is the stock. Bought it Monday at $48.26, and sold it Tuesday for $44.00. The position lost 8.8% in total. It was nice knowing you.

Four more positions where added today, and when you look at my portfolio now, you'll notice heavy weight in the Energy and Machinery sectors. This is where the bull market is now. Can it change tomorrow? Absolutely, and I'll have to keep on my toes when it happens.

As it stands now, even though energy stocks are in a bull market, I will still seek to take profits on the way up as long as the overall market continues to be in correction mode. There's an old saying on Wall St: "Bulls make money, bears make money, but pigs gets slaughtered." With that in mind, when the market is in a correction, there is no point in overstaying your welcome. You'll likely regret it.

Here the additions and subtractions to the portfolio on Tuesday:

Subtraction:
ANSS, Ansys @ 44.00

Additions:
CAM, Cameron Int'l @ 55.76
SWN, Southwestern Energy @ 48.58
ECA, Encana @ 92.02
CNQ, Canadian Natural Resources @ 103.21

Each weekend, I will display my total portfolio and discuss it's overall performance. Stay tuned.

Sean McLaughlin
Chicago, IL

First Positions

2008-07-01T07:28:00.004-05:00

Monday was a busy day as I established my first positions. Most days won't be this busy. Once I have my 10-20 positions on, stocks will have to get sold before I make any new additions.

No doubt, this will lead to missed opportunities. And this has caused frustration in the past. But the important thing to remember is: You can't catch 'em all. It's impossible. I can "woulda, coulda, shoulda" myself to death easily by recounting the uncountable times I've sat on the sidelines and watched a position double or triple just days after getting out for a tiny profit (or worse, a loss).

The important thing is to stay true to a process, stick to my principles, and focus on putting positions on in stocks that have solid fundamentals and underlying reasons to own them. I'll catch a few...

This being said, here is the rundown of the positions I put on yesterday:

ACI , Arch Coal @ 75.48
ANSS, Ansys @ 48.26
GHM, Graham Corp @ 74.96
GTI, Graftech Int'l @ 27.31
OXY, Occidental Petroleum @ 90.01
PBR, Petroleo Brasileiro @ 70.72
RBN, Robins & Myers @ 45.84

It isn't lost on me that I've embarked on this journey literally two days after the stock markets "officially" landed in Bear Market territory. However, as Jim Cramer likes to say: "...there's always a bull market somewhere!"

As of this writing, Oil & Gas drillers, Metals producers, Energy, and Agricultural themed companies continue to rise in the face of soaring crude, rising inflation, and good old fashioned Supply and Demand. As such, you'll notice that many of the above picks (and many to come) will be focused in these areas in the short term.

Strategy Overview

2008-06-29T14:51:00.005-05:00

The strategy that I will be employing will be centered around a mix of Fundamental and Technical analysis of stocks.

Stocks of companies I will be selecting to trade and invest in will be leaders in their fields. These companies will be experiencing strong quarterly and annual Earnings per Share (EPS) and sales growth, and will be members of top performing industry groups. Their stocks' price performance will already be outperforming at least 70% of all other stocks' performance. These stocks will also be experiencing increased accumulation by large mutual funds and hedge funds (institutional buyers).

From this pool of eligible stocks, I will be determining entry points based on break-out and trend continuation chart patterns.

My method draws heavily on the teachings of William O'Neil of Investors Business Daily as well as Richard Dennis and William Eckhardt of "Turtle Trader" fame in the commodities arena.

I will not invest more than 10% of total investible cash in any one company and will seek to limit my portfolio to no more than 20 companies at any one time (utilizing leverage where necessary).

During periods when the broad markets are in correction (as they are currently), I will attempt to take profits on the way up sticking to a 3:1 profit target. This means I will attempt to take profits three times what I am risking upon initiation of the position. For example, If I purchase XYZ stock at $100 and my stop-loss is $90, I will exit my position for a profit at $130.

During confirmed rally periods for the general market, I will give winning positions more room to grow. While maintaining a strict stop-loss, I will let violations of 50-day trendlines be my signals to exit positions.

As Jesse Livermore, one of the greatest Traders of all time has been known to repeat (in paraphrase): "The best money is made in the sitting and the waiting". When general markets are in confirmed rallies, I will attempt to do just that.

Without giving away the farm, this is a broad overview of how I will build my investment portfolio. If my hypothesis is correct, and I execute according to this strategy, it is my belief that I can target annual returns in the neighborhood of 100%. While this number is certain to cause investment professionals from all corners of the globe to scoff at my assertion, I believe it is absolutely within the realm of possibility. It is my intention to find out.

Wish me luck.

Sean McLaughlin
Chicago, IL

The Beginning of a Journey

2008-06-29T12:42:00.001-05:00

Today is Sunday June 29, 2008 and I sit on the precipice of a new beginning. Perhaps new beginning may be a bit inaccurate - a new start may be more appropriate. However, it has the feel and the makings of a true new beginning.

It is over the past two weeks that I have decided my true calling is to be a Trader. A full-time trader, dedicated to earning his living in the markets.

I am no stranger to this role, as I spent nine of my best years attempting to accomplish this. And it worked - for a time. Sparing you the details, towards the end of my previous run, I was burnt out having struggled to earn steady profits and relying on managing money for other people (prop trading firms, for example) that required I follow their rules and parameters for entering trades and managing risk. Due to these constraints and my inability to accept direction from others, I was doomed to fail.

Though I have continued to trade in a small way - in January 2007 I had given up. I had lost all ability and confidence in myself to provide for my wife and myself as a Trader. It was time to get a "real" job.

Since February of 2007, I have been employed in various roles for a fast growing, pre-IPO logistics company in the transportation industry. The experience has been fruitful. I've gained confidence in skills I didn't know I had. I've been given duties and responsibilities on escalating scales of importance. And I've made many friends in the process. However, one thing that always felt out of my control was my ability to succeed. And again, I really don't enjoy having other people tell me what to do. Recognize a common pattern here?

I have now spent the better part of the last year and a half away from the trading world, spinning my wheels in the corporate world. During my spare time I have immersed myself in studying the stock market, taking the 50,000-foot high-level view of trading and portfolio management instead of viewing it from the trenches. This new perspective has given me fresh ideas, fresh confidence, and the willingness and belief that I can be successful again in this pursuit.

Which brings me to why I've started this blog and what I hope to accomplish:

As a totally independent Trader managing my own money, it is my intent to hold myself accountable. While I don't work well under close supervision, I do feel there is value in broadcasting my portfolio results for the world to see - the good, the bad, and the ugly. If for nothing else, this blog will force me to stay true to my strategy and provide a diary for constant review and improvement. And it also satisfies a small interest in being a Writer that I've always secretly harbored.

It is my expectation that I will do well, and deep down inside of me is a hope that perhaps somebody or some group out there will recognize the value of what I'm doing and would like to hire my services to manage a portion of their risk capital.

At the very least...and perhaps this is more realistic, I hope my personal Journey to Prosperity will prove to be inspiring to other traders, investors, or people who are currently or considering chasing their dreams - whatever they may be.

Tomorrow is Monday, June 30 and my Journey begins. I still have my day job, but I will be resigning from that no later than the end of August. The potential trading profits from my modest sized trading account won't be enough to solely provide for a comfortable standard of living in the short-term (for this my wife and I will count on her job). But it is my hope and expectation that biting the financial bullet in the short-term will pay significant dividends in the long-term. Both financially, and mentally.

If you've made it this far, thanks for reading. Please feel free to post comments, suggestions, criticisms, or well wishes.

Sean McLaughlin
Chicago, IL