Endurance: The Cousin to Patience

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

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

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

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

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

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

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

"Tao people never try, they do"

"Live with commitment"

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

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

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

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

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

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

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

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

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

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

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

Live with Commitment.

Adjustment Thursday!

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

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

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

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

The Market Moves to Make It Most Painful for Most Participants

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

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

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

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

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

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

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

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

October Positions

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

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

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

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

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

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

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

Thoughts:

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