Too Good to be True

If I told you that my trading account has been practically unchanged since early September, you’d probably be surprised. If I told you that over the last 15 months, my paper trading account, open for anyone to see, has grown from $100,000 to $172,000, you’d certainly would like to see each trade wouldn’t you?

The “trading education business” is actually quite large, but only a handful of such businesses are willing to show their results, and when they do, they hardly ever exceed 30% growth per year.

When I first started this blog, I was motivated by my very own failure to find a methodology that could be consistent through any market situation. I thought that by disclosing what I was doing, I would motivate other frustrated traders to cooperate with me in finding a methodology that worked. Perhaps naively I shared my knowledge even when I got little in return. Then in 2006, I reached a profit of 30%, which I though, was a great accomplishment. By mid 2007, I was ready to test my strategies openly, in a paper trading account, and I begun to record each trade real time, for everyone to see. I recorded each trade on video and .pdf files. Each one of those trades, winners and losers were recorded and so was the success.

My methodology has already been described in this blog. All you need to do is to read it all in this blog, and put the strategies to practice, and over time (at least 6 months) you should see similar results. Of course even that requires determination. I can tell you that the paper trading alone requires persistence to reach a point in which your faith and hard work will pay off, to the point that you’d be ready to trade good portions of your portfolio.

I understand that there is some skepticism because folks think of trading as a zero-sum game where there is only one winner and one loser in every transaction. That you could only become a successful trader if you beat others at the game. If that is the case, why would I be giving away my secrets to others that could actually beat me at the game some day?

The events of the last few days not-withstanding, I believe that there is abundance in the world and that humanity can’t help but make progress, and grow. Perhaps because I have seen how Bill Gates and Steve Jobs, members of my generation, created two huge businesses out of thin air, that I can believe that wealth is created from the hard work of people, and that investors should benefit from that growth. But I also believe that as new businesses become successful, others unable to adapt become obsolete and die. Not to mention others that disappear because of the incompetence and sometimes the greed of their officials.

Assuming that businesses create growth of thin air, we could easily benefit from their growth. The PCCRC profits from the earnings growth by virtue of the long calls and short puts in the position. But it would be foolish to pretend that we have access to all the information we need to make the decision to exit the position in a timely fashion. In fact the reality of a meltdown in a recently successful company may be so devastating and sudden that we rarely have sufficient time to react. Often the meltdown occurs overnight, so we have no opportunity to exit the trade in a timely fashion. If that is to occur, the only way we can survive is to become extremely lucky or benefit from foresight. When that happens in that zero-some game, we are the losers, sometimes enough of a loser to ruin months of profit growth. But if we have a PCCRC, and enough of us have PCCRC’s on that collapsing stock, who is the loser? If I give away my strategies, am I not actually setting myself to be the loser?

I don’t see how. If every trader in the world had the exact same position in the exact same stock then IV would skew in such a way as to set other opportunities that could be beneficial for other traders playing the IV skew in another format. But the biggest mover of put options, that would appreciate in a sudden collapse in a stock in particular, are not the retail traders, but the big mutual fund managers that must buy puts as insurance when the market conditions merits it, such as at the proximity of news or earnings releases. It is up to us to find situations in which IV is low and likely to grow.

So, no I am not afraid of sharing what I know, and hopefully my choices of trades would be on companies with large growth potentials, but If I am wrong, I hope to benefit from the mutual fund industry that DO need puts to be able to hold onto their precious stock shares.