Advanced Option Trading Systems

2011-06-04T11:08:00.001-07:00

In June, this account was opened with $100,000 fictitious dollars. I have been trading it LIVE, once a week, every Thursday, in front of an audience for almost 4 years now. The account has grown to over $265,000 as of today, May 11th, 2011. An average of more than 28% growth a year. You too can see how I trade this, and have access to my easy to follow set of rules. Just register and OptionsVet, and subscribe to the Thursday webinar.

Current Value: $268,932.18

Year to Date: $36,161.00

FREE WEBINAR: INSIGHTFUL

2011-05-15T13:51:00.000-07:00

Soon, free webinar. Insightful, revealing. Tutorial: How Is Trading Different From Gambling? e-mail to attend: paperprofit1@mac.com

Two Secrets to Sarmiento's approach to EW

2011-05-05T20:53:00.000-07:00

I have been studying the Elliott Wave since 1995. Only a couple of years ago, I learned that the S&P500 e-mini futures were so liquid that provided very detail charts even in 5 min. charts. I begun to study and quickly view the results of my forecast. Based on observations by R.N. Elliott and G. Neely, I created my own approach to Elliott wave analysis revealed in my e-book "Elliott Wave for Traders". This e-book is only available to the participants of my Tuesday and Wednesday webinars. I believe that the EW is not a simple matter, and that teaching it requires a series of demonstration. A yearly subscription and series of webinars is the only real approach to putting this incredible forecasting technique to good use. So please consider joining OptionsVet and then subscribe to either the Tuesday (Directional Trading) or Wednesday (life Trading) Webinars. Here are two secrets that are part of this unique, simplified but effective approach to EW analysis:

2010-02-04T09:49:00.000-08:00

Yes, folks, the time has come to spend the time and effort mentoring Options traders deserves.

You can now visit me at www.OptionsVet.com and read good articles, post your comments as usual with no obligation on your part, just Pay it Forward!

I will continue to post valuable articles that reveal my views about trading, options in particular, and the Elliott wave analysis and forecast as well. at no charge.

If you want to attend one of my three weekly webinars, you can register to my group. But you can also have access to tutorials, videos and relevant content for a ONE TIME fee. Yes only one payment and you are a member for life. You'd have access to my forum where other traders discuss their finds, successes and frustrations.

I have now accumulated dozens of recorded webinars that you can also access, if you wish to participate in the Archival webinar group.

I am very proud of the website my friend and fellow group member Steven Kuo has created, bringing my vision to a reality.

Please come and see it!!!

Teaching Principles, not Giving Stock Picks

2010-01-31T13:34:00.001-08:00

I am often asked, do you make stock recommendations in your web site? I wonder why people expect this from a site that is focused on teaching? I remember when I first took the Optionetics basic course in late 2002, they offered a few trades as part of the teaching experience. Keenly I went home and tried to evaluate the recommendation myself, invariably I was disappointed, and did not enter the trade. I just could not agree with the assessment of the instructor. They also had newsletter subscription for several thousands of dollars, but I never took that offer. This is not to say that the trades might not have been successful, I am merely saying that I could not find myself to do the trades because my own analysis was opposite to theirs.

I also took McMillan’s excellent newsletter, with multiple recommendation along with daily followups on the trades. They had very specific rational for each recommendation, and one could certainly learn from the experience, but I just could not be on a daily watch waiting for their instructions on when to enter and when to exit, rollover, or take partial profits in one position. This is not my approach to trading, I am more of a swing trader, and I hope that my positions stay in place for several weeks, or months, rather than changing them every day. I simply have a different style.

I suspect that there are differences of opinions between my group members on what are good trades, and what timeframe to trade. I am sure, however, that they understand that my goal is to teach them a set of principles, and rules of entry and exit, hoping that they reproduce my trades in papermoney. Learn from my good and bad trades, and eventually begin to make their own choices. My goal is to teach principles, rather than give them recommendations. You may say that the following Chinese proverb applies here: “Give a man a fish and your feed him for a day. Teach a man how to fish and you feed them for a lifetime”.

I have noticed in many trading “educational” enterprises with whom I have trusted my time, faith and hard earned money, that they usually over promise and under-deliver, with rare exceptions, and I won’t list names, here. This should not surprise anyone because: a. no one really knows the future. b. not every system works 100% of the time. c. None of this enterprises spent enough time mentoring their “students”. This should not surprise anyone because neither them nor I can promise to turn you into a winner. That is entirely up to you. What I can promise you is that I will teach you, without reservation, everything I know. That is my commitment to the participants of my group. Eventually you will be able to learn my principles, apply them or adapt them to your own trading, and eventually, on the balance, end up better off financially that you are today.

My approach is NOT to charge you thousands of dollars for some hours of teaching, and then leave you to test the approach on your own. My goal is to teach you by letting you look over my shoulders (Thursday and Wednesday webinars) and teach you the principles that guide my trading (Tuesday webinars). At the end of a one year period, you will have the knowledge to use or adapt to your own trading reality or even create your own approach. Copying what I do exactly, or following my recommendations will only make you leave disappointed and more frustrated than ever. However, if I can convince you that you can adapt what I teach you to your own trading style, you will stick with it. In order to succeed in trading, I recommend the following quote from Henry David Thoreau: “I have learned, that if one advances confidently in the direction of his dreams, and endeavors to live the life he has imagined, he will meet wih a success unexpected in common hours.

Understanding Elliott Wave Theory

2010-01-29T21:49:00.000-08:00

Why doesn’t the Elliott Wave Theory work with Stocks? Actually it does, but the conditions and parameters to use it with, makes it impractical for traders in most situations. In addition there are significant obstacles to a definitive Elliott wave count for most equities. I have been lucky to have found the best equity in which to test and implement the Elliott wave, and work on a set of 4 secrets I have implemented in my own counting.

First, let me say that I used the Elliott wave in my life outside of trading to make financial decisions that saved me a fortune when all around were losing their savings. This is because I recognized the pattern that was developing in the stock market between 2000 and 2007 early, and avoided any large investments in real estate, or bonds or stocks, and focus instead on locking in high, long-term interest rates in CD’s between the period of 2004-2008. In addition I tapped into Options to create a strategy which would take advantage of sudden movements in the stock market, whether up or down. So, I DO believe that the Elliott wave is a great theory, but with big limitations most people don’t recognize because they do not stay long enough to find them and understand them.

Click on image to enlarge it

Over the last 2 years, I have focused on Elliott counts in short-term charts on the e-mini S&P500 futures. This instrument has the unique feature to trade day and night, except weekends. This is important because any swing in the stock price is important to the final evaluation of an Elliott Pattern. There are no “gaps” in the e-mini chart, so one can easily count an Elliott patter without ambiguity in 15min, 1hr, daily, or weekly charts with great accuracy.
The chart above shows what I mean. With little ambiguity, a completed pattern can be identified and thus a reversal recognized. You can only construct a smooth chart if: a. There are no gaps in the charts, which would hide significant market action, which may be essential for Elliott counts. b. The instrument is high liquid so the chart reflect the true sentiment of the participants as orders are filled in a timely fashion.

Click on image to enlarge it

Stocks often have big gaps that obscure the true pattern under development, obstructing rational decision making. In the chart of QCOM above, the Elliottician is unable to discern the true pattern in the movement. Is QCOM at the end of an elongated flat? or in the middle of a wave 3? perhaps wave X of a double zigzag is about to form? These may be important observations that an options trader could use to make decisions such as buying a put or a calendar spread in this case.

Click on image to enlarge it

An hourly chart is not any more revealing, when including after hours data. Even though there is after hours trading in this stock, there are significant limitations to this trading and the charts are not a good reflection of the sentiment. The long, red candle right after the earnings release is not an accurate representation of the true market action. But even before that, the candles seems quite inaccurate, particularly in after market action. An elliottician cannot rely on this hourly charts to accurately count short-term charts, and thus extrapolate to daily charts. Still, in some cases, provided that the stock is liquid enough, the gaps are smoothed out when weekly, rather than daily charts are used. Provided that the stock is heavily traded (liquid), and a consistent counting technique is used, a reasonable count can be achieved.

Click on image to enlarge it

In this weekly chart of AAPL, gaps are eliminated from the count and a double zigzag is revealed without much ambiguity. The daily chart may be used to confirm some of the movement. If there are gaps, the count is unreliable and the weekly chart is the only way out of for the elliottician. Therefore, Elliott have counting is a good long-term approach to investing in the markets but it is inaccurate for most swing/day trading. This conclusion is supported by years of observation , which vindicates my own use of the Elliott wave during the 90’s when I followed careful counts of a set of about 30 separate stocks. Similarly, other observations have also help me understand how I was be very wrong about some specific cases in which I lost money.

There are heavily traded stocks that could have reliable daily chart counts, as demonstrated from this chart of GS.

Click on this image to enlarge it.

The limited number of gaps reveal a sequence of ups and downs without the typical extension rule that applies to impulse theories as described by Elliott (Neely’s Litmus test). Understanding this is paramount in trying to make sense of chart patterns. Simplifying the approach to counting is the basis of profiting from Elliott wave analysis.

My observation of the E-mini S&P500 futures in hourly charts has put my understanding of the Elliott wave theory in to a great new perspective, and has helped me formulate a variation of Ralph Nelson Elliott theory using his original channeling method. I have kept the largest set of Elliott patterns described by Gleen Neely under my arm for consultation, but I have relied on Rich Swanelle’s most common patterns right on my desktop as common pattern occur almost exclusively. I am formulating a new theory that classifies Elliott patterns as Trending and non-trending while preserving the original classification of impulsive and corrective patterns. I have learned to recognize also ambiguous vs. unambiguous situations that could and should be used to profit from the markets and even make long-term decisions in our financial lives. Understanding the short-comings of the Elliott wave theory is just as important as understanding its strengths.

I believe that R.N. Elliott was a pioneer, and there have been great contributors to the original theory such as Prechter and Frost, Neely and Swanelle, but the original theory stands as strong today as does the original principles of genetic described by Mendel, although there have been significant modifications to those principles by Morgan for his work with the fruit fly, and Watson and Creek for their proposal of the DNA molecule. Careful observation can lead into the verification of some basic principles but it can also reveal complexities not understood by the original proposed theory.

For me, the Elliott wave theory is only useful to the extend that we can use it for what it was intended: to profit in the markets, and that has been the focus of my work. To dismiss the Elliott wave theory as unworkable or unreliable has been my temptation many times. My love-hate relationship with the Elliott wave has lead me to a point where I can confidently say that I get it!

Elliott Wave Forecast, S&P500 futures

2010-01-21T10:13:00.000-08:00

Here is my Elliott Wave analysis of the Bull Market that started in March 2009. I give you a few minutes to reflect on it.

PLEASE CLICK ON THE IMAGE TO ENLARGE IT

The participants to my private group, and vistiors to this blog have been looking at my charts for a while.

Over the weekend, I made a short video clip explaining my views and why I though the top had been reached.

If you'd like to see my forecast, please send an e-mail to Paperprofit1@mac.com. All requests are welcome.

The Secrets to Elliott wave Forecasting

2009-12-25T09:56:00.001-08:00

Over the years, I have had a love-hate relationship with the Elliott wave, but lately, I have been in a honey moon with it. I think that most of you will benefit from what I have to share, even if you have just casually listened to elliotticians with wonder and skepticism over the years. I have said before that my first exposure to the Elliott wave theory came from the book “At the Crest of the Tidal wave” by R. Prechter. Ironically, Prechter was predicting a bear market by 1995, when I first read the book. Although I questioned some of its assumptions, I was very intrigued by the theory because it appealed to my scientific nature. For example, I questioned that he would go back to the 1400’s to begin counting the Elliott pattern in the “markets”. I think that if you are to trade the S&P500, you should start counting the waves in the index, when it begun to include the 500 components, back in the 1950’s. Ironically, however, the components have change significantly since then, so one would still have to question the validity of the counts. The Dow when it begun had only 15 components back in the 1890’s, and the index had grown at an exponential rate since then, so most elliotticians count waves in the log transformed charts, but I question the validity of this approach too. Now you can see why I have to be very skeptical about any long-term interpretation of wave counts, particularly if the analysis is included in some book that predict the end of the markets as we know them.

However, I have to credit my Elliott wave analysis from having saved my financial life both in 2000-2003 and 2008-2009. That alone is worth all my frustration over the years with the Elliott analysis. Thanks to my analysis of the S&P500 index, I expected the decline of 2008. Because of this, I have not owned any stock since 2000-2003, and was inclined to trade the volatility-sensitive PCCRC, which I credit with the greatest one-week profits of my trading career, precisely on the worst week in US market history. However, I have to admit that the profits did not come from forecasts in individual stocks or indices. In truth, I could have profited, albeit not so handsomely, if the markets would have ended higher in 2008. Now I am offering my secrets to Elliott wave analysis here.

Trading individual stocks by Elliott wave forecast is probably not wise. There are exceptions of course, but some conditions must be met. It is ironic that I used the Elliott wave analysis successfully early on between 1995 and 2000, but you could probably say that I was in the right place at the right time. While it may appear to make sense to buy calls in individual stocks at the bottom of a wave 2, you’d have to keep a watch list of stocks and examine them on a daily basis, for you to enter your trade at just the right time. With the explosion of software for charting, search and trading, today it seems unpractical to keep counts on a watch list of stocks. More significantly is the lack of accuracy of wave counts of stocks that you do not follow routinely. Some softwares claiming to search for Elliott patterns have fallen short of my expectations over the years, and even my own counts are erratic, at best, in many individual stocks. I think that the main reason for that is the significant gaps that occur between days. This is particularly true for stocks that trade with relatively low volume. Even though one could restrict the forecasting and trading to highly liquid stocks, the truth is that after hours trading is not recorded in most charts. I believe that this is a major fault in Elliott analysis because wave patterns are determined by highs and lows, and some of these may occur outside normal trading hours. If one where to restrict the trading to clearly identifiable patterns, the you could rely on Elliott wave counting. The truth is that such unambiguous patterns are the exception, rather than the rule. Making this approach unpractical for those who want to swing trade options for a living, like I do. You may find such patterns in hourly charts, particularly in currency pairs, but to me the time spent in day trading, along with the stress, do not fit my personality.
S&P500 futures are the best! I have been observing the /ES and trading it here and there, for a little over 1 1/2 years, since I joined the DTI group. Since then I have found that day trading is not for me, but I have discovered that the /ES is probably the best instrument for forecasting using the Elliott wave. My Tuesday and Wednesday webinar participants are witnesses to the almost uncanny forecasts I have been given lately. I am convinced that this is mostly because the /ES trades all day and all night, with the exception of 15 min and Friday to Sunday, which are actually of little significance in Elliott forecasting. There are very few gaps, and one can easily count waves with little ambiguity. That is not to say that there are not periods of uncertainty. By its very nature, there are sequences with low predictability. However, the advantages of having a forecast on the S&P500 are obvious, since most stocks follow the indices most of the time. The validity of the Elliott wave forecast on the S&P500 futures may derive, at least in part for the high liquidity of the instrument.
Believe your eyes. In 1995, I used the methodology described in R. Beckman’s book “Elliott wave Explained”, this is the channeling methodology. In fact, this is derived from Ralph N. Elliott’s own methodology. Somewhere along the way I was disappointed by my own counts, as I noticed that some patterns did not conform to the channeling rules. I then went on seeking further advice. One book that interested me was Glenn Neely’s “Mastering Elliott wave”. However, the complexity of his approach made it almost impossible to use for trading. Over the years, I have learned that there are basic rules, basic patterns, and that there are also rare patterns that almost never occur, and if they do, we just need to recognize them. I have also used the Advanced Get and the Refined Elliott Trader, each with its own advantages. In the end, I have returned to my first love, the channeling methodology, having adapted it based on my additional learning over the years. I believe that when all is said and done, it is the human eye that is best adapted to pattern recognition. I should have understood this since the beginning, after all I am a Pathologist, and we learn to recognize lesions at the microscopic level, something computers are unable to do (so far).
Long-term charts are the best. Go back a decade in a weekly or monthly chart, and the noise will disappear, making your analysis clear. You could make larger decisions in your life, such as understanding that the 2000’s was a bad time for investing, for example. If I had told you that the March 2009 low as a major low according to my own Elliott wave forecast, would you have believed me? Better yet, would you have believed yourself if you could identify the 2000-2009 move as a FLAT that reversed just as expected by Elliott analysis? This will be complicated by the forecast of other well recognized elliotticians such as Prechter and Greenblatt who were calling for a continuation of the decline as recently as August 2009. They were wrong. Yet the FLAT pattern from 2000-2009 calls for a strong reversal after completion. That is what we are getting. My group-participants will tell you that I have been saying this since December, 2008. I don’t want to boast because invariably I will get it wrong some time too. However, it is nice to know that I have a frame of reference which the long-term Elliott wave forecast of the S&P500.

Please join my group, attend my webinars on Tuesdays which involve the basic of options and technical analysis. Some of my recorded webinars deal with the Elliott wave and my approach to forecasting. The tools are available in the free charting software that come in the Think or Swim platform.

Do you Know how to get Rich Trading?

2009-12-23T09:10:00.001-08:00

I have been investing in the stock market since 1991, and trading options since 1995. It is undoubtedly an exciting way to spend your life, but is it really the way to riches?

You can generate a large amount of wealth in the stock market by being at the right please at the right time. For example, you could have worked for Microsoft in the 90’s and participate in their incentive options program, that would certainly be an easy way to a great deal of money, that could allow you to retire early. I made a fortune in a variation of this approach, but I wont give the details, I don’t want to brag or raise expectations.

To me today, the important question is: Is there a way to become wealthy enough to stop working and trade for a living? I have been in trading for a long time, and I don’t usually hear of those stories. For most of us, trading is a secondary way to generate income, and a very erratic way at that. When I started trading, I wanted to hit some home runs to grow my account quickly, to supplement my income from my business as a consulting Pathologist. Most professional traders (trade for a living), they are seeking a steady income to pay the bills with and to become successful enough to never worry about money. But is it become rich realistic? If I did not think so, I would not be doing it. In the process of finding an approach that would allow me to do that, I have come to understand a great deal about trading options. One of them is when you think a strategy is working well enough to make you rich, then the game changes, and you have to adapt. This is when knowledge comes in very handy.

The PCCRC is one of those promising strategies, but it is not the only one. In the current market environment, the biased (bullish) butterfly has proven to be effective, as long as you follow a set of rules for entry and exit. Becoming rich by trading is the dream of all who enter this endeavor. But if one can find a consistent approach to producing income while exploring other approaches then one has a better chance to run across that approach that can make one rich. Building a knowledge base, is undoubtedly the first step. Whenever someone promises to teach you how to trade, ask yourself: Has this guy become rich trading? if so, why would he be teaching his strategies? why should I follow him? I have taken many courses in the past, and the pattern is usually this: They give away some basic knowledge and some tricks, but I have never learned something that would make me rich by any courses I have taken. They are very guarded with their secrets, or they have no secrets at all. However, I have learned a lot by courses, reading books and attending free and paid seminars. There is a lot that forms the bulk of my trading knowledge, and I am willing to share that with you. Perhaps you can come up with the strategy that would make you rich, perhaps you’d be willing to share it with me.

The PCCRC produced great profits between 2005 and 2008, but I have to be quite honest, as I have always tried to be, and tell you that this year has not seen good profits. The paper trading account that I have been trading was worth fictitious $210,000 at the period of highest volatility in November 2008. During this year, the account has been around $193,000 with little change in either direction. While it is comforting to know that an unfavorable environment can not cause large losses, There are other approaches that could have cause great gains, as many stocks have gone up in unprecedented ways since the lows of March 2009. I for one have experienced great gains in bullish trades using the biased butterfly strategy. Does that mean that I would abandon the PCCRC? no, it is still the best strategy for most markets, just not one in which volatility is in the decline. In fact, one of my best trade this year is a PCCRC on AMZN, which I could not timely enter in my PCCRC trading account.

Far from quitting on the PCCRC, I feel very satisfied that it has provided me with much knowledge in the workings of Options, Volatility and time decay, technical analysis and the Elliott Wave theory, among other important concepts in trading. For the last year, I have been sharing that knowledge in my Basic of Options webinar. I have now accumulated 41 sessions most of them as long as 1hr 20min long.

Trading is a profession, and as such, you need to read a lot, study a lot and then gain experience either by fly simulation or by guided practice. Doesn’t it make sense to get as much from others as you possibly can? My webinars are not expensive, I started them with the philosophy of “Paying it Forward”. As I approach the first year of the webinars, I am likely to reach 45 webinars in one year. At a cost of $100 per subscription (likely to increase in the new year), you’d pay just $2.20 for webinar. This is a great gift to you, all you need to do is “Pay if Forward”. But there is more. If you were to join the Stock of the Day group ($200 one time contribution) and subscribe to the webinar series ($100), you will be included in the Stock of the Day II group, and thus have access to the entire collection of recorded webinars (41 webinars).

But hurry. Sometime in the new year, I will be unavailing my new web site. If you are a lifetime member, committed to “Paying it Forward”, you will have access to Discussion Forums on the PCCRC and basic of options. If you are a webinar subscriber, you will have access to the entire collection of videos, but understand that to do some of the things that I want to do to improve the service, I am preparing to make the web site a business, so costs will go up.

If you are willing to “Pay it Forward”, please join us NOW.

The End of an Era, The Beginning of a Better One.

2009-11-24T11:43:00.000-08:00

Have you been reading my blog over the last 3 years? have you enjoyed the honest and informative material in this blog? Perhaps you moved to the private group, enjoyed the discussion and the video tutorials for a modest, one time only contribution. Perhaps you have been watching one of my 3 weekly webinars for the yearly subscription of about $2 per webinar. Now, the group has grown to 150 members, all of them benefiting from a simple rule-based approach to trading options. I have offered my time and effort for free (minus my costs) with the hope that you’d Pay it Forward. Most of you have. I have learned of heart warming stories showing your commitment to the idea that the world could be a better place, if you do something really great and good for three of our fellow human beings in need. Although the commitment if for expanding this generosity to 3 other people, I have done it to >160 traders. I have done more than my part.

Now, it is time to move on. There are a few things I want to do, going forward to increase my group, and share knowledge with more of you. My goal is to reach 500 members. For this I need more capital for advertisement, resources to generate videos and coaching programs, and live seminars. I have found that I really enjoy my interaction with other traders, and teaching come very natural to me. I have found that my strongest instinct is the pursuit of mastery and my biggest joy is in sharing what I have learned. In order to grow, I am planning to create my own web site that would be subscription-based with webinars, tutorial videos, articles and forum discussion. If you are a member, or become a member before the web site is complete and functional, you will be a member for life and will have access to the forum and video tutorials for no additional costs (webinar fees still apply). Once the web site is in place, however, fees that are in sync with the quality and abundance of content will apply. So take advantage of this pre-launching offer as soon as possible.

It was Napoleon Hill who once said, and I paraphrase here, that people do not value a good or service that they acquire unless they pay for it. I still believe that sharing what you know is a labor of love, but N. Hill’s view have made me think a bit, but I can still keep the cost quite reasonable in order to share my views with the largest number of traders, so they could share with me too. I strongly believe that any trader will benefit from what I have to teach, even if they do not directly apply my methodology. However, I do understand that markets are difficult, and that you cannot always profit under all and any circumstance. So I do believe in teaching the good and the bad, so that the trader can be prepared for anything. To accomplish this, I cannot over-promise and under-deliver, like many “trading education” outfits do. Until now, I have thought that by not making it a business venture, I could avoid that trap. Salesmanship requires a representation of the best-case scenario. However, I think I can reach a balance in part because I have created a reputation of honesty and openness, in part because I will continue to keep fees to a minimum necessary to grow the group.

So be prepared, join soon if you can, and make suggestions now that the site is under development. If it continues to grow, I will keep making every effort to add features to the site and thus increase its value to the participants.

The 10% Rule

2009-11-22T08:59:00.001-08:00

This week I had the opportunity to attend some of the presentations from the Las Vegas 2009 trader’s expo that were broadcasted via the internet. As always, there were a group of presenters representing a business of education selling a website, a subscription or a coaching service of some sort. They try to hook you with some piece of knowledge or a system of some sort, such as a moving average crossover, or a gap, or a candlestick pattern, or a certain pattern that they have identified as a great forecaster of the future movement of the stock.

Chances are that if you have never traded before, and you decide to go through their courses you may never deviate much from that original system. It will become your basic trading knowledge. I still think of fundamental analysis because I first entered the stock market after reading Peter Lynch’s book “Beating the Street”, and I will never look at a chart without considering the Elliott wave Pattern at play because in my first few months as a trader I read the books “At the Crest of the Tidal wave” by Robert Prechter and “Elliott wave Explained” by Robert Beckman. They are in the fabric of who I am as a trader.

For many years, I have made a point of listening to many other traders, I have even paid for courses that were probably too expensive, compared to the value they offered me. Perhaps their advice and tips were no more than tips that I needed to test and adjust to my very own style of trading. One of the most intriguing pieces of trading wisdom was one offered by George Fontanills in the book “Swing Trading” edited by Jon D. Markman. It was George’s 5 min success formula. He would look at any stock jumping or declining 30% or more from the previous day close. Of course that was back in the 90’s. Today you would probably not see that change very often, and even then you would probably pick takeover targets only, hardly what I would call an option’s trading opportunity.

Everyone has their one system, everyone modifies it to adapt to their reality, but it is almost impossible to transfer that knowledge or preference to others without some kind of adaptation or modification. We all have different personalities, and these, together with our experiences and knowledge will mold our trading to a place where we feel comfortable and can sleep at night. This is why I have adapted Fontanills basic rule into one of my own, to the point that I have a system with very specific rules from candidate selection, option strategy, maximum risk, time to expiration, to adjustments or exit rules. I have my rational for everyone of these. Even the original 30% rule, has become for me the 10% rule, but that is just only the beginning. It has taken me 8 years of trading and observation to feel comfortable in this form of trading to trade it routinely. Yet, I can with all honesty say that many trades will turn into losers, the goal for me is to limit the loses in the losers, and maximize the returns in the winners.

This week, in my Tuesday webinar, I will be discussing the 10% rule in detail. I strongly believe that it is an approach that takes what the market gives you, rather than to count on some T.A. reading, there is a fundamental rational to every 10% jump, and I have made a list of items that would be associated with good followthrough. I have opened the webinar to all members of my private group that are not yet subscribers to the Tuesday webinar, but you need to contact me so I can include you in the list.

Needless to say, that this is a unique gift to you, with the motivation that you’d Pay it Forward. You can always adapt the strategies fit your personality and knowledge. Still, it is a great piece of information for the experienced and the novice alike.

If you are not a member of the group and would still like to join me, please send me an e-mail. This landmark presentation will remain in my archives for those who join the private group and the Tuesday webinar subscription in the future.

Please don’t forget to Pay it Forward.

A simple method to swing trading

2009-11-14T11:14:00.001-08:00

As a professional in the biological sciences, I transitioned my career first from a job in the pharmaceutical industry to my own consulting business with part-time trading and now I spend as much time trading as I do running my Pathology business. At first, I did not want my trading to interfere with my business because that was my main source of income. That has changed now, but I do retain the view that time is money and that my trading should be profitable on an hourly basis compared to a job with a 401K account. Therefore, a successful trader must beat the performance of the S&P500 and exceed it compared to a job that he could otherwise have. Otherwise, it would not be worth it. You may say, but what about the freedom of a full time trader? I think that one must keep his/her mind occupied in a productive endeavor most hours or our lives, so freedom is a relative term. I for one work as much as I always did, and that is how I am happy.

The fact is that a good trader must have a time-effective approach to the markets. I recently experimented with day trading futures and found that it was not time-cost effective. One could spend hours looking of the right opportunity and end up feeling pressure to trade when there were no good set ups. The inevitable effects are frustration, fear, stress and psychological defeat. I soon learned that to day trade successfully, the first obstacle is one’s one psychology and the second is the profitable use of one’s time. Time is money!!! It becomes critical that one spends as little time as possible in the identification and selection of candidates and trades, otherwise you are simply in an expensive hubby.

Compared to the 1990’s, the internet has provided us with a explosion of technology as of late. There is great number of resources that can provide us with the information we need. Take for example Yahoo finance, FINVIZ.com, Stockcharts.com and the ThinkorSwim platform, all providing free resources, and other paid services such as Optionetics Platinum, Telechart.com and Iqcharts for paid services. Locating and selecting big opportunities has never been easier. So, why do we complicate it all by listening to advisers, gurus, commentators and pundits? why not just follow our own advice?

You need to answer this question: when does a stock becomes a good candidate for trading or owning? The answer is deceptively simple yet most people would probably not see this answer because of confusion, information overload, lack of patience, fear or simply the lack of the tools to take advantage of that situation. Let me illustrate my case with an example that everyone can relate to. May 5th, 2003: Apple Inc, [AAPL] releases an important piece of news

Top News Story: Apple's Online Music Store Sells 1 Million Tracks  * Apple Computer Inc. said on Monday that its iTunes music store, which opened for business a week ago, had sold more than 1 million songs at 99 cents each, a figure that record industry executives said topped internal expectations.
The rest, as they say, is history.
But let’s take a look at the signs, we traders (or investors for that matter) could have identified and what potential trades could we have made to take advantage of this once-in-a-lifetime opportunity, and how do we identify similar opportunities going forward....

On May 2, 2003, a time when most investors were dismayed of the last 3 years of bear market action, specially on AAPL, which had fallen from $60 to the close of $14.45 on that day (The chart shows a split adjusted sa $7.23 a share). On Monday May 5th, 2003, AAPL closed at $16.1 (sa $8.05) after having opened at $14.78 (sa $7.39). By the close, AAPL had appreciated by 11.42%, having been as high as 16.8% on that day. Here is my message: AAPL jumped ≥10% compared to the previous day’s close.
Understanding the significance of the news is easier today than it was then, but clearly it was a paradigm shift in the music business and AAPL was there in the center of it all. Today AAPL is the biggest seller of music in the world and the benefits for shareholders are obvious, as the stock is currently trading at 26 times the closing price on that day. A lot of 100 shares costing $805 (sa 50 shares) would be worth $20,445 today.
Now of course not every stock turns out like AAPL, and buying stock is inherently risky, since any stock can go to $0. However, you have a hedge when you trade the ≥10% spikers, provided that the reason behind the jump is significant for the long-term future of the company. But there is one more important factor to my approach, and it is the user of options to both limit risk and leverage the rewards. Please join my group if you want to see the potential in the use of options in swing trading.
For now, let me state the secret here again: use the platforms currently available, both free and paid to locate the spikers and find the rational behind the jump. Only a few seconds a day may be enough to pick the AAPL’s of the future. This is a simple methodology that is available to everyone. You do not need any proprietary secrets, or software, nor do you need the advice of any Guru or an insight into the secrets from big institutions. All you need is a few minutes a day, and mostly freely available resources of the Internet.
If you join my group you’d have available, video tutorials, question and answer forums and 3 weekly webinars to coach you into trading success. I ask for a small contribution as well as your commitment to Pay it Forward!

AMZN

2009-11-08T08:27:00.000-08:00

On October 23, AMZN jumped after earnings from $90 to $120/share. Traders may have watch in awe without knowing what to make of it, let alone trading it. I offered some suggestions at to where could AMZN go based on Fibonacci projections and Elliott wave forecast and posted this article for the Stock-of-the-Day private group. I am posting the .pdf here for your information. If you think it is valuable, why not join my private group?

AMZN

I let you in a little secret...

2009-11-05T20:02:00.000-08:00

There is a very simple way to locate stock candidates to trade almost every single day. Hence the name of this pages, The Stock of the Day. The tough part in not finding the candidates, computer technology has grown to such levels in the field of trading that you could find this stocks with only a few simple commands in a “free” platform such as TOS. I name it “free” because you Do pay for its use in commissions. But if you learn to use the platform effectively, and make a consistent profit, then the commissions are not that important, are they?

You can look at publications, search through Yahoo Finance, subscribe to an expensive Newsletter, watch CNBC or Bloomberg, and get the recommendations from a financial firm. You can look for upgrades and downgrades, but don’t you think that there must be an easier way? don’t you think that there should be an insider’s list of real winners somewhere that the big guys have access to that you would never have? “The game is rigged!” they often say, somewhere out there has the edge, and trading being a zero-some game, edge they have makes you the loser.

Not necessarily. I have found listening to ex-floor traders, and even well-known traders that make a fortune teaching others their tricks, that we can also have our hedge, that they could not have access to. They don’t even try. My hedge, for many years was the Elliott wave (EW), but to be perfectly honest, EW theory is hard to transform into practice, due to the great deal of ambiguities among Elliott patterns. I have found that my methodology for EW forecasting has grown to be unique and fairly accurate, but to transform this in to profits you need: 1. A very liquid stock or index. 2. A perfect set up where there is no ambiguity in the pattern to follow. 3. A working knowledge of other technical analysis (T.A.) methodology to confirm the reversal after a completed EW pattern.

Right at about 2005, after many years of frustration, trying to get my trading into a positive momentum, I resigned myself to abandon the EW (at least for a time) and focus on stocks that were obvious winners, and thus worked out my PCCRC strategies. One of my approaches was to look for stocks jumping >10% from previous day closes. I found that almost every day you have a stock spiking up >10% or declining more than 10%. Finding these can be accomplished easily, providing that the platform you are using can alert you of these jumpers any time during the trading day, or at the closing. The TOS platform provides me with such an alert. Not only can I have a front page report of the big performers of the day, I can find also the largest decliners as well. Both these groups may vary from 0 to at least several candidates from day to day. This is what I got today:

Not always, but sometimes we have winners and losers too.

This is hardly the complete story of my trading but it is the first step. Next, I have to decide the options strategy, the time to expiration of the options selected, and of course the rational behind the selection of one (or more) of the candidates in the list. No every trade is going to turn into a winner, in fact we have to be ready to lose all the capital on each trade but our hedge is in using a strategy that makes my winners large and my losers as small as possible. Here is were the retail investor has a hedge over the floor traders and the big institutional traders. We can be selective and we can make small best in many candidates. As many as one a day.

But I am not one for vigilantly looking at 20 days day after day, I would rather enter a trade and let it work for several months and only take a glance at it in case I have a big winner, like my AMZN trade recently which I entered on Sep 16th, 2009 when the stock was $90. Today it is almost $121.

My approach was the selection of AMZN because of the jump of almost 10%. The rest is a matter of finding the rational for the jump and think if the jump is justified. Eventually, there should be follow through.

There are times when market conditions hurt even the most bullish of stocks, as we saw in Oct-Nov 2008. This is why you need both bullish and bearish trades, the leverage of options would compensate you for your loss in bullish trades through the leverage in your bearish trades, should another market collapse occurs unexpectedly.

Please join my e-mail group and one of my webinars. For just a token amount to help me pay for the cost of broadcasting my webinars, you can get a wealth of information that will, at least, help you find your hedge.

Why would I give away my secrets? because I want to you Pay it Forward!!

Covered calls on AAPL? Not!

2009-10-23T11:20:00.000-07:00

My friend is all exited because of the money she made with the recent jump in AAPL. Just a few weeks back she explained to me that she had a large position in stock and that she had sold calls against it. I told her that a covered call is really not a smart way to trade options because you have all of the risk of owning stock and not much of the reward, if the stock rallies strongly. The idea in a covered call is to sell premium in a call that you believe is expensive. However, you must protect yourself against an huge jump in the stock by either buying a call at a higher strike price, or owning the stock itself.

I was talking in one of my webinars about “Synthetics”. That is, for every option position, there is a stock and option combination that matches it well on risk and potential reward. To easily understand the synthetics, you need to calculate the stock as having the potential reward of a long call and the risk of a short put. In essence:

Stock = long call + short put

So, a covered call is the same as:

Stock + short call = long call + short put + short call :.
Stock + short call = short put.

When you look at it that way, then you have two possible substitutes the covered call, which requires much cash to keep in your account:

You can simply sell a put. However, you should not sell more puts than the equivalent stock position that would result from assignment. Here your broker is going to request that you keep enough cash as though you were to buy the stock. Here again, you have much capital at play, and at risk, just to get the “premium” of the short put. The sad part about this is that when a stock rallies strongly, and all you have is a short put, it makes no difference how high the stock goes, as long as the put expires, your reward is always the same.

The covered call is not much different. If the stock rallies strongly, you do not have a better reward than if the stock has just gone high enough to call away your shares. Perhaps you are happy with this, but given the cash at risk in a covered call, you must realize that the risk/reward ratio is rather high. If you really think that the stock will go slightly higher at a slow rate, but you are concerned about an unexpected decline in the stock price, perhaps you want to enter a Collar. In essence, with the collar, all you did is use the proceeds of your short call to buy a put. This is used if for some reason you do not wish to exit your stock.

Covered call = stock + short call
Collar = stock + short call + long put.

This again is not a very practical approach because you have much capital at play, that you insist in protecting by buying the put. Yet, you have limited your potential to profit, should the stock jump strongly. Here again, this is not the kind of trade that you would do if you want to protect your capital. Now, what if we use our knowledge of synthetics to create a position that is equivalent to the collar, but does not require so much capital?

The call vertical spread is the synthetic equivalent of the Collar, and can be used when we believe that the stock is going to move slightly higher over a long period of time, say 3 months to 1-2 years.

long call + short call (higher strike price)

Why is this equivalent to the collar?

Collar = stock + short call + long put

remember, the stock is equivalent to a long call + a short put, so our collar becomes

so the collar would be the same as a vertical spread, as long as the short call is above the current price. Try drawing a risk graph for the collar and the call vertical spread and you see that this is the same.

I don’t know if it was due to my influence or not, but the fact is that she bought calls on AAPL, before the post-earning jump. Perhaps my webinar made it see the light. Now would my friend be so happy as she is if she had vertical spreads, collars or covered calls? probably not, although she would be satisfied that the stock went up, perhaps she would be sad that this stock has been called away. So what made the different for her?

I would rather own one long call of a momentum stock than 1000 shares of stock with 10 short calls on top. Why? because the long call has unlimited upside potential but only limited downside risk. In essence, you can have the cake and eat it too, so long as you do not risk all of your capital on a few calls. Don’t go buying enough calls to meet the cash you were willing to use in 1000 shares of stock, you should think of the calls as equivalents of the shares of stock you are willing to buy, or perhaps a little more, but always contemplate how much you’d lose if the stock trade goes against you and falls below (or does not reach) the break even point by expiration.

The important thing to remember about long call options is that they are going to be expensive during a raging bull market, specially when the underlying is a “high flier”. Sometimes, however, the price is justified, if the stock is capable of jumping >10% in one day or >30% in one week. Not many do that this days, but AAPL and AMZN come to mind.

Back in the 90’s I had a friend that call me regularly for my opinion in her idea to buy technology stocks such as CSCO or SUNW for example. She had a knack for picking them at the top. I would say, don’t buy stocks, buy the long call... She would reply, stock is what I know. Eventually playing this game she was burned when the market reversed. I got burned too, but because I was buying calls, my loss was minimal. The value of limiting your risk was obvious to me. Clearly, I thought, there must be a combination of options that would allow me to own a position that has limited risk and unlimited reward but that would not require the attention that a long call would require.

My two friends learned, I presume, that holding stocks is capital at risk but the gains you accumulate are in danger if you hold overnight. I should know, I was holding AAPL back in Sept 2000, when it collapsed overnight from $63 to $28. I am lucky I did not hold Enron. There are approaches to trading stocks that limit risk and maximize reward and lower the break even point to near the current stock price (or raises it in the bearish case). This is what my Tuesday’s webinars are all about.

Yes, I do have 3 webinars a week, that is attended by the participants of my group. Would you like to participate? you can join the group and then subscribe to the webinars for a year. I ask for a small contribution to keep the effort going, pay for my expenses and not much else. Please send me an e-mail at paperprofit1@mac.com and I will tell you how to enter in the group and what you’d get.

Five Option Strategies, A Diversified Portfolio

2009-10-09T09:47:00.000-07:00

Since Sept 2000, I have not held shares of stock following a collapse in the price of AAPL, a stock that I had held from the time Steve Jobs returned as CEO. Back in November, I said I was going to begin buying the SPY, and I did so, a few shares every 15 days until mid April, but that is the exception rather than the rule for me. I still do not hold stock. I don’t do covered calls or collars, I don’t sell puts. This is because I do not like positions that limit my potential profits and/or make my potential loss unlimited. This is why I am an option’s trader: I want unlimited profit potential with defined risk. I only enter a position knowing how much am I likely to lose so that I can allocate a portion of my capital in a balanced manner. This is portfolio as well as position management. I may have a bad year, but I know I can handle my draw downs.

I have been advocating for the use of the PCCRC because I can limit my risk for position to 2% of my account, and placing up to 10% of my portfolio in a trade. This unique approach make it unnecessary for me to own any stock. I can trade between earnings and be prepared for a market collapse. This strategy worked like a charm last year when I had the best period ever in my career as a trader, and the worst single week in Wall Street was by best week ever. However, volatility has been in decline ever since, and my PCCRC strategy has been lacking of candidates only until recently. I had a lot of capital in the sidelines simply because there were no good PCCRC set ups as volatility declined.

Still, there were plenty of opportunities as the markets begun to rise, and early on I advocated the use of biased butterflies, because they lock in the volatility. I used a very simple strategy: located stocks that jumped >10% in a day. Found the reason for the jump, and entered biased butterflies in stocks that reported earnings and raised earnings guidance. The result is that most trades have returned a profit. However, I understand that such a form of trading depends on the stock market itself, and we have had a very good market. This is why I limit my risk on these trades to only 1% of my portfolio. That is a lot to manage, to be sure, but placing such trades requires little attention, as long as you understand that you can lose every penny. The biased butterfly I use has unlimited potential, just like my PCCRC’s.

In addition to this directional trades, which depend on stock volatility, I have recently begun to sell Iron Condors (IC) on the SPY. For years I have been listening to Don Kaufman of Think or Swim and Options Planet about the IC strategy that he uses (you can learn about Don’s strategy by locating one of his presentations and the Trader’s Expo. Simply go to the MoneyShow.com and search for the videos in previous shows. I never played this strategy because based on my Elliott wave analysis, I was expecting a collapse in the markets. This is the same reason why I adapted the PCCRC in my own trading. So I went back and begun to back test the IC as suggested, entering one a week for the whole year 2008. The result was that despite of the two big loser months (October and November), the IC overall gave an excellent return for the year. Then it occurred to me that the creating and entry of this trade week after week, month after month required very little effort, and would certainly pay better than many investments, even in a terribly volatile year like 2008. However, if you put this together with my PCCRC strategy, the losses from my IC could have been absorbed easily. The combination of IC and PCCRC could be quite profitable and generate consistent profits year after year. This year, the PCCRC candidates have been hard to find but the IC would have generated profits repeatedly. A 5-10% of my portfolio could be easily allocated to the IC.

We can also play the decliners: Stocks that fall more then 10% in a day. For this I look for skews in the front vs. back month options and then trade biased calendar spreads. Contrary to the butterflies, the Calendar spreads benefit from increasing volatility and volatility does increase as markets decline. These days this are rare, but markets do change. Again, I would limit my risk on these to 1% per trade, as I might lose all the cash in each trade.

Finally, I can trade long calls and long puts, but these require a systematic approach. One of my favorites is the approach that Price Headly of Big Trends has come up with. Again, these are play money trades, and I have to be willing to lose all the money on each trade, although he does have rules to exit when the trade is not working.

The most important component to my portfolio is the PCCRC. It requires only 1 day a week for me to see what each trade is doing. The IC is the hedge that will generated consistent profits, with the occasional losing month. The remaining forms of trading are high maintenance, but they are good approaches for traders with lots of time in their hands. Despite the fact that this year has been poor for PCCRC candidates, it remains in my mind as the most powerful approach for the traders that have a “real job” as they say. The IC also requires only 5 minutes a week to select the proper trade, and then a few minutes on the week of expiration to exit the shorts that need to be closed.

If you like to learn more about this strategies, consider joining my e-mail group. For more information, just send me an e-mail at paperprofit1@mac.com.

Is the Ellott Wave Analysis Predictive?

2009-09-25T07:35:00.000-07:00

Is the Elliott Wave Analysis Predictive?

I have been an Elliott wave enthusiast since 1995, when I first read the book “At the Crest of the Tidal Wave” by Robert Prechter. Back then, Prechter was forecasting a bear market to last decades. Although scientifically, it made sense to me that there would be an order to the universe — my training is in the biological science, I am a Veterinary Pathologist — it made little sense to me that Prechter would go back to the 1400’s to look for the origin of the Dow Jones Industrial average, when the Dow had only been around as an index since the 1890’s. Nevertheless, at the time I thought that understanding the Elliott wave theory was a task worth the effort.

If you search in the web for Elliott wave forecasts going forward, you might find R. Prechter how is calling for a terrific decline in the next few weeks, as a proposed wave 3 down gets under way. You may find Larry Katz forecast that calls for a bottom of the bear market in March 2009, and thus a bull market to last for years to come. There is also Jeff Greenblatt who is talking about the completion of a 4th wave on the impulse down which begun in Oct 2007, and thus a potential for a new low, but not nearly as bearish as Prechter. With so much divergence, it is easy to become skeptical about the Elliott wave theory.

Today, I can say that the Elliott wave saved me from a big loss in the 2007-2009 decline, because I have not owned a stock or mutual fund since 2000. However, I DO maintain a love-hate relationship with the theory. I have learned to maintain my distance and only make trading decisions when when there is little or no ambiguity, and believe me, there is often a lot of ambiguity. It is only after a complete pattern that we can make a good forecasts, and even then, most elliotticians are way too exuberant and grandiose. So I have learned its limitations. From a traders perspective, here are some basic rules:

Elliott theory is based on mass psychology, so it makes sense to keep the forecast for highly traded instruments, most specially indices.
Gaps are problematic because they can be misleading as to how high or low a stock may have reached after hours. This is why I like the e-mini in daily charts, as it has no gaps to speak of.
You are not always going to get a good, reliable forecast, so only trade the reversal, once a pattern has been completed.
You always need to go the origin of a stock or index, but beware of interpretations from logarithmic transformations, they then to be inaccurate.
Beware of Elliott wave forecasting programs, particularly when you apply them to stocks, particularly low liquidity stocks. I have tried softwares that claim to produce reliable counts, but I invariably find myself in disagreement with the results. Understanding the Elliott rules and at least the 7 basic patterns is essential.

As a trader, I DO like to trade the Elliott wave reversals, but I am prepared to exit my trades not based on interpretation but on money management rules. Perhaps I might enter a small options position that I am prepared to lose entirely, or perhaps I might enter a bigger one, with a contingency stop order, but I never debate whether I shuold be right or wrong while my position is in place, there is always time to reevaluate my count and where I could have gone wrong.

Back in the 90’s, when we did not have such powerful internet services as today, I used to download historical data from Yahoo finance into my software (ProTA from Beesoft) and do my analysis. I used the approach described by Robert C. Beckman in his book “Elliott wave Explained”. It worked like a charm, while most stocks, specially technology stocks were in an impulse series. With the years, I have found that price charts can be trending up (or down), without necessarily being impulsive, and this is where Beckman’s method falls apart. Recently I have learned to adapt Beckman’s method to the interpretation of non-impulsive, trending patterns, and have found that once can easily interpret most patterns with this simple method, leaving the rare structures to the purists. However, I DO keep Gleen Neely’s book “Mastering the Elliott wave” handy because that book as a compilation of most possible patterns. However, it is critical for me as a trader to keep it simple and practical.

The Elliott wave is powerful, sometimes, and could save you a lot of grief, if you wait for the right time and signals to make a commitment to a trade. However, money management rules should still apply in order to avoid the arrogance of believing that you must be always right because of your wave interpretation.

How to Profit from the Bull Market

2009-08-23T08:59:00.000-07:00

Here are my rules of entry and exit for Swing Trading stocks:

1. Is the Stock Market Bullish? Here are some measurements of the status of the market, using the S&P500 as the ultimate index.

The S&P500 index (SPX) is above the opening of the year.
SPX is above the opening of the month
SPX is above the 50dMA which is moving UP.
SPX 20dMA is above the 50dMA.

You can use these measurements and make a judgement. Keep a vigilant look at the SPX because the market may reverse unexpectedly. I keep an Elliott wave count of the SPX and although bullish currently, this can change. Keep in mind that the SPX is reaching levels not seen since October, 2008. This is why I have a very simple and stringent exit rule (see below).

2. Select stocks that exceeds previous day close by 10%. This does not include stocks that have received and accepted a takeover offer.

3. The stock price moves above the 20dMA and the 50dMA.

4. Volume more than doubles 90 day average.

5. The stock price is up compared to the opening of the month.

Here is an example, CRM:

If you are thinking that this stock has already moved significantly from the opening of the year, and it is about to correct, you might be right, but in my experience, more often than not, stocks like this will be higher soon. The goal here is to take advantage of the momentum, and be out of it at any sign of weakness. This is why I have a very stringent exit strategy:

Exit: close your position when two consecutive price bars close below the 20dMA. There are no exceptions to this rule.

Keep in mind that when the stock market reverses, you may be loaded with positions like this, and a quick reversal might hurt you. This is why is so important to limit your risk using options and good money management strategies. When the market conditions change, the index rules above should be reversed to correspond to a bear market. You will be looking for bearish positions, rather than bullish ones.

I follow very specific Options strategies and I would like to share them with you. I am creating a paper trading account to show the participants of my Tuesday Webinar how I would trade these. Keep in mind that you need to check these positions once a day after the market closes since the exit rules says "bars CLOSE below the 20dMA". If you want to participate of the Tuesday Webinar, please send me an e-mail at paperprofit1@mac.com

The Bull Market Proceeds

2009-08-01T17:45:00.000-07:00

From the ashes of the bear market, a bull market has sprang following the completion of the Primary Wave 4, which was a flat that lasted from 2000 to March 2009. The primary wave 5 that is forming, early indications are, that will form as an ending diagonal, which is not uncommon among 5th waves. This means that although is going to be a strong bull market, it will have steep or long corrections that could take the bulls by surprise. The best approach in such an environment is wise.

My explanation of the FLAT bear market that has just concluded is not new, I have been talking about this for a couple of years, now. Feel free to look back in this blog to look for my previous forecasts.

My contention that the bear market was concluding with the formation of this accelerated downtrend that started in October 2007 is not new. The completed intermediate wave C is an impulse wave as one would expect in the case of a FLAT. The next interesting and most important questions would be, what now?

Once an Elliott pattern is completed, one expects a counter trend, that would go back to test the highs, unless the FLAT is only the first part of one more complex pattern, such as a double three. With that in the back of my mind as a possibility, I will start with the most simple forecast: Primary wave 4 has completed, and Primary wave 5 is now underway. Early analysis of the bull market shows that the pattern is NOT developing as a classic impulse series, but rather as an aggressively up trending but corrective double zigzag. The simplest explanation is that wave 5 is developing as an ending diagonal, which is a series of 5 ABC waves. There is some ambiguity to this structure, thus one must be cautious in trading as well as investing for the long time, because there are likely to be steep and/or long corrections in the years ahead, until the pattern completes.

Since my forecast last weekend, the market continued to rally within the channel that I will use as my guide in the months ahead. The breakout from the June high has completely eliminated the possibility that intermediate wave C was still in progress. Minor wave Y of intermediate wave 1 of Primary wave 5 is in progress and this should go test the upper band of the channel.
I can almost hear the skeptical voices that are usually raised against those who appear to be market contrarians. On June 5th, 2009, at the trader’s expo I sat in a speech by Larry Katz who also called the bottom of the markets and called for a multiyear bull market. He was attacked with the most vociferous arguments implying that the economy could only get worse.

Today, the bull case is more easily made. I have searched a for companies that have reported earnings and exceeded expectations, while having a significant increase in stock appreciation. These are not few. You can look at any of them as potential candidates for trades:

CNW BDK OI ACE LLL IBM OXY BNI STR GWW STT SLAB NOV AMZN ZMH CTXS CERN CELG VZ ECL GS CF NTRS MA ISRG SRE RTN JPM CB COP SHW EMN ETN ITT NSC PPG DD MMM VFC MRK ADS ITW PX GILD AGN KMB HON WHR WLT ECA AAPL NBL NE NFX CSX RAI UNP PM CNI RRC APD AFL SAP AMT PCAR MHS UPS TROW BG BTU CAT DO BIDU TYC ALXN MET VAR FFIV FAST APA WDC TWC HES LIFE CMI SU SWN ROK AEM X FCX CVX MOS PCZ WY HP ABX AVP VSEA ADP RDSA MT MCK KLAC GG LRCX BEN CNX COF PCP

Although the forecast for the next few months is quite positive, there are those that might say that the market is overbought. To be sure, markets do not go up in straight lines, and I would not advocate to enter bullish positions at the top of the market. That is, I do not chase rallies. I had been buying the S&P500 in small amounts starting in December. I have since then stopped doing so, and will only buy again after a good correction. Still, one must look at the list of candidates above and use selective options positions. Here is what I am doing: Stocks with low volatility, I consider the PCCRC. Stocks with high volatility, I am considering biased butterflies with >3 month expiration. Although I am giving sufficient time for the markets to rally, I am also taking profits if the positions pay off early. This is my money management strategy.

Let’s take for example CNW which reported earnings of $0.64 while analysts were expecting $0.51. This is a considerable amount in excess of expectations so it qualifies as a surprise. If the company had raised guidance, I would have also considered an important entry point. When a stock jumps 10% or more after earnings, that triggers an alert in my trading platform (ThinkorSwim). Usually within minutes of the opening, I have read the earnings report, look at the volatility profile of the options and entered a butterfly or a PCCRC. This is what I did in this case:

Since the volatility of the ATM options was above 40%, I entered this biased butterfly. Although I am using December options to assure sufficient time until the next earnings season, I also make sure that the break even point in my trade is just above current market action. The biased butterfly has the additional feature of “unlimited” potential profit, if the stock in question goes well above the strike price of the butterfly’s higher strike price ($50). In this case, I am risking well below 1% my account’s available capital, so be sure to adjust accordingly.

In just a few days, CNW has exceeded the strike price of my shorts. If I had entered a plain butterfly, I would be concerned that the price would soon exceed the butterfly’s range without much profit for me. With this set up, and expiration months away, I can look forward to added profits if the stock continues its momentum. However, only days after my entry, I already have 70% return on investment, which annualized is huge. I elect to exit the trade and place my stock in a watch list, in case it corrects, giving me another entry opportunity. If volatility decreases, I might consider a PCCRC as well, since this stock is now a momentum stock.

My justification for this type of trading is my believe that the bull market is on, that in the immediate future (as Minor have Y is in effect) corrections will be shallow, so we can afford to place bullish trades while still protect against those shallow corrections. Butterflies and PCCRC’s are ideal for such markets.

Finally, I would like to present my current count on the /ES or e-mini S&P500, note that the market is making a zigzag from the lows of June. Wave A of that zigzag was completed on the overnight trading on Sunday, July 27th. Although the most recent high was on Thursday, this is really part of the B Minuette wave correction currently in progress.

I am expecting sub-minuette wave Y to retrace back to the level of sub-minuette wave W at about 965, but then the market should begin to rally again. We will see...

The History of the S&P 500 Index, where are we going next?

2009-07-25T17:23:00.001-07:00

The best approach for forecasting in the stock market is the Elliott wave analysis. Admitedly, it is not perfect, but it is still the best, despite of long periods of ambiguity. Historically speaking, however, there is little ambiguity now, and this represents a great opportunity, even for long-term investors, willing to assume the risk.

I have often see Elliott wave enthusiasts to go back centuries to well before the inception of the Dow-Jones industrial average to try to piece together a historical account of the markets. I think that this methodology has proven wrong, so I am going to limit my analysis to the S&P500 as we know it now. It is clear than companies rotate in and out of the Index, so that is not perfect either. In fact, the index as we know it today is different to the original S&P index of 233 stocks created in 1923. The S&P 500 starts in March 4th, 1957. This is the starting point for the and what I will be using for my analysis. Based on that starting point, the S&P500 has recently concluded a primary wave 4 and is currently in primary wave 5. This is an impulse wave that should take the market to new highs in the next few years, possibly a decade. In fact, we already have an indication of what type of market this might be. For those who understand Elliott Wave, Primary wave 5 is developing as an ending diagonal. My rational for this assertion follows here:

An impulse series is composed of 5 waves. This pattern repeats in different periods of time, whether in an hourly chart or a quarterly chart, as shown above for the S&P 500 index. There are three possible accelerated patterns that cover a great deal of territory: the impulse, the zigzag and the double zigzag, so a strong market may not necessarily be characterized by impulse series along. In fact it is very important for the Elliott wave analyst to consider that the three patterns may occur and in fact they have occurred in different time frames in the chart of the S&P 500 alone.

The main characteristic that differentiates impulse waves from zigzags and double zigzags as they are in progress is the characteristic “extension” of one of the trending waves (1, 3 and 5). It is usually wave 5 the one that extends, but I have also seen extended waves 1 and 5. take for example the bullish trend between 1982 and 2000, which I have labelled primary wave 3. This trend is significantly larger than the previous primary wave 1 seen between 1957 and 1968. I said that typically is the third wave the one that extends. However, within that trend, it is intermediate wave 5 the one that extends, lasting from 1991 and 2000. In fact, a similar extension occurred in the Dow-Jones industrial average who took Robert Prechter by surprise as he wrote in his book “At the Crest of the Tidal Wave” that the end of the bull market was at hand in 1995. Little did he know that the intermediate 5th wave would extend as the internet bubble developed. From the Elliott wave perspective it was a bubble too!

Impulses are relatively easy to identify once they are in progress, however, corrections are much more ambiguous and for long periods we might not know what to expect. In fact, since early 2003, I had been expecting a “second shoe to drop” as they say and I remained in fear of the markets between 2003 and 2008. The ambiguity has given way to clarity as the correction of primary wave 4 has completed a “Flat” pattern. Corrective patterns can be confusing an include flats, zigzags, double threes, double zigzags, and triangles both contracting and expanding. There are other less common corrective patterns, but understanding these would suffice for most situations. Primary wave 4 is a text-book, classic Flat which lasted almost exactly 9 years from March 24, 2000 to March 6, 2009. The idealized flat chart is included here for your convenience. Note that in this diagram, wave B can exceed the beginning of wave A and wave C can exceed the end of wave A but not by much. This is exactly what happened in the S&P 500 high of 2007 and the low of 2009.

The waves A, B and C are three of the most trending movements we have seen in the markets, yet they are corrective because they form part of a larger pattern which is a corrective FLAT. Trending patterns, as I said before can be impulses, zigzags and double zigzags. In the S&P500 Flat of 2000-2009, I described A as a double zigzag, B as zigzag, and wave C as an impulse. The most characteristic aspect of the FLAT that differentiates it from a double three, is the 5 wave impulse that concludes wave C.

The completed impulse intermediate have C that took from October 2007 to March 2009 is shown below. This is a characteristic impulse pattern with 5 Minor waves. Minor waves 1 and 3 are composed of 5 Minute waves, however, Minor wave 5 did not developed typically. As it is often the case, wave 5 was an ending diagonal, which complicated my analysis... Until now!!!

I have been holding to two alternative patterns. The ambiguity has ended. Let me explain why by showing you the two alternative counts. By the way, the two horizontal lines in the chart match the high of 2000 and the low of 2003, respectively. This gives you a good idea of the proximity of the extremes during the range that wave the FLAT that conformed Primary wave 4.

Ok, here is how I have arrived to the conclusion that the bear market (flat correction of 2000-2009 has concluded). I present you with two alternative counts. First the one I had eliminated. The proposed count suggested that the bottom of March was merely Minute wave A of a flat which would be Minor wave 4 that appeared to have been forming a top at the highs of June. If this count had been the correct one, the market would have quickly move down to reach a new low at the bottom of Minor wave 5 of Intermediate wave C. The movement of the markets over the last 2 weeks to a new high, I believe, has ruled out this count, as the market exceeds the top of the proposed Minute wave A of Minor wave 4. It is very unlikely that Minor wave 4 is still in progress. It is more likely that Intermediate wave C, and thus Primary wave 4, concluded at the bottom of the market back in March.

Having ruled this count out, then we are left with the most likely scenario, we are now in a double zigzag up, the first leg of what would most certainly develop as an ending diagonal and a new historical high, in a few years.

First, Minor wave 5 of the downtrend completed as an ending diagonal at the bottom of March near 666. Since then a strong trending pattern has formed. Remember, trending patterns can be: impulses, zigzags and double zigzags. The rally between March and June is unlikely to be an impulse because, as I have said before, the most important characteristic of an impulse it that one of its trending waves (1, 3 and 5) must extend. This is usually so evident (as we have seen in larger patterns), that it would be hard to miss.

So having ruled out the impulse, then we should have a series of zigzags. All we can do here is to label every wave and hope that at the end, a series completes and the pattern becomes evident. At the top of June’s high, a zigzag has been completed. I am proposing now that the zigzag is only the first of a series, that is, the index is currently in at the early stages of another zigzag, having completed a corrective wave between June and July. The aggressive movement since then, indicates to me that the wave Y is in progress already, and that it should emulate the rally of March-June. When completed, it should be Intermediate wave 1 of an ending diagonal which will be primary wave 5. Below is a characteristic ending diagonal and the location where I believe the market is right now.

The market is likely to make new highs, but we will have some steep corrections along the way, so keep on focusing on the PCCRC’s which offer the best risk management strategy I know of.

Juan I. Sarmiento.

Believe in your system, make it work!

2009-06-17T14:52:00.000-07:00

Better a mediocre system that you understand and believe in, than a great system that does not seem to work in your hands.

I have related to you in previous articles, that my early success at trading was in a great deal due to the book “Elliott Wave Explained” by Robert C. Beckman. Back in the early 90’s, I begun investing in stocks following the fundamental analysis tips in Peter Lynch’s book Beating the street. Back then I invested in Microsoft, Home Depot, Staples, and Scolastics among others that escape my memory now. But I soon discovered that there were drawdown periods that could not be explained simply by fundamental analysis. Often, by the time the fundamentals changed, it was too late to recover much money from my previously successful trade. I soon understood that stocks move in fairly predictable ways, I just could not anticipate the moves. I slowly begun to believe in Technical Analysis, although I believe for a long time, that T.A. was like boodoo or black magic reserved to a few geeks with thick glasses and methodologies that were impossible to reproduce. Mind you, I considered myself then and now an intellectual, although my field of science is not finances or mathematics.

In 1995, Robert Prechter promoted the book “At the Crest of the Tidal Wave” on CNBC, so I got the book and begun to read about the upcoming bear market. I did not believe in Prechter’s premise that you’d go to the 1400’s to start counting the cycles of Elliott wave, and then come up with a relevant forecast for the 1990’s. However, I was hooked by the idea that market movements can be modeled by simple Fibonacci numbers. After all, as a Veterinarian, I know the value of mathematical modeling in the study of biological phenomena. Why couldn’t want predict the movements in the markets based on Fibonacci ratios and numbers? It was worth the exploration. Within weeks, I begun to observe the rallies followed by distinct corrections followed by stronger rallies, etc. that seem to match the Elliott wave analysis. I gain such confidence in my ability to predict the markets and its timing, that I felt I had to take advantage of that knowledge. Options provided me with the leverage I wanted. At a very good time too. In retrospect, buying calls during the biggest bull market in history, was probably an excellent beginning for my trading career.

By the turn of the century, I realized that I would rather buy a few calls in high fliers such as YHOO, AMZN, SUNW, CSCO and ORCL, rather than commit capital in a diversified portfolio. Good thing too. By using options I limited my risk, and when the market begun to collapse, I lost some money, but not nearly as much as I could have lost if I had shares of SUNW, just to name one. But the devastating thing for me is that the bear market from 2000 to 2003 was too hard for me to trade the way I had been trading the bull market, by simply buying options. My approach to trading the stock market was no longer workable. I entered a period of search of an approach that would work the way the Elliott wave combined with call buying had worked during the 90’s. Only by 2005 was I able to trade with confidence. Although I still had a love-hate relationship with the Elliott wave, I had more or less given up on trading substantial amounts of money relying on my Elliott wave counts for forecasting. I used 2, very expensive Elliott wave programs trying to compensate for my lack of decision and clarity about the my analysis. In the end I realized that the counts I was given were so far out of my understanding of Elliott theory that I abandoned them too.

Elliott wave is not simple. It requires much experience to come up with a count one can rely on, and then when you show your count to someone else, you find with dismay that they do not agree with your count and that you cannot agree with theirs either. Nevertheless, I never ceased to contemplate with wonder how in the end, when a pattern is completed, it all makes sense. I believe in the Elliott wave but with one big caveat, there are so many periods of ambiguity during corrective periods, to render the forecasting complete useless. Still, I simply cannot give up my hope to make some sense of the Elliott wave analysis and return to the great profitability of the 1990’s. Perhaps this goal will remain as illusive as the hope of returning to a bull market such as the one in the 1990’s. However, as weeks turn into months and months turn into years, and we approach the end of the first decade since I last reproducibly and routinely got great results from Elliott wave forecasting, I remain, more than ever, a fan of the Elliott wave. Why? because the Elliott wave saved me from losing 50% of my portfolio, like many people did. Following the collapse of the markets in 2000-2003, I understood that this was simply Intermediate wave A of a Primary wave 4. I saw wave B develop and violate every Fibonacci retracement landmark until eventually it exceeded the high of 2000.

During this period, I did not buy one single stock or bond. I had saved my money in CD’s and traded the PCCRC in what turned out to be a highly profitable period between 2006 and 2008, including what turned out to be my best ever week as a trader, which coincided with the worst week ever in the stock market. My trading was completely independent from Elliott analysis, but I am sure glad I had the understanding of Elliott theory in the back of my mind, because I prohibited myself from investing in the markets, other than with PCCRC’s.

The same way that I believe that the market was topped out in 2007, I believe now that the Primary wave 4 is completed as a FLAT, and that the markets will enter a powerful bull market that will last a decade or so. That is not to say that there won’t be corrective periods, but why not begging to buy SPY (spiders) in small chunks? But I digress. The bottom line for me is that the Elliott wave analysis is elegant, particularly when large patterns are completed, and this is one of those times in history when the pattern has completed.

Persevering with the Elliott wave saved be a fortune, but I also think that it could still make me a great deal of money in my trading. I have found ways to complement my knowledge of Elliott wave to go beyond Fibonacci retracement and support and resistance lines, which are never hit on the dot. I have found methods to better understand when a correction is over. I have also found methodologist that can easily help me to profit during the very ambiguous and frustrating corrective periods, such as the bull run of 2003-2007. For example, in the recent Trader Expo, I attended an engaging seminar by Leslie Jouflas of TradingLiveOnline.com where she explain her AB=CD pattern trading. I found that this was quite similar to the A-B-C corrections of Elliott, and she found a way to profit from the recognition of the patterns. In fact, you can easily find complex corrections such as the double and even triple three defined by Neely in his book Mastering the Elliott wave, that could be easily split into AB=CD series. Take a look at this chart of AAPL, early this year:

I have highlighted in yellow the AB=CD segments, and the in green the strong reversals that took place after the completion on the AB=CD segment. Understanding of Elliott would have simply kept me out of this market, but if I had bought a call or two, my risk would have been low, and the profit could have been good, provided that I had used good money management techniques. In fact, the very last rally, eventually took the stock to recent highs of 140. Understanding of Elliott was good, but learning the AB=CD pattern recognition and trading was powerful. In fact, I could retrospectively look at the period between 2003-2007 and find similar patterns in the up trade, that would have facilitated my trading during a corrective, Elliott-ambiguous period.

My point with this whole story, is that believing and thus persevering is probably more important that trying to find the holly grail of trading from someone else. Without a doubt, however, keeping your eyes open for what others do is probably very helpful. Only recently I have ran across a technical analysis study, which is combination with the Elliott wave analysis can be very predictive of the end of corrective periods. This is a great addition to my knowledge of Elliott theory, that I would be delighted to share with anyone willing to participate in my private group. I am looking forward to having you!

Please Pay it Forward.

The Fear of Being Wrong

2009-05-23T14:26:00.000-07:00

Today I was talking to a dear friend that wanted to be a trader but that her attempts to getting started always resulted in failure and a such a shame associated with that original failure that she could never find the courage to start again. Indubitably, there are different personalities, some of which may appear not to be suitable for trading. One needs to be a bit of a gambler, able to recognize and recover from one’s error quickly. But every personality, I believe, has features that can give the trader an edge over others. I suggest you look for the descriptions of the Enneagram, and find your own personality type. Under the Enneagram, my personality is identified as “8”. My friend is a “1”, and as such, she has the tendency to avoid mistakes at all costs. But the personality 1 has many great features such as the capacity to identify details, to follow a set of rules, to be methodical and a keen interest in learning. I believe that these features could be fair more valuable than the risk-taking feature of the number 8. Understanding your personality may be a great asset when it comes to trading. So look for books on the Enneagram, and learn out your own personality.

So how could a personality “1” be a great trader? by looking at trading as something to study and master, understanding that this is a discipline an “inexact science” if you will but a science none the less. Look at each trade as an experiment that will lead you to the answers you seek, rather than a task to be done perfectly. Each trade may give you information, whether the trade is profitable or not. If you are a “1”, you are a perfectionist, but we are not seeking a perfect result, we are seeking information to improve our methodology so that in the end we profit consistently.

Another great feature of personality 1 is there capacity to look back and pinpoint their errors in judgment and keep them in mind going forward. The secret for them is not to look at the errors as faults to be penalized for, but rather to guidance for course correction. Even if you failed miserably in the past, think of your errors as the seeds of an equal or greater benefit in the future, to paraphrase Napoleon Hill. Think of it! the greater the error, the greater the benefit in the future. This very blog was more the result of my failures than my successes. If I had not met with failure at very important points in my trading career, I would have probably not felt the need to share my experiences with others, in the hope that I could find answers to consistent trading. The PCCRC is the direct result of my loss of capital when AAPL fell from the mid 60’s to the high 20’s overnight, in Sept 29, 2000. After that dreadful event, I decided never to buy stocks gain. The PCCRC is my answer to trading great stocks without fearing the overnight collapse, without the fear of being wrong.

The new century brought us a variety of technologies we can use to trade better than the professionals using our personal computers at home. Further, we can explore any theory of trading we might have and test it in real life, without ever spending one penny. Here are three tips on how to put your learning in warp speed, without losing money:

Optionetics Platinum. Before I bought my first PCCRC, I tested dozens of them using this web-based software, that allowed me to look at different markets scenarios, different stock and different volatilities. I could easily locate candidates as if it was today. No other software can do this. A less powerful approach is to use TOS Thinkback feature.

Paper money trading. TOS’s paper money platform is almost identical to the real cash account. You could test your ideas as if it was a real account. I keep to this day, a paper trading account I started in June 2007 in order to show the members of my private group what I do and how profitable the PCCRC can be. You can adjust the amount of capital in the account too, to make it more realistic.

Day trading with TOS. I have discovered that using the 1 min charts I can use a variety of T.A. patterns in a very short period of time. Using this approach I can see in just a few minutes what would take me months to see in a real time chart. Here I can test my combination of oscillators and moving averages. My findings can then be applied to daily charts to swing trade options.

My friend can do her due diligence and begin to trust herself. I don’t have to teach her anything, she can teach herself. She can do as I did, see what others do and make up my own mind as to what is a good idea. Her scientific mind, I am sure, will produce great results, once she overcomes the fear of being wrong!

What is Experience?

2009-05-13T09:20:00.000-07:00

When it comes to trading, even the best of systems eventually fail to some degree. Why? because no one knows the future and times change. A trading system that was suitable for yesterday may not work today. With the years, you accumulate enough errors that you learn to recognize the patterns that will lead to such error, and you course correct to avoid the pain you once suffered. I remember as if it was today, the pain I suffered in Sept 2000 when my AAPL stock declined from $61 to $28 overnight. I have not own stock since. And I think I was lucky because it was the first of stock to fall among the many Nasdaq components in a bear market that was to be known as the “.com” bubble, which included many internet and technology stocks.

The “experience” saved me the pain of losing a lot more money, if I had kept my stock positions from that point on. It was only in 2003 when I begun again to trade, and only options positions. I was gun shy. I barely placed a few trades, and then guarded them like a hawk. Evidently that was not a good strategy because I lost money by exiting the winners too early and staying with the losers too long. Oh, who am I kidding, I exited everything at the first sign of trouble. I simply had lost my touch. My strategy, which was reading Elliott wave patterns on a few stocks (20-30 stocks) did not work anymore, at least not in my hands. I retrospect I understand that Elliott wave analysis on individual stocks is extremely difficult, particularly during corrective periods and there is a lot of interpretation and subjectivity to that analysis. Removing subjectivity is very difficult, but I made several attempts with software such as Advanced Get and the Refined Elliott Trader. The remedy was worse than the disease (as we say in my country). I did not believe the results I was getting, so the computer systems were useless. Believing in your system is essential for good results. This is an essential part of trading psychology because jumping in, and staying in, requires a level of confidence in what you are doing.

Once you have a system you can believe in, simply because it fits the way you look at the world, then you have the reason to stay with the system sufficiently to stay with it through rough periods, not just when you are having success. The Elliott wave fit my personality because I am a scientist, and the science involved made sense to me.... Fibonacci numbers, fractals, psychology of masses, mathematical modeling of biological event.... All these factors made sense to me. So I stayed long enough to become successful at it during the bull market, while stocks moved in impulse series. Once the markets begun to decline, they did so in a corrective fashion with a large number of rallies along the way. I found it impossible to trade by just buying options (puts) which is how I handled the bull market, buying options (calls).

I could no longer use my previously gained experience because the nature of the markets had once again changed, and I did not have the tools to adapt. I stopped trading. Ironically, I begun to listen to others, and payed dearly form information that either I already had or that could be found in cheap books. I did not find that system I could believe in. I had to create it myself. I accumulated knowledge from others, gaining small golden nuggets of information from other traders, “education” vendors and books. It was a long road, but now I understand that the first thing is to believe in your system. I know that my system is good enough to carry you through the rough periods into times o What is Experience?

The trust in your system allows you to gain experience to limit your losses when you have more losers than winners, and when the conditions are not optimal for your approach. Then you begin to see where the weaknesses of your system are. However, your trust in your system will prevent you from abandoning it, instead you keep at it and begin to tech yourself new rules and adaptations to a variety of markets. That is what I mean by experience. Eventually, though, rather than making consistent profits day after day, you begin to make profits year after year. During the year, there will be periods that won’t work for you. Eventually, though, you will have a few months, or a few weeks that will make it all worth it.

Finally, do NOT abandon previous systems completely, they probably have valuable information anyway. I have never completely abandon the Elliott wave. The principles and tenets of the Elliott wave principle have served me well over the years. I understood that the correction that begun in 2000 was not over (the market formed a FLAT), and the period between 2002 and 2007, I knew, was a corrective period, a bull market within a bear market, and I prepared myself of the collapse of the markets. This was the “C” wave, which as I suspected, ended up being an impulse series, similar in duration and extent to wave “A” that occurred between 2000 and 2003 (see the S&P500). Today, I have a better approach to Elliott wave analysis that goes beyond subjective analysis. If you’d like to learn this approach, perhaps you want to join my private group. Please send me an e-mail at paperprofit1@mac.com.

Fantastic approach to Day and Swing Trading

2009-05-07T21:05:00.000-07:00

I have run across the most remarkable way to use T.A. for day trading and Swing trading I have seen, EVER. I remind you I have been trading since 1995, and have been reading about technical analysis since 1991. I have seen it all, from “head-and-Shoulders” to candlesticks, from Elliott wave to Bollinger bands. As a matter of fact, I have always been a believer in the Elliott wave, but have to recognize its short comings. Well, no longer. I have found an approach to interpreting the Elliott waves in a unique and logical way. No longer do I need disappointing and expensive software to figure out counts I cannot believe it, no longer do I have to study the dozens of possible Elliott patterns during corrections let alone use complex mathematical models as suggested by Neely. As a matter of fact, I don’t even have to way until the pattern is complete to guess what would be next.

I wont’s spoil it for you, but you can imagine what I can do with this revelation? I used to think that Bollinger Bands, combined with stochastics or moving averages combined with MACD’s were “two dimensional”, that only the Elliott wave analysis can give you the three-dimensional view. Well, now I thin that the former, traditional T.A. approaches are ONE-dimensional and that the Elliott wave as we know it is Two dimensional. What I have found is that there is a system out there that together with the Elliott wave analysis can give me the complete picture and allow me to trade both intraday as well as swing trade with better results than I ever got.

I have spent over 1/2 a year (since Aug. 2008) studying and observing what day traders do. At first is was my need to explore, to learn something new, to expand my horizons. It soon became an obsession. With the PCCRC approach to trading I have, I should have been just happy. Learning a new approach to day trading was a challenge I could not resists. At first I tried the DTI method of “Tape reading” but in all honesty, it was simply not for me. As much as I respect Tom Busby, I could not produce results I would be happy with. I am too much of a T.A. junky. I have been for over 17 years.I learned an important lesson, however, If you want to place your trading learning in Warp speed, try interpreting one minute charts for a while...! So I explored, I tried old concepts and some ideas I got from my visits to the Traders Expo. Then I found it! this February in New York City. In fact, my wife who was with me attended a T.A. session and came back to me with the idea. Nothing new really, just new to ME.

At first I was skeptical, as you probably would be. What it there in the world of T.A. that has not been already described? and as good as the technique might be, wouldn’t it be just the same as some other band or average?

I cannot claim authorship to the technique, but I can claim enough of a vision to put this technique together with the Elliott wave to produce great results. For day trading, I have created a set of rules of entry and exit, a compilation of the best I have observed others do to reduce risk and maximize reward over 6 years of study in the fields of futures trading, options and T.A. My approach will not seem to be too foreign to most regular trader, except for one thing: It works very often, and when it doesn’t the risk is limited so you can live to trade another day without feeling too bad.

I want you to join me in my day trading and Swing trading private e-mail group. If you belong to my PCCRC group, you need only send me an e-mail and I will integrate you into the new group. But you must subscribe to the series of Webinars that I am doing to cover the basics. If you have not joined my PCCRC group and are really not interested in that technique, but only in day and swing trading, then you may want to join my new group and the and attend the webinars.

Remember, I am not a business, I am only a trader keen on sharing what I have learned, simply because keeping it to myself does not do justice to my efforts. So I will only ask for a contribution to cover my costs. The rest, I just give with the hope that you will pay it Forward by doing something really great asking that the beneficiary of your good deed also commits to Paying it Forward. Please send me an e-mail at Paperprofit1@mac.com.

2009-04-18T08:20:00.001-07:00

Now that we can safely assume that the series of waves from the highs of 2007 are part of an Intermediate wave C of a Flat, we can also assume that wave C is an impulse. A such, it must have 5 waves, one of which is “extended” or the larger one of the three components that go with the DOWN trend. The severe decline between May and October 2008 is the impulse Minor wave 3 (nothing minor about that, right?). The reversal we saw between November and January 2009 was quick but powerful, but as experienced traders will tell you, bear markets are characterized by very strong bear rallies that may caught you by surprise and make you react by buying the markets and thus fall into a bear trap.

Fortunately, the impulse series are much easier to define than corrective waves, and knowing that, we can wait until the markets have made a higher low before committing large sums of money. Nevertheless, the bear traps are quite tempting and using short-term options in a highly volatility market one can profit substantially, at least in some high performing stocks. I am partial to the use of Butterflies in this market with no more than an month to expiration in a select group of highly volatile stock with liquid options.

The common question among investors and trader these days is: have we formed a bottom? there are plenty of skeptical traders who have seen these strong rallies in the past, only to be disappointed in the end. I say that even if the bottom has been reached and the current rally is the beginning of a great bull market, one must be cautious in the understanding that every wave 1 must have a wave 2. Second waves correct up to 99% of the first wave, but generally no more than 61.8%. That does not mean that we cannot take advantage of both ups and downs.

Let’s compare my two proposed counts: Once more hopeful says the bottom is already in place. The impulse wave series is completed with a lower low compared to the lows of 2002-2003. Minor wave 3 is clearly the extended wave, and Minor waves 1 and 5 have an approximated symmetry. Minor waves 2 and 4 are also very similar in duration, but sufficiently different to satisfy the alternation rules. There is only one problem, which is by no means a small one: the proposed wave 5 is neither an impulse nor an ending diagonal, therefore it is not really a Minor wave 5. Until a final impulse or ending diagonal occurs, then we have to believe that the Minor wave 4 is still in progress.

So. what is the alternative? look at the next chart below. I would appear that the market is still in Minor wave 4. My problem with this count it, although it is an acceptable FLAT progressing through its Minute wave B, the Minor wave 4 is significantly larger and more complex than Minor wave 2. Once decided that these 2 choices are possible, then we can perhaps forecast how the SPX will behave going forward. In both cases, the resistance above is at the January peak of 943.85. Also, this is where the 200dMA is likely to be in a couple of weeks, and that alone could prove to be a strong resistance. This correspond to the high of Minor wave 4 in both cases. This is a reasonable place for wave 1 to end (if the first analysis is the correct one). If Minor wave 4 is still in progress, then we should expect also a peak at the same resistance point were wave A of 4 completed. Ironically, therefore, it is almost inconsequential to be “right” about the count.

We can then focus on the targets for the correction. In both cases we can expect a test of the lows. If the S&P500 makes a new low, then we’d have settled the question, if the 5th wave forms an impulse or an ending diagonal. If instead the SP&500 retrace about 60% of the rally that started in March, then we could say with more authority that the bear market has been over since the lows of early March. Then we could expect a strong rally after than. Hopes of new highs in the coming years may not be unreasonable. In my next article, I will describe the situation for the Nasdaq composite.

An e-mail received today

2009-04-15T12:24:00.000-07:00

Hello Mr.Sarmiento,

Hope you are doing well. I am sorry. I didn't get a chance to look at the document you sent or touch base back with you immediately. I am definitely interested in joining your group. But I have one quick question: Is it a fact that by joining your groups, I should be able to learn your methodology step-by-step, understand it and implement and trade on my own? I understand you don't claim that whoever joins your club is going to be successful. Can you please let me know whether your instructions are clear enough for anybody to understand and if followed carefully, one will have success in their trading?

Here is my detailed response:
Let me be clear about this: No one can teach you how to be successful. Whoever says they could teach you are lying to you. I have spent many years teaching myself, attending many seminars, reading books, back testing and paper trading. I have been very successful at times, and unable to make good trades at other times during my career. I have found that in my hands the PCCRC strategy I have outlined is successful in that it has given me returns of 30% in 2006, 75% in 2007 and 45% in 2008. My methodology IS very specific so that someone with training in options can learn to do it exactly as I do. I cannot guarantee that going forward my methodology will result in good profits. However I am so happy with the results I have gotten, that I feel compelled to share my approach with others. In essence I am sharing MY secrets, exactly telling you what I do. It is up to you to learn what I do and have a shot at becoming successful.

Let me also be clear, you do NOT need to join the group to learn my strategies. It is all laid out in this blog. I have posted hundreds of articles, showing examples and the methodology is described in detail. I created the group at the urging of some of the participants as I begun to post short video clips and tutorials of my method. At first, I posted these videos in a private blog where people could ask questions. Little by little I built a library of video clips that proved to be very helpful for the participants of the video blog. In clips, I begun to record my PCCRC trades in a paper trading account that I started in 2007 with $100,000 fictitious money. People saw my trades being entered live. I would either record my trades on video clips or send .pdf files describing my candidate selection. Today, that account exceeds $200,000, 100% return in a 1 1/2 years.

Eventually, participants urged me to create an e-mail Google group were they could ask questions about my trades. I kept posting my trades and making them available to the participants. Videos and documents are accessible to all group members. You could ask all questions you may have. I have been very diligent in answering all questions and the older members of the group participate with their own opinions. I am asking $200 as a ONE TIME contribution from all new participants in order to pay for my costs of creating and delivering the video clips to you either by online download or by DVD mailing, wherever you might be. In addition to the tutorials, I have also posted in my web site a document I call the PCCRC manual, with very specific cookbook-like explanations on how to enter and exit trades following my strategies. This was at the request of participants. Again, none of this is necessary, since my strategies are all described in the public blog. However, people find it easier to follow the video clips and we have now created a nice community where others can share their experiences with you.

You may have very little experience with options, which would make it hard to follow all that we do. Some of the participants, committed as they may have been at first, like the Thursday webinar I begun as an easy approach to tell people new trades going into my paper trading account. I DO pay Webex for the subscription, so I ask for a yearly contribution of $75 for participants to have access to the recorded sessions. The capacity for attending the webinars live is now full, but participants paid $100 as a contribution as a yearly live subscription. I have shown that I enter trades and manage the account with only 1 hr of trading per week. That is all that is required. Some of the participants have full time jobs, some others live in the Asia-Pacific rim, and Australia and New Zealand so they like the idea of trading after hours. I am showing that it is not only possible, it is advisable to trade this way.

Finally, more recently, I begun a second webinar group to teach the basics of options, for those who want to see my perspective on trading while learning the basics that they need to have in order to trade the PCCRC as well as other options strategies. Here again, this is yearly subscription-based and I am asking for a yearly contribution of $75 for the recorded sessions and $100 from live participants.

I have recently made available ALL existing video sessions for new comers. This is particularly helpful for the new participants to the basic of options. I have covered 12 lessons so far, and keep on increasing the lessons weekly.

My intention is NOT to make money, but rather to share with others what I know in the hopes that they my find it useful, profit and then Pay it Forward. I derive great fulfillment out of teaching. A lot more than money could ever bring me. I believe that trading is very difficult, and it takes many years to become profitable. I found my way and I think it is so valuable what was able to learn and create that I think it is much more valuable than the money I could make for myself trading. I am not interested in creating a business out of this approach because I like my freedom. I believe that if someone is successful trading, it should not need to have a business to make money. Yet many do.

I want you to believe that I am just like you and that I am just a trader trying to find the best approach to trade the stock market. I don't want to be thought of someone teaching to trade, but rather as someone willing to share what he knows. I don't want you to think of me as a business, but rather as a regular individual wanting to share what he knows in the hopes that you'd Pay it Forward.

Juan.

Elliott Wave Forecast, S&P500 and Nasdaq Composite Part 2

2009-04-13T14:58:00.000-07:00

If you have been observing the markets for over a decade, you’d probably agree with me that the indices seem to change in unison except for very rare occasions such as during the “.com” boom where the technology stocks seem to outperform all other sectors for months. We used to call it the “new economy” to signify that commerce from the late nineties would depend mostly on the internet. They “old economy” was everything else, including blue chip stocks, commodity-based companies and manufacturers, among others. Not surprisingly, when the “.com bubble” burst, the nasdaq composite lost value that had accumulated at a logarithmic rate. Since 2002, the Nasdaq composite returned to change at a pace similar to that of the S&P500. So how does the Elliott wave theory reconcile the two charts (1999-present)? Easy. They are both corrective patterns. While the S&P500 is a FLAT, the Nasdaq looks more like a yet-to-be completed zigzag.

Below is the chart of the Nasdaq Composite. I have taken the liberty of applying a log transformation to the prices. This technique is commonly used for stocks with strong growth (and decline) over a long period of time (close to 10 years in this case). Although not necessary, the technique helps visualize the pattern. I also applied a Fibonacci study to evaluate the retracement of Intermediate Wave A. First, Wave A, from 1999 to 2003 is a Double zigzag(a1-b1-c1-x-a2-b2-c2). The double zigzag is also known as the Waterfall pattern. It is an atypical pattern which may appear in the place of an impulse or in the place of a zigzag. In this case, Wave A is the first wave in a long-term Zigzag, which is near completion. Note that wave B of this Zigzag does not exceed the 61.8% of A, which serves as evidence that the entire correction is a Zigzag. Intermediate Wave B (from 2002 to 2007) is also a zigzag itself, and matches very well the pattern in the S&P500 during that period. Both are zigzags.

More importantly, both the Nasdaq and the S&P are in the process of completion of intermediate wave C, and in both cases, these are impulse waves, with a wave 4 in progress. Take a look at my previous article, and compare both charts from the 2007 highs. Once the 4th wave is completed, one last wave down, to exceed the March lows should bring the bear market to a close. It is just a matter of time. At least, that is what my current analysis indicates. We know this from the chart below and the minimum requirements for the completion of a zigzag. Wave C must retrace wave B completely and exceeded by at least 1%. that means that until the Nasdaq has broken below the lows of 2002, even if it is by a small amount, then we cannot say that the zigzag is completed, and therefore the bear market is still on.

Elliott Wave Forecast, S&P500 and Nasdaq Composite

2009-04-12T10:22:00.000-07:00

As many elliott wave enthusiast have discovered, it is easier to agree on a pattern once it is completed, than it is to forecast the next move in the markets.

Back in 1995, when I first read the book “At the Crest of the Tidal wave” by Robert Prechter, I was fascinated. I am a scientist by training, a Veterinary Pathologyst with a bit of an interest in population biology. It made perfect sense to me that human mass behavior could be mathematically modeled. The Elliott wave theory was as good a model as any. Fibonacci numbers and the Fibonacci golden ratio were found to be reproducible in many natural phenomena, particularly in the science of biology. Ironically, Prechter’s predictions that the market would collapse in 1995, was not any good, but that did not matter to me in the least. Biology is an inexact science and attempting to modeling biological phenomena by mathematical means is subject to error. Nevertheless, I will always prefer an inexact, prone-to-error model, than to rely on my own experience alone.

Prechter has been more right as of late, as he predicted the eventual collapse of the market. I also thought that there would be a second shoe to drop, the first being the bear market of 2000-2003. You would not find me trying to sell the idea of a bear market between 2003 and 2007, but I did take a bearish stands, putting my money in long-term CD’s, avoiding stocks and real estate, and focus my time and effort into creating a hedged approach to trading based on McMillan’s PCCRC. My cautious approach paid off, not only last year when the markets finally collapsed but also in 2006 and 2007. How was I so sure that the markets would collapse? because corrections in the Elliott wave theory generally take 3-wave form. The period between 2000-2003, was the first of these 3 wave sequence (Intermediate wave A), the bull market between 2003 and 2007 was the second wave (Intermediate wave B). It was only a matter of time until the third wave was formed (Intermediate wave C).

The very nature of the Elliott wave, particularly during corrective periods, makes one shy of committing to big predictions that would end up making one look foolish. Now we know that the whole corrective period is a FLAT (the three waves are approximately equal in price length), but it could have well been a TRIANGLE (formed of 5 waves with contracting price lengths), or a Zigzag with a B wave being shorter than the other two. There are less common corrective waves, but I prefer to stick with these more common sequences. Once the Top of 2000 was approached and barely exceeded, it was clear that the bull market was coming to an end. Still, I would not have bet the range that such a collapse, the likes that we have seen would actually take place. But I did save myself from a 50% loss, as many traders and investors suffer in 2008. Understanding the Elliott wave saved me. Ideally, understanding the theory may help you be more cautious and think of alternative to investing for the long term during some periods and actually investing for the long term in others. Provided that the C wave finally closes, we should be poised to another bull market again. The trick is in finding the proverbial market bottom to buy at historical lows.

In the following articles in this series, I will be speculating on when and how would the end of this bear market would be reached.

2009-03-06T14:35:00.000-08:00

Today there was a posting in my private group, which raised important questions that seem to be of general interest, and that I would like to address for the general audience.

OptionJedi: Hi Juan, in reading all of your posts, I know that you propose that you risk no more than 2% of your capital on a single trade. As I have looked through many of the examples, this mostly has been the max amount the expiration day risk curve that dips below zero (usually this has been on the put/down side of the trade).
My question: is this realistic?
1) As you have said, IV usually goes up when the stock drops so that
curve will be "lifted" as the underlying price drops.

Juan: As with other IV-dependent trades, looking at the price/profit&loss charts is not reflective of what might happen with the value of the trade because it ignores the effect of volatility. Since this is a delta neutral trade with higher number of longs than shorts, and higher number of back moth than front month options (Calendar) it is exquisitely susceptible to variations in volatility. Therefore some may actually use variations of this trades are volatility plays, but they ignore the exposure to Theta and Delta. To answer your question, IV usually spikes as a stock goes down (but not always). So what you are saying is true, the risk curve will move toward the profit zone (higher in the ThinkorSwim analyze tab charts, or to the right in the modern risk graphs that I often post). The estimation of the risk may not be realistic, as you say, but you could still use it as long as you keep my rules of entry and this is why: I have been trading PCCRC’s for 4 years, and I have never encountered a situation in which I met the 2% max risk. In fact, very rarely did my losers meet the loss of 1% of my account. Remember, each trade may use 10% (I can have 10 trade at a time) of my account, and the risk of capital in the trade is 20%. In most other option trades, you risk the entire capital in the trade. So I view the PCCRC as a conservative form of trading.

OptionJedi: 2) Given that IV risk is the biggest risk of the PCCRC, I know you try
to mitigate by entering when IV is relatively low (<= 40%) and try to
get a skew edge between the front and back months. However, just like
a stock can fall to zero in theory, IV could also, in theory, fall to
zero. So maybe not zero, but certainly lower than when the trade was
entered. Would it not make sense, from a defining risk more
convervatively perspective, to calcualte the max loss using an IV at
the lower bound of trading for some previous period of time? For
example, you take the lowest IV from the past year and plug that
into the TOS analyzer to figure out what that risk curve under zero
looks like at expiration and use that to determine your 2% per trade
max loss computation. I know that may be an uglier number, but it's a
number more probable in terms of defining risk.

Juan: First, I look for situations in which IV may rise such as in the case of 52 week highs, best performers over the last 90 days, breakouts, 52-week-highs and post-earnings jump of over 10%. The skew is a volatility play that you may or may not have in those situations. So long as the skew is positive (higher IV in the front month) or is negative by no more than 1%, I am comfortable trading the PCCRC. Finally, I have chosen arbitrarily the <40% cut off point because a decline in volatility after a takeover offer will not immediately go to 0%. Take the example of DNA, following the hostile takeover offer my Roche today, the IV went from the mid 40’s (IV back month) to the low 20’s. Along with that, the stock went up more than 10% in price. This should have been a good enough jump to increase the value of the trade due to Delta gains, while not causing much of a damage due to Vega, provided you’d have entered the trade before the announcement was made, and following my strict rules.

If you do go back in time and trade only stocks whose IVs are at the lowest point in their 1 year range as you propose, you probably would not find any candidates in the current environment. My recommendations have considered the fact that you may have a drop of 10-20% if the underlying company receives a takeover offer. However, I’d estimate that I won’t lose much since the takeover offers usually result in a good jump in stock price. Coincidentally, one of the trades that exceeded my 1% loss was DNA in Aug. last year when the company received the first offer from Roche. It is very good to know that even in such an extreme, I did not loss more than 2% of my account, which is very manageable by any standards. Imagine if you have a $100,000 account including 100 shares in $100 stock (a $10,000 investment). Would you exit the trade if the stock fell to $80,000? that would be a loss of 2% of your account. Keep that in mind when you define our own risk tolerance using the PCCRC. I reiterate that you can confidently expect to lose less than 2% in the worst case scenario. A scenario, btw, that I have not yet encounter.

Option Jedi: Why am I harping on this? Because the whole notion of the PCCRC is to
put a trade on and "foreget about it" for the most part. However, it
is not a defined risk trade. Because the profit could be unlimited,
the risk is also not defined. So an iron condor is defined. Long or
short verticals are defined. Butterflies are defined. Meaning, when
the black swan hits, you know exactly what the worst case scenario is
and it will be no worse than that.

Juan: I most often heard from Options traders before I started trading the PCCRC that would recommend a maximum risk of 5% (of your account) in any individual trade. This to me is actually quite aggressive, because If I had a $100,000 account, I would not be willing to lose $5,000 in any individual trade. Compare this to a stock, and it would be equivalent to tolerating a decline of $50 in the price of a $100 stock for which you own 100 shares. In fact, when I enter butterflies, condors and vertical spreads I risk very little and only trade does strategies as curiosities, not trading even 1% of my account. Why? because I know I can rely on the PCCRC to produce profits consistently. I would suggest that you look at the statement of my paper trading account in which I have religiously kept my rules, and you will see the very large percentage of winners using the PCCRC strategy alone. So I rely on my experience to state that the risk, which is only “defined” by my experience, does not exceed 2% (at least not yet).

Option Jedi: However, for the PCCRC, that risk curve can "sink" if IV sinks.
Mentally and emotionally, I probably would "sink" along with the risk
curve. However, if I use the TOS IV adjustment feature of the
analyzer, I can subtract 10% or 15% from current IV and then look at
that risk curve as a more probable scenario in the black swan scenario
so I can sleep better at night using that number as the actual amount
per trade that I am risking, and therefore what the total amount of my
portfolio is at risk at any given time.

Juan: I can only speak for myself when I say that I can sleep at night quite soundly. I can even leave the country and go to a remote area with no internet access for weeks, and only worry about doing my rollovers before leaving and be sure to be back 1 week before expiration. This is one of the very reasons I chose the PCCRC and further developed my rules. I can also relate to you that I have grown so weary of losing money while trading other strategies between 2000 and 2005, that I could not really sleep at night so long as I had a trade with “defined risk” or not. Today, I actually look forward to waking up hoping for some kind of a surprise such as a 10% jump or decline in an underlying for which I hold a PCCRC position.

I cannot persuade you not to worry about what may happen with your trades, but I can offer this: Paper-trade the PCCRC’s that I discuss in my Thursday webinars, follow the in detail for several months. I can assure you that whether you begin to trade 1 year or 3 years or 3 months from now, the results will be very similarly positive. You will soon stop worrying about any individual trades, and being focusing on the overall portfolio management.

Finally, If you start any form of trading with your own money and find that you cannot sleep well at night, reduce the risk on the trades. Do not do this by eliminating any candidate with higher then 30% volatility (I actually do not recommend IV’s below that). Instead, reduce the amount of capital per trade until you experience the consistency in profits that I have experience. Then you’ll graduate to a higher risk bracket.

Juan

Questions about the PCCRC - New York Traders Expo

2009-02-28T10:24:00.000-08:00

Last Feb 22nd, I had the privilege to talk to a good sized audience at the Traders Expo in NYC. I was fortunate enough to have a very advanced group, who asked very relevant questions. Here are some of them for those of you who are trying the PCCRC on your own, and have not yet joined my group.

Why do you choose all at the money, 2:1 proportion of long:shorts? Have you tried different number of contracts per leg?

Try the KISS principle: “keep it simple stupid”. My rules are born of hundreds of backtesting trades over several years using Optionetics Platinum. When I started my testing, data were available to 2000 only, so I tested various markets between 2000 and my first real money PCCRC in 2005. In order to do as many tests as possible, I simplified my entry, using the 2:1 proportion, all at the money options. I quickly learned that the trade was Delta positive at the start, when using my configuration. Turns out that this was a serendipitously good choice and this is why:

By making my entry at as Delta positive trade, I assure a profit if the stock goes up. My PCCRC is not just simply a Vega play. Making the PCCRC Delta neutral and Gamma neutral, you expect to profit from a rise in volatility, but if the stock rallies, you are not likely to make money. My PCCRC is moderated by Delta, but it is not just another bullish trade because it still has considerable Vega exposure.

If a stock goes up, implied volatility (I.V.) usually decline, although I have seen cases in which a stock goes up with increasing volatility, but that is a rare, though highly profitable occurrence. On the other hand, when a stock goes down, suddenly, it usually does with a spike in I.V., which means that you’d be protected against an unexpected decline.

One of the most damaging occurrences to a Vega-only trade is the takeover of the company in question. This usually results in a strong move up in the stock price, but also a dramatic drop in volatility. So long as you follow my rules, you are likely to make a profit because the format of the PCCRC as described, is Delta positive.

Have you tried changing the number of contracts per leg?

Here I follow the old saying: “if it ain’t broke don’t fix it!”. I did my research with the format I have described and got excellent results. As attractive as it might seem to modify the number of contracts per leg to obtain a specific amount to exposure to each Greek, it would not have the backing of my extensive backtesting. Would I go back and back test again, this time making sure that I get a Delta neutral, Gamma neutral, Theta positive and Vega positive trade to begin with? probably not, because it would require much more time to enter each adjusted trade. As I explained above, I have obtained consistent results already. The modified PCCRC would probably be a different animal altogether.
What is the best way of submitting an order to the floor?

Here again, the 2:1 ratio in the PCCRC may be a good thing. Suppose you enter a PCCRC such as this: -10c, -10p, +20c, +20p for a simple debit and a bid:ask spread of less than $1.0. Now consider this one here: -11c, -9p, +23c, +17p or some variation thereoff. Your debit in this position could not be simplified, so your bid-ask spread will be much variable, so first, you are likely to have difficulty entering the whole position for a single debit, in my experience it is a little more difficult to find the fair price for the second than the first.

Why not legging into the trade rather than entering the whole thing as for a debit?

Back in 2005, when I started trading the PCCRC, I had an OptionsXPress account, and they do not have a way to enter the PCCRC in a single ticket. I was forced to enter the trade in two portions. First, I entered one of the two long straddles, usually between 11:00 and 12:00 Pacific, because I always found this period to have the lowest volatility. In addition, I believed the long straddle to be the most difficult to fill. The remaining portion, I entered as a double calendar, which can be enter in OptionsXPress as a “condor”, or a four legged position with equal number of contracts per leg. I found this to be hard and stressful, and sometimes the second portion would not fill. Since what I want is a PCCRC and not a long-term straddle or a double calendar, I simply prefer to enter the whole thing as a single trade. If it does not fill, I can make the determination that the trade I am considering is not liquid enough for my purposes, and I abandon the idea altogether.

After some research, I have found that the floor traders would much rather do two straddles (one short, one long), separately, and that these would fill faster. Is it worth accommodating the floor traders, would I get better fills that way? I have not truly investigated this, but my goal in doing the research would be which one of the two forms of entry would yield the better fill price for me.

Why do both calls and puts in the short side? Here again, my research into the PCCRC did not explore all possible permutations. However, we know that there should be parity between the ATM calls and puts, so selling either should be the same as selling both. Therefore selecting the one that yields the largest credit should be the one to choose. However, my goal is not necessarily to have the short contracts expire worthless. I also want to profit from a strong move in either direction. We know that Vega tends to decline in an up swing and increase in a strong move down in the stock price. Would selling exclusively calls or puts in the front month actually change the results in my PCCRC? here again I would have to start my research from square one, even if in theory there should be no difference. I simply choose to stick with what I have already researched.

For good or ill, I chose to simplify my entry in order to do as many case studies as I could in my back testing. There are certainly many variations of the original concept that I could be testing. My designed has been proven successful in situations in which a stock jumps in price with declining volatility, or in cases where stocks have outperformed the market for months, or are breaking out to new highs. These stocks are the darlings of Wall Street, or they have fundamentally sound reasons to be outperforming the markets. These stocks also tend to have high Statistical Volatility (SV), that is, they can make strong moves in either direction. So why bother trying to find the next best thing or hope that market direction will change? the big winners exist in any market. I believe that my search strategies can find them easily, and the PCCRC takes good advantage of them, whether the markets go up or down, or whether some bad piece of news changes the outlook in these stocks overnight.

Acres of Diamonds

2009-01-10T08:51:00.001-08:00

Acres of Diamonds

There are many successful trading educational enterprises. One of the sales pitches the often use is that trading without an education can be many times more costly and frustrating and time consuming than any course costing thousands of dollar. That of course is quite convincing. I have taken several of these courses in my quest for success, but you all would be curious to know that I don’t explain my success by any courses I have taken but to my own perseverance. Approaches to trading abound, but only you can determine if that approach will work for you, whether you payed $100 or $10,000 for the information that lead you to that approach.

A few years back I purchased one of the most valuable pieces of educational tapes I ever heard by a brilliant man named Earl Nightingale. One of the audiotapes was named “Acres of Diamonds” talking about a story often told by the famous founder of Temple University Russell Conwell. Please hear Conwell’s own voice telling the story, in this link: http://tinyurl.com/yh6eku and then come back to this article when you are done listening. Nightingale makes the point that one must first dig deep into the abound reserves within our souls to find the unique ideas that would make us successful. My experience since listening to this message is that indeed there are acres of diamonds within us, if only we were willing to do the work of digging them out.

I have been reading about stock fundamentals, technical analysis and options since 1991. During the 90’s I never attended a course on trading, I did it all through perseverance. Eventually, my approach ceased working, so I had to go on searching for more information to jump start my trading again. The irony is that the approach that has led me to yearly returns of 30%, 70% and 50% in the last 3 years, respectively, has not come from the multi-thousand of dollar courses I have taken, but from my own creativity. The reason is deceptively simple: In order to become successful you must first believe!

If you are frustrated because after taking a course you are not better able to deal with the markets, it is probably because you cannot envision yourself as successful using that system. Quite ironic because we are so willing to place so much credit in someone else’s system that we in essence relinquish control over our own destiny, forgetting to ask the question: would I be able to find an approach to trading that could far exceed what others are doing? If you look hard enough, if you persevere long enough, you will, you just need to believe that you will. Most people do not stay long enough to succeed.

Let’s say that you attend a seminar by a charismatic speaker that tells you that you need first to get educated in the markets and that he can teach you how to become a successful trader, that he has done it with hundreds of other traders, for the modest fee of $5,000, for a 5 day course. You immediately think of the easy way: Within a few days you will be making money consistently. I can almost guarantee that you will end up like the first owner of the farm that went prospecting for diamonds elsewhere. The reason is simple: your initial euphoria will lead to doubt, the doubt will lead to frustration and eventually to resignation, never exploring the true possibility that you have it within yourself to create a unique style of trading that would fit you like a glove. As superb as the trader/educator might be, you’d be soon inclined to believe that if he/she is so good, how come he is wasting his time teaching others? The business of “Trading Education” is a business, and the people working at it are focusing on their income from teaching, rather than their trading. I can tell you for myself, that I would not be willing to “teach” others in such a setting simply because I would lose my freedom, a freedom that I have spent 2 decades building.

Since 1999, I have always believed that there must be an approach to investing/trading using options. I wanted an approach that would free me from the computer and allow me to do my traveling confidently, without fear of losing my shirt while I was away. I found this approach with the PCCRC, but not before reading dozens of books in the subject of trading, and attending very expensive seminars. Invariably, the “instructors” lost credibility in my eyes, and I had to either modify or abandon their style of trading.

Nightingale talks about our willingness to assign more value to some one else’s skills than to our own. Very often we take the shortcut of a mentoring by someone we admire and respect, and try to emulate them. This is because we know ourselves so well, that we fail to assign the proper value to our ability to reach success. We often believe that we need crutches to walk and doing so we fail to run. Remember the moving Forrest Gump when the kid suddenly frees himself from his leg braces and begins to run? Be sure that you give your own ideas the value that day deserve before exploring someone else’s approach to trading.

You may find funny that I’d say that when I have a whole web site dedicated to share my approach to trading. However, I am hear to share my experiences as a trader, rather than to make a living at your expense. I derive my fulfillment our of sharing knowledge to others. Since my trading and investing give me what I need to live comfortably and travel the world, it makes sense to me to share my experiences. Among these experiences one of the most valuable ones is that I have found more power within my own creativity than in all the books or courses that I have taken. Thus I can pass along to you the idea that you too, have acres of diamonds deep within the reserves of your soul and brain. To tap into them, all you have to do is Believe!

2009: A Great Outlook

2009-01-02T15:41:00.001-08:00

I don’t know about you, but I already made up my mind that 2009 is going to be the first year of the best 20 years of my life. I have much to look forward to. I am hoping to have the great opportunity to teach others what I have learned over the last 17 years of investing and trading. Hopefully you, yes you reading this article, will join me in one of the presentations I will be giving live, at no cost to you. The next is in New York City! I haven’t been there in years!

This year promises to be much better than last year, and there should be great opportunities to build a brand new portfolio, and the markets should raise up again from the ashes of the 2008. You know what they say, as the first trading day of the year goes, so will go January, and as January goes, so will the year... Are we really willing to bet on that? Another great sign is that the major indices tested the lows of 2002-2003 and rebounded quite nicely, can we also rely on that as an indicator?

In reality, my Elliott wave counts indicate that we are currently in a countertrend wave 4 which should go test resistance at 1010, and then continue down to complete wave 5, at or near a new 10 year low. Perhaps this is all euphoria for the new administration, as we are all finally ready to pass the page of the Bush administration. However, the reality is yet to be seen in all of its complete and crude detail. After all, the markets have only been anticipating a continued recession and many have been tossing around the big “D” word (Depression) such as that of the 1930’s.

I don’t know about all that, I am not much of an economist. I long ago gave up on the Elliott wave as the guidance for my trading, although it did serve me well by keeping me away from owning stocks since 2000 (with the exception of one or two stocks). As you know, I don’t own stocks, but I have started nibbling at the S&P500. I have been buying small portions of the SPY every 15 days or so. I will continue to do so, even if the markets go down below the November lows. So long as the S&P is closer to a 5 year low than to a 5 year high, I will buy, very small amounts. I will begin to sell in small blocks, as soon as the markets reach a new 5 year high, but that may take a while, won’t it.

Regardless of what my “forecast” might be, I have the perfect approach for a market that is this bullish in the new year. We do not have to blindly trust the Elliott wave, or even the euphoria of the new year. We only need to let the markets tell us when it is time to enter selected stocks, as the implied volatility of options continues to decline. The fear will subside, but is it for real?

With the PCCRC we have nothing to fear but fear itself, as the previous “Depression-Surviving” president FDR would say. The upcoming earnings season will begin to reveal who are the winners and who are the losers. We need only see those stocks that exceed expectations and/or raise guidance going forward. They may be few and far between, but we need not rush into any other stocks. We can afford to be quite selective. If a stock goes up 10% after earnings, with increased guidance chances are such stock will continue to go up, but if we are wrong, or if the markets continue to pressure down winners along with the losers, we will be alright because such events will bring the I.V. even higher.

So be euphoric if you’d like, but just wait for the right time (earnings) for the winners to show their stuff, then you respond to the move with a PCCRC. There is no need to risk being wrong in advance of the earnings. And when it happens, enter your trade confidently, no matter what happens, the PCCRC will give you good returns.

Happy New Year to all... Thank goodness 2008 is behind us.

Do not Trade in December

2008-12-22T09:41:00.001-08:00

The PCCRC strategies I have described are narrow in that the rules fit very specific scenarios of low volatility with the potential for increase. Over 3 years of experience trading these strategies, I have found a consistent seasonal characteristic: Volatility drops in December, earnings reports are rare and news releases are not common. The consequence is that good candidates are not likely to show up, and the existing positions may suffer from stagnation both in statistical and implied volatility.

This year is no different, despite the historical levels of volatility of the last 3 months, December has been proven to be a month of reseting of volatility both statistical and implied. It seems as though investors and traders alike have decided to take a beep breath in preparation for what it may come next year.

I promised myself last year that I would be out of my trades by the beginning of the month, but with all the historic events of October and November, I thought that things would be different, and decided to keep some of the trades in case there would be some strong moves. That was a mistake. One thing is clear, though, if this extremely volatile market found some relief this December, we can expect volatility to decline seasonally in December, and therefore, PCCRC traders should take December to find something else to do. This year I planned a vacation to Mexico, and will be back at the beginning of the year.

In a way, the PCCRC is keeping us out of the market: There are no high fliers to speak of, there are no 10% jumpers as of late, and the implied volatility in the back month options of most stocks is well above the standard maximum of 40%, according to my rules of entry. There are simply not many candidates that would fit my conditions, and the ones that are out there seems to be those that only a few months back would have been eliminated for having volatilities below 25%.

I have received e-mails from people suggesting that we ought to change the rules because the volatility standards have changed. The VIX has reached 80% at its high and have now settled down between 40 and 50% ant it is unlikely to return to it previous 20-30 natural range. I would say, do not change the rules in the middle of the game. The conditions are simply not favorable to this form of trading and modifying the rules would mean that you need to back test the system the way I did, over extended periods of time.

In my way of thinking, the rules are keeping us out of the markets are a perilous time, awaiting for a period of clarity when a few heroes will save the day! markets go down when most stocks go down, and up when most stocks go up. Invariably, there will be the stocks that will outperform the markets. We just need to wait until they show up, and with the rules of entry described in this blog, you will find them fairly routinely. We only need a handful to secure profits in the following months.

Once certain stocks begin to report better than expected earnings and increase their earnings guidance, we will have the candidates we are looking for, as they begin to fit the rules of entry. The question I would ask is, why would you trade anything else but the heroes? Even when they disappoint, their moves then to be dramatic. We need just wait for the appropriate time.

The current bullish run has mitigated volatility somewhat but has not revealed any candidates worth considering, which may be frustrating for some. I have to urge patience to avoid mistakes. In the meantime, consider other forms of trading. In due time the PCCRC will show it value.

The Role of the Greeks on the PCCRC

2008-12-15T15:47:00.001-08:00

Today, I received this e-mail from a beginning trader:

Hi Juan!
I watched your video and it is obvious that you have worked out a system, been trading for awhile, and really understand how options work!!!! You have a deep understanding of the Greeks. Is what you are doing something like a butterfly? Hmmm, maybe I will call your style of trading, dragonflies! :)

I am not comfortable -- meaning I don't really understand -- all the Greeks yet. I do understand Delta and some about implied volatility. In the past I have traded long with options being in the money, higher deltas, and haven't paid too much about the other Greeks, not even really knowing that they had much importance. As some traders, who are successful don't watch all those, and seemingly don't care about them ...

I am going to watch your video a few times more to try and understand more deeply. I would like to learn what you are talking about, BUT I believe I have too little money in my account for doing this for real, and it requires some expensive stocks for great rewards!!! :) I have to find ways to grow a small amount of money at first.

But I would paper trade it first to get the hang of what you are doing!!! I am going to wait to join you until late January or early February. I want to watch your video a few more times too. I admire you for how thorough you have been in working out your system.

Laura

=====================

As it is usually the case, I get motivated by people’s impressions of my techniques to write up articles. I will try to clear some misconceptions expressed by Laura, that could probably be reflective of those of many beginners.

...”some traders, who are successful don't watch [the Greeks], and seemingly don't care about them ...”

I can back that statement somewhat because I begun trading options after I became skilled in the Elliott Wave theory, candlestick, and other Technical Analysis tools. I soon realized that I was not taking full advantage of my abilities by simply trading stocks. I begun trading options very gingerly, but soon discovered the power of leverage in options. In essence, I relied on Delta which measures the appreciation of an option relative to the price of the underlying. The stock goes up, you make money using calls, the stock goes down you make money with puts. I thought I had all I needed, compared to people that shorted stocks. Shorting stocks was way too risky for my liking, so I either avoided downtrending stocks or bought, very occasionally a put or two.

Buying calls and puts is the natural approach for the beginner options trader. After all, they come mostly from the stock market, and have trained themselves to master either fundamental and technical analysis. But there is a lot more versatility to options than just that. The downside of course, is that options expire, and time has a very deleterious effect on options, particularly in the last month to expiration. This is why it is critical to understand the effect of time decay on the price of an options. This decay is measured by Theta. It does not take a rocket scientist to look at the Theta of an option and see how much you could be losing with every passing day. If Theta is -1.0, for example, you’d be losing $1.0 a share (100 shares in a contract) with every passing day. Obviously, you don’t want to be holding options with, say 10 days to expiration. But there is nothing wrong with selling some short-term options that are “expensive” (see implied volatility below), IF at the same time you have a similar option with a different strike price (see credit spreads) or a longer time expiration (see calendar spreads).

Back in the 1990’s, all I knew about options was that a strong move in either direction could make me a lot of money (leverage), but I also understood that I did not want to stick with that option for too long. How ever, understanding the Elliott wave theory, I was willing to risk Theta decay because I could “predict” how fast and how far could a stock go, mostly up. But those days of the Impulse waves (strong rallying or declining waves), it was easy to select a few technology stocks and take them for a ride. Eventually, the “.com” bubble burst, but close to the end I discovered another feature of options that saved my financial life: Limited risk.

I remember a friend that no longer trades, that routinely called me and ask: “What do you think of Cisco (CSCO) or Sun Microsystems (SUN), or Qualcom (QCOM)”. I would say invariably “it is too high, I would not buy the stock, but it could go higher” and of course, I would buy calls on them, and make very quick money. One day, I was taken out of all my long calls, but my losses where quite limited, thanks to the risk management features of options. I did not like what happened to me, but I was happy that I did not lose a great deal of money, as I saw many traders losing their fortunes and eventually leaving the markets to greener pastures. It was clear to me, however, that I should never own stock. Understanding the leverage and risk control built into options, I wondered if one could create an options position that could be a good substitute for stock, yet with sufficient risk control built in so that I could place large amounts of cash as a substitute for stock. If you have $10,000, you’d probably buy 10 stocks at a portion of $1,000 in shares on each stock. You’d probably do about the same thing if you had $100,000, maintaining about the same percentile allocations, wouldn’t you? However, if you were to buy puts or calls, you’d not dare to spend 10% of your capital because your risk would be exactly 10% of your account. Most aggressive options traders would probably keep their risk at 5% of their trading capital, understanding that you can lose all of that capital. Presumably, if you have a $10,000, you are willing to lose $500 in one single trade. My strategy is to place 10 trades with 10% of my capital per trade, and only 2% at risk in any trade. Overall, my maximum risk in the whole account at any given time is 20%. In the years I have traded the PCCRC, my loss has not exceeded 1% in any individual trade.

...I have too little money in my account for doing this for real, and it requires some expensive stocks for great rewards!!! :) “

Actually, a large account can be very deleterious to your financial health. You should not be using options as a substitute for stock in capital traded, but rather in amount at risk. Let’s say that your “small account” is $10,000, and you decide to invest $1,000 in each of 10 stocks. Would you place a stop loss 10% below the current strike price? that would limit your loss to $100, if your stock goes south, would you? Most people I know do not do this. They may stay in the stock until they lose 20% and some don’t use stop loss routinely. In reality, however, any stock can go down 30% overnight, without giving you the chance to sell at the 10% loss point. If you had bought a call, with equal number of shares, your loss would be limited to the cost of the option, even in catastrophic declines in stock price. However, if you had spent $1000 in one call on the same stock, you could lose it all, if the stock declines 30% overnight. The trick is to understand your own risk tolerance. If you were willing to lose $300 in a stock that declines strongly, you should not be spending any more than $300 in any single options trade.

The secret behind the PCCRC techniques I use is to take advantage of strong moves in either direction, as you would using a call or a put (or both), while limiting my risk to 2% of my available trading capital, which is actually quite conservative. I finally met my goal of finding that hedged position with built in leverage and risk control that could substitute a stock position in terms of capital exposure, but with much more limited risk and much more leverage. But there is a lot more to this strategy, assuming that you are able to find stocks that can make monster moves in either direction within a 3-4 month period. Amazingly, I have found that the risk control serves me well by reducing the number of losers and reducing the amount lost per loser. I believe that this is what all traders traders are looking for, whether they have $10,000 or $100,000 of trading capital.

I have to find ways to grow a small amount of money at first.

While it is true that there are advantages in trading PCCRC’s with high price underlying stocks, it is not true that small accounts could not trade my strategies. There are some limitations, to be sure, but I believe that trading puts and calls exclusively, may end up being much more frustrating and limiting that a few simple PCCRC’s in relatively small accounts. In fact, I have the evidence to prove it. I have a relatively small retirement account which I started with about $15,000 at about the same time I begun to trade the PCCRC strategies. I decided early on that I would use this account for miscellaneous strategies, rather than running a scaled down reproduction of my PCCRC’s in the larger accounts. I have grown the account to as high as $27,000 and then reduced it to $17,000. The ups and down are frustrating and unproductive, and I can guarantee you that I would repeat the same trades given the same circumstances. Buying puts and calls, are simply too volatile. I call this form of trading “...yes, no, maybe so”, even with all the background and years of trading I have, trading is just too difficult to produce success in routine and consistent ways.

I watched your video and it is obvious that you have worked out a system, been trading for awhile, and really understand how options work!!!! You have a deep understanding of the Greeks.

It is true that I was fortunate to have run across Larry McMillan’s book “Options as a Strategic Investment”, and amaze myself when I begun to test the “Put Call Calendar Ratio Combination”. It dawn on me that this form of trading was actually taking advantage of Delta, Theta and Vega. Eventually I begun to understand the value of Gamma in it too. But it is not true that it was my understanding of Greeks that lead me to the PCCRC. I just intuitively knew that it would work. Here is why: The PCCRC has two basic components: a. A front month short straddle, and b. A back month long straddle with 2x as many contracts. See if this phrase makes sense to you: “Given sufficient time, any stock will move strongly up or strongly down”. Regardless of the Technical Analysis or Fundamental Analysis principles that you use, all you need is time to make long options profitable. A long-term straddle may certainly accomplish this if it weren’t for the decay in time value.

Have you heard the phrase “options are meant to be sold?” this is born out of the misconception that most options expire worthless. However, there is some truth to the fact that selling OTM options would turn a profit more often than not. This is why former floor traders and professionals prefer to sell options, or sell credit spreads or use strategies such as the iron condor and butterflies. After all, Theta works with you in these positions, instead of against you when you buy calls or puts. I sought to take advantage of the well known fact that options decay faster one month before expiration. Selling the front month straddle would turn my trade profitable, month after month, even if the underlying does not move much at all. This is the same principle behind the calendar spread.

As I begun to make consistent and sometimes unexpectedly large profits with the PCCRC, I simultaneously continued reading about options trading and the secret weapon behind options: Implied Volatility (I.V.). It truly amazes me how most traders choose to ignore this the most powerful of factors behind the value of an option. Vega measures the effect of the change in I.V. over the price of an option. In fact, most traders limited themselves to avoiding I.V. when they should be taking advantage of it. When you buy a call or a put, a large portion of your premium comes from the demand for those options. That demand creates an artificially large price that “implies” that the underlying is likely to move strongly in either direction, or both, before the expiration of that option. Knowing this, an option’s trader may choose to create a vertical spread, rather than being exposed to the Vega in an expensive long call or put. In effect, they sell as much volatility as they buy, virtually neutralizing Vega, this most powerful of Greeks.

Others actually DO use I.V. or “Vega exposure” but in a somewhat schizophrenic way with the Calendar Spread, and here is why: A calendar spread consists of a short front month option and a long back month option with the same strike price. The Vega exposure comes from the fact that the back month option is more susceptible to changes in I.V. than the back month option. It makes sense that if options “imply” a strong move in the future, the farther away that future is, the stronger the move would be. You don’t expect a blue chip stock to move $10 in one week, but that may be a bet you are willing to make if it involves 3-4 month into the future. A Calendar is usually Vega positive, which means that an increase in I.V. would favor the position, but I.V. could only increase if there is a perceived potential strong move in either direction before the long option expire. Ironically, or paradoxically, the Calendar trader is expecting the stock to remain within a trading range for the life of the trade.

In many ways the PCCRC is similar to the Calendar spread because they both profit from Theta decay in the front month option, and from increased volatility in the back month option. However, when it comes to Delta, the similarities end. A strong move in either direction in a Calendar spread will turn a loser, regardless of the increase (if any) in I.V. However, a strong move in either direction and the PCCRC can make strong gains due to Delta Exposure. Very often, a decline in stock prices results in a spike in I.V., returning a profit.

So you see, the understanding of the Greeks is paramount to Options trading, whether you trade long options or fanciful spreads. The Greeks are, however, nothing to be scared of. In reality, if you have been trading options for a while, you intuitively know the role the Greeks play, even without knowing it. You know that options decay very rapidly toward expiration, so you know Theta. You probably know that stocks that move strongly in either direction routinely, demand high premiums and thus may seem to cost a lot more than a quiet stock of a similar price. This is the I.V. of an option is measured by Vega. Knowing that the PCCRC, when properly applied, can take advantages of all the Greeks alone or in combination, the better question would be, why would you not take advantage of all this potentiality? why rely on good old Delta alone?

Too Good to be True

2008-12-08T09:30:00.001-08:00

Last Nov. 22nd, I had the great opportunity to present my strategies at the Las Vegas Traders Expo. I had my wife with me who sat at the back of the room to tell help me with the lights, sound and overall technicals of the presentation. At the end of the seminar, he was pleased to see people coming out with nice comments, but one in particular caught her attention: “this is too good to be true”.

At first the comment brought a smile to my face because I know very well that it IS true, my strategies have given me returns of 30% in 2006, 70% in 2007 and this year promises to be above 40%, even with the decline of 50% in the major indices. Upon reflection, however, I had to ask myself, how did I fail in convince the guy that made the comment, that my claims are legitimate and that he too, could benefit from my experience of the last three years. I offer my own experience as evidence that the PCCRC techniques I use should work for anyone, particularly because I use very stringent rules. I also considered that even stringent rules may not be sufficient in real life, so I offered the results of a paper trading account which I started a 1 1/2 years ago, and traded real time under the scrutiny of the participants of my private group. Still, it seems like none of that is not enough to convince people that this stuff works, and it is going to produce results practically all market conditions, keeping you out of dangerous markets, if you follow the rules.

I would understand that someone would have misgivings about trying my techniques if I asked for an upfront fee of thousands of dollars, like many “trading education businesses” do, but I have described my techniques in much detail in numerous articles that date back to 2005 in the present blog. All you need is the determination to try the strategies out, without spending one penny, in a paper trading account, or even using back testing software such as Optionetics’ Platinum. You can make your judgment without risking one penny. If you still think that you need a helping hand, then you could join my private group and have access to dozens of video tutorials that describe visually, with examples that I entered real time for my paper trading account, for a small contribution, so that I can pay for my own costs. I even have a weekly webinar with a selected group where I describe the entries to my paper trading account, real time. Yes, once a week, for one hour, that is all it takes to keep the paper trading account going with good returns. I would say that this is perfect for amateurs that have a regular job and that are not ready to go into trading as a profession.

They often say: “If it is too good to be true, it probably is”, as a phrase to forewarn people about the dangers of con artists that would take your money and run. In my case, you are risking nothing, and could in fact gain a lot from the experience. If you discover, eventually that my techniques are nor for you, you can certainly benefit from the in depth look at the effect of the Greeks on option pricing, for example. You’d learn a lot about risk management, and even the Elliott wave theory.

There is a scene in the movie “Pay it Forward” in which a journalist has his old car totaled in front of his eyes at the scene of a crime. A lawyer, of all people, walks up to him and gives him the keys to his brand new, sports luxury car. In disbelieve, the journalist asks why would you do this, are you out or your mind? he simply could not believe that someone would be that generous. The lawyer, with a very cool demeanor replies: “Just Pay it Forward”. Believe in the generosity of others, because if you do, then it won’t be so hard for you to do likewise, and if you do, then there will be more generous people and less evil people willing to kill, steal or cause harm to others. That, I don’t think it is too good to turn into reality.

P.S. If you'd like access to a streaming video of my presentation at the Las Vegas Trader Expo, just send me an e-mail at Paperprofit1@mac.com

Ask the Tough Questions.

2008-12-05T21:45:00.001-08:00

Here is an interesting question. Why would anyone get into the business of educating someone about trading successfully?

If you look back on my blog’s early days, you’ll soon find out that I just wanted to get a bunch of people like myself to learn from each other, and find the “holy grail of trading”: make money consistently.

To be honest with you, I never thought that was even possible. Since markets change, trading success appeared to me to depend on one’s adaptability to trade in different markets. I would admit, however, that recognizing the change would be in itself a great feat of trading knowledge.

So, assuming there are people out there really willing to teach others this “holy grail of trading”, why would anyone do it. If you are really successful at trading, let’s say to make 30% a year, you could, in a matter of years reach any goal one sets for one self. Compare that to risking time and money into developing a business of educating people. Yet if you went to the Trader’s Expo, you’d see dozens of businesses willing to teach you how to make nice living from the comfort of your home, by just taking a few lessons for the modest sum of $3,000. Then there are also softwares, websites, newsletters and services of all kinds, designed to “make you rich”, or so is the implied or expressed promised.

Yet, how many of these services actually claim what sort of returns have they had in the last few years? months? You figure that if they had achieved a return that exceeds the S&P500 index, they would only be very proud to show their results. That would not be a very hard thing to do, considering the the S&P has fallen 50% over the last 12 months. Yet, no one is ready to boast that they have even exceeded 5%, let alone 30%. Why is that? Therefore, asking for the performance over the last 12 months seem to be a reasonable thing to ask, at least to give you an idea how much would you be expected to make in the next 12 months.

The reason some of these people don’t even say that much is because they may not even be traders themselves, so a reasonable question to ask when contemplating buying into a system is: do you trade the system or software or newsletter recommendations? After all, I want to learn from another trader, not from someone that may have traded in the past, but found “educating” rather than “trading” to be a better business. Some may find “software development and marketing” to be a better business than trading. Which begs the question: Why would I not do a better job of developing my own strategies? after all, I trade every day, and thus continue to sharpen my skills.

When I finally came up with my PCCRC strategies, I thought about sharing them freely to anyone that would visit my blog, but clearly, not many took it seriously until I begun to trade the strategies on a fictitious account and started to generate amazing results. Once I produced my first few Videos, I had to make a decision: Do I create a business of teaching my strategies? The irony is that once I thought of the possibility, I started to “sell” my system. I started telling people about the great results I could obtain with this approach. I insist to the participant of my group that not every trade is going to turn out and that trading is always a risky operation. However, by following every trade through to the end, I am demonstrating my techniques, not just making claims. Real time demonstrating of the trading I do is essential to back up claims. Yet very few do.

When someone claims to be teaching the “art” of trading (I’d call it simply an inexact science, but a science nonetheless), they should be very proud to show you their past performance, they should tell you how many trades they place in a day, week, month, or how much time they actually spend trading, in addition, the should be able to show you their trades LIVE, as they enter them and how the manage them to their conclusion, losers and winners alike. If they are not willing to do that, then you can’t expect them to teach you how to trade consistently. Personally, I have taught myself how to trade.

For me, teaching how to trade the PCCRC has become more of mission, rather than a business. I decided that I wanted to teach the very people that were struggling, as I was at some point. The very people that can not afford a $3,000 program. In addition, I decided that I did not want to enter the business of teaching how to trade. When I reentered my trading career in late 2002, it was to make money without having to spend hours a day trading, and to develop an approach to trading that would permit me travel the world, and not be tied down to a desk. So I could not make a business of teaching trading. I felt so confident that the PCCRC would make me the money I needed, that I felt that my life was full, except for one thing: make a contribution to help make the world a better place.

I urge you to try my PCCRC by paper trading it at first, and learning about the Greeks, and implied volatility under special circumstance. If you reproduce what I have been doing, you’ll find that the PCCRC is a stress free approach where you DO get more winners than losers, and where the winners are often larger than the losers. The results, of course, is profits months after month.

Remember, I don’t have much to gain from teaching what I know, but hopefully, you’ll “Pay it Forward” and help me make the world a better place.

How I Survive and Thrived During the Market Crash of 2008

2008-11-30T09:49:00.001-08:00

Let me start by saying that I am not some sort of financial guru. I am a Veterinary Pathologist and I run my consulting business from my office at home. However, I have been investing in the stock market since 1991, and trading options since 1995. As a scientist, however, I have a great deal of interest in statistics, and natural phenomena, and as a Pathologist, I have trained my eyes for pattern recognition. This is probably why the Elliott Wave Theory appealed to me. It is not a big stretch of imagination to think that mass psychology could be measure, and that patterns of euphoria or extreme lack of confidence and fear dictate the sequence of waves in a market chart.

I learned about the Elliott wave from Robert Prechter’s book “At the Crest of the Tidal Wave”, and how to analyze an chart from Beckman’s book “Elliott Wave Explained” in the mid 90’s. That was a very lucky occurrence because I begun to trade call options based on my analysis, at a time when most investors profited dramatically. At the same time, I learned about the power of options: limited risk! While my winners could make me a great deal of money, my losses were always limited. I always thought that there must be some option’s strategy that I could use that would maximize my rewards and limit my risk, under most circumstances.

By the end of 2000, my strategies begun to fail as the markets topped out. Here again, the limited risk saved me from big losses, but inevitably, I was hurt by some of my long-term holdings. All in all, I faired well, but soon discover that the Elliott wave and options combination was not so easy to trade when the bear market of 2000-2003 had begun. However, I did know where we were: Wave A of a long-term correction that could last about a decade. Frustrated with my inability to trade the downside, and fearful for my long-term investments, I stopped trading until October 2002, ironically the bottom of the market, when I started to explore options strategies other than buying calls and/or puts. I took courses, read books, and begun to see the market rise when the war in Iraq begun. As the market rose, I understood that it was merely a countertrend wave B, that could end at any minute, in unpredictable ways. You see, countertrend waves have very little predictable value. I took the rally of 2003 as an opportunity to sell my long-term stock positions and to experiment with various options strategies.

Using Optionetics’ Platinum software I back-tested several approaches until I ran across the PCCRC.
By 2005 there were very compelling, strong stocks such as AAPL, GOOG, RIMM and DNA, just to name a few, that were performing as they would have in 1999. It was clear that I needed a strategy that would take advantage of strong movers, while protecting me from the impending Wave C. I was completely unable to call the top. Month after month from 2003, I speculated that the Wave B was near the end. I gave up on Elliott wave forecasting, but did not give up on the theory. Wave C could begin at any minute, and the long-term data supported that opinion, but the exact count, from the bottom of 2003 was nearly impossible to make with all certainty.

I started trading the PCCRC strategy in 2005 by selecting “high fliers”, until one day DNA jumped more than 10% on great news about its cancer drug (April 2005). Two years earlier DNA had already jumped strongly and it continue to rally after such news. I entered a PCCRC, and in the process discover a second approach: selecting stocks jumping more the 10% with great fundamental news. I noticed that after news IV declined, only to rise again in subsequent weeks, and the stock could move strongly up subsequently as well, I just had to give it sufficient time. The rallies could be immediate, but sometimes were delayed. Only the PCCRC would give me peace of mind to trade momentum stocks during a bull period that could end at any time. I begun to profit consistently, like never before in my life. I had losers, to be sure, this is inevitable in any market, but by 2006 I had grown my account by 35%. All the while speculating that the market was at its peak. Although I did not avidly read Bob Prechter’s forecasts, I was aware of his overall predictions and largely agreed with them, but with the PCCRC I was trading successfully a bull market in limited stocks. Being completely out of stocks by then, I kept the bulk of my nest egg in CD’s with only 4.5% annual interest at first, but as I was able to select the best rates from my Schwab account, I picked a few long term 5-5.5% CD’s. In retrospect, that was a great move, as I avoided Real Estate and Corporate or Municipal bonds.

2007 was my best year ever, with a return of 75% in trading my account. Most of my trades were profitable by virtue of the strong move up in the underlying, but in August 2007 an unexpected thing happened: Volatility spiked and many stocks went down, even in my portfolio. This was a test of my PCCRC as the S&P 500 lost 150 points in just a few days. I had my best month ever until that point, and I learned the power of Vega, the Greek that I like to call the bull. The best was yet to come. I was ready for the eventuality that was to be Wave C, but I had found a method to profit for the markets, if the forecast was completely wrong.

I continue to trade as though the markets were going to continue to go up. I selected stocks to trade that included: 1. High fliers (best performers of the last 90 days). 2. Breakouts to new 52 week highs. 3. 10% jumpers post-earnings with increased guidance. 4. Stocks with I.V. Skews. I began to feel most comfortable with the 3rd strategy, but they all produced gains very consistently with only the occasional loser. However, in the 3 years that I have been trading the PCCRC, I never had a loser exceed 1% of my account in max loss. This is remarkable because potentially, any PCCRC entered by my rules, have a maximum loss of 2%. So the PCCRC strategy has a built-in money management mechanism. So long as you keep you max capital per trade to 10% of your account and 2% of it at risk, you don’t even need a classical stop loss. The PCCRC has a natural decision point one week before expiration, at which time one may decide to rollover the trade, or simply exit the trade. I have found that having this decision point forces me to face the facts: if I am not making money, I can hardly justify doing a rollover, or perhaps I find that there is little money to be made with the rollover. In either case, I am forced to take action.

2008 started rather unremarkably in my account, I begun to see that 2007 had been an exceptionally good year and that I was not about to repeat the performance. However, I set 30% increase as a reasonable goal for the year, and stuck to my approach. By Aug-Sep, I was still picking the best performing stocks, even when the financial crisis became evident. As the markets begun to decline, volatility begun to run up to historical levels, amazingly, every single one of my trades was profitable and by large amounts. I begun to roll down my outstanding puts (long puts that exceed the number of short puts), and closing my outstanding calls as measures to reduce volatility, while keeping my trades opened to the possibility of profiting to continued decline, or a potentially strong reversal. By the end of the week of 10/10/2008, the stock market had had the worst week in history. I had the best single week in my trading career, and because I had no stock, bonds or Real Estate holding (other than my home), you may say I also had the best week for my entire portfolio. October, far exceeded my previous best month of Aug. 2007.

As 2008 draws to a close, I am looking forward to a bullish 2009 with lots of capital in my account and confident that the PCCRC will also give me a strong year, this time with selective bullish picks. In fact, I am starting to buy small portions of the Spiders (SPY), which I will continue to buy once a month until the markets are closer to their 5 year high. So long as the markets are closer to the 5 year lows, I will continue this strategy. Nevertheless, the PCCRC, more than ever, will be my preferred approach for 2009 as well.

December, Relax do not Trade

2008-11-24T20:54:00.000-08:00

Starting this week, trading the PCCRC is going to be difficult, at best. There won't be many candidates, not only because the I.V.'s have exploded and should begin to decline, but because there is not going to be much activity during the holiday seasons.

I already told my wife that we should plan a relaxing vacation, rather than stay at home and let the days go buy without any big surprises or news that could cause any stock to jump 10% after good earnings, increased guidance or product release.

Those that recently discovered my Blog because of my talk at the Las Vegas Traders Expo, should take this opportunity to prepare because starting in January, the companies will begin to release earnings and then we will see how the economy really is.

According to my Elliott wave forecast, it would not be surprising that the S&P500 exceeds 1000, until inauguration. After that, though, There will be one more test of the lows, before we finally end this nasty bear market.

In the meantime, let us all see this extreme volatility dissipate during the holidays. Perhaps then we'll find good candidates.

Those of you who have lost much, but have a few PCCRC trades that are profitable now, let me remind you that the success of the PCCRC has a great deal to do with the selection of candidates based on a carefully constructed set of rules. I'd rather have cash in my account than to have trades that were entered while breaking the rules.

Enjoy your holidays and keep the hands off the mouse until a decisively good candidate shows up.

Meet me in Las Vegas on Nov. 22nd

2008-11-18T14:15:00.000-08:00

For the last year and 1/2, the S&P has lost considerable amount of value, as we transitioned from a bull market into a bear market the likes of which we have not seen in our lifetime. Th S&P has lost over 50% from the highs, and by all accounts, traders who've managed in this environment are fw and far between.

You'd be surprised if I told you that I kept my head above water, but what would you say if I demonstrated to you that I made 107.87% in a paper trading account shared with the participants of my Google e-mail group?

An what if I told you that I was willing to share my secrets, asking only that you "Pay it Forward"?

http://www.youtube.com/watch?v=CwHcS-XoYbc

So come to Las Vegas and Join me on Nov 22nd and I will show you how I was able to grow my account with short and/or shallow drawdowns to a peak of $27,866 today.

I look forward to meet you there!

Elliott Wave and my Rational for the PCCRC strategy

2008-11-14T19:44:00.000-08:00

First of all, yesterday I reached a landmark on my public, verified paper trading account using exclusively the PCCRC strategy described here over the last 17 month. The account, which I started in late June 2007 with $100,000.00 has now reached $203,258.20, an annualized return of almost 47%.

In figure 1 you can see the starting point on 6/28/07, and the net liquidation value on 11/13/08.

Figure 1.

Needless to say, this stuff works. My approach has proven routinely profitable over months and months, even over the treacherous markets we are experiencing this year. The creation of the strategies described in this blog have not been by serendipity alone, although there is some of that too. No, my motivation from finding a method that would not catch me by surprise came to me by 2005, as I understood that the bull market between 2003 and 2007 was no more than a corrective wave B of a FLAT (see Elliott wave description below) in the S&P500.

To correctly count the sequence of Elliott wave counts in any market, one should start the count from the begin. Here is my long-term count on the S&P500:

Note that the Primary wave 4 that started at the climax of the internet "bubble", is still in progress, but at long last close to the end. This period has been market by events such as the Enron debacle, 9/11, the war in Iraq, Katrina, and lately the financial crisis. I have used the channeling method to identify waves 2 and 3 and project wave 4. Since the channel has now been broken, we can say with certainty that wave 4 may be close to concluding, since the minimum requirement (exceed the lower trend line) has been met. Also, I have examined every Intermediate wave since 1950 and are prepared to argue the validity of each one of the counts.

Primary wave 4 seems to be a FLAT, which is a 3-3-5 sequence. Wave A formed as a double zigzag, and wave B as a zigzag. Wave C is an impulse, and Minor wave 3 is in progress and almost concluded. Following Minor wave 3, we will see a corrective Minor wave 4, which will keep the range we have seen for the last few weeks, but eventually we will have a final Minor wave 5. I am expecting Minor wave 5 to test or exceed the bottom of Intermediate wave A, finally concluding Intermediate wave C, the last component of Primary wave 4.

Let us examine the components of wave C in more detail:

Intermediate wave C started a year ago, and it is likely to last a few more months. Currently in minor wave 3 is in progress and only a day or two away from finished..

I believe that Minute wave 5 is developing as an ending diagonal, which is the only impulse wave that may takes the unique 3-3-3-3-3. Accordingly, the S&P500 is in Minuette 5, which should bring the Minute wave 5 and Minor wave 3 to a conclusion, with a strong rally to 1010, the top of the 4th Minute wave. This will mark the beginning of Minor wave 4 which should take a few weeks. Be prepared to see the markets continue to zigzag with strong moves in either direction for a while.

Gigantic Volatility: Hard to Find PCCRC Candidates

2008-10-27T15:55:00.000-07:00

My rules of entry of the PCCRC are quite stringent, so readers have been expressing frustration about finding candidates in the current environment that includes the most significant Volatility Index since the crash of 1987.

Here are the entry conditions for the PCCRC:

The IV of the back month options must be ≤ IV of the front month options.
The IV of the back month options must be < 40%.

These two rules are essential to profit in case of a decline in the stock value (usually accompanied by a spike in volatility) and to avoid a volatility crush, should the volatility begin to decline. This decline could occur unexpectedly, so we do not want to hold a PCCRC with excessive volatility.

I have described several scenarios in which the PCCRC would be an appropriate strategy. I call them search conditions because we can use technical analyses software to locate the trades:

Post earnings jump of 10% with a decline in IV, and raise in earnings guidance.
High fliers or the best performing stocks of the last 90 days.
Break outs to new highs, stocks that go up to new highs after several weeks of decline and reversal.

Such candidates were abundant just a few months ago, but with the strong decline in the stock market, they are few and far between. Although the market decline has proven the value of the PCCRC strategies I describe, the question is, would it be a viable strategy going forward if the markets are so overextended in volatility and price declines.

I would argue that today, more than ever, the PCCRC would be the strategy of choice. On one hand I have demonstrated a phenomenal track record with the publicly traded paper trading account I have been posting in my private group (97% increase since June 2007). On the other hand, the entry and search conditions will keep us out of trouble by helping us select good candidates, even for the treacherous markets of today.

Following the strategies described above, I have entered PCCRC for JNJ and AMGN, even in the mist of the worst week ever in Wall Street. However, even if there were not such rare cases, there is one more search condition that I rarely used. I call it the IV skew strategy.

Provided that there is a large difference between the front month and the back month volatility, we can tolerate a slightly higher volatility than we would normally use. One can use the ThinkorSwim platform or Optionetics platinum, to locate stocks with a high volatility skew. Take for example RTN:

The difference between December and May options exceeds 20%. This is particularly unusual considering that the company has just reported earnings. Perhaps the election has something to do with this, but it is quite clear that this imbalance is going to have to resolve. I have to be more vigilant with this trade because once the volatility skew resolves either with an increase of the IV of the back month options, or a decline in the front month IV, I have consider exiting the trade.

Note also that I have bought OTM calls. Given the current market conditions this is not a bad idea. By doing it this way, I give my trade a more than unusual bearish bias, but if the market decides to bounce strongly once and for all, I’d have Gamma on my side.

The flexibility of this form of trading comes at a price. The trader must have a clear understanding of the Greeks. The risk in this strategy is quite tame, but only at the right time. I have been trading the PCCRC almost exclusively since 2005, and since then my returns have far exceeded my expectations. Please take advantage of it too, and if you succeed, as I am positive you will if you put enough effort into it, Please Pay It Forward!

You’ll be surprised and delighted of the calm confidence that comes from trading this way.

Fearless Trading and Capital Preservation

2008-10-09T13:37:00.001-07:00

Have you heard recently people using the old cliche “Cash is King”? The financial crisis, which seem to be spreading through the globalized financial world has gotten people really worried! The VIX (volatility index) reflects the fear, with a historical spike of almost 60%.

I have heard the fear in the voices of professional traders that have come out to lend support to their audiences but fail to be reassuring as they question the wisdom of their own trading such as selling puts even though premiums are at extremes. How could we have predicted the this strong declines in the market that challenge the “.com bubble” in speed and in points of decline?

If you’d forgive my lack of modesty, I have been telling you about preparing for this storm since I begun to describe my PCCRC methodology in 2005. I also told Tim Bourquin’s audience in my trader interview back in December of 2007:
http://www.traderinterviews.com/archives/2007december.php

I have also been talking about my strategy in my seminar at the Los Angeles Traders Expo and simultaneous interviews for the money show, which I encourage you to watch:
http://www.moneyshow.com/directory/Results.asp?q=Sarmiento

Back in mid July, I tried to convince my audience that “stock trading was too risky, while the PCCRC provides both leverage and risk management. The PCCRC takes advantage of Delta, Vega, and Theta, together or individually, to assure profits under most market conditions.” I showed you then how in a year I had grown a $100,000 account into $164,193.70, all under the scrutiny of the participants of my Google traders group.
[ Please click on each image to enlarge it.]

Figure 1. Performance of a paper trading account opened on June 2007 with a fictitious capital of $100,000 (see Cash Balance on the right). By 6/15/08, almost a year later, the account had grown to $164,193.70, a little less than a year later, for a 64% gain.

Since then, and still under the scrutiny of my group members, the account has grown an additional $20,000, almost 12% in just three months. In fact, my strategies have produced $50,286 in profits since the beginning of the year (Balance was $134,289.2), that is a 37.5% growth during a period that the S&P 500 alone, has declined almost 37%.

Figure 2. Balance of the paper trading account ($187,336.7) as of 10/9/08. Note the year to date profits of $53,047.5. A profit of 39.5% so far this year.

But all of these claims would be meaningless if I did not make these trades real time and entered in real time in front of an audience that could verify my every move real time. I am posting here the pictures for your careful analysis. I am confident that you’ll find the results quite consistent under most market conditions. In fact, I am showing you the growth chart (left), so you also see the reliability of my methodology, in producing consistent results with very little risk, and shallow and or short drawdowns.

Note the the strong decline in the stock market of the last few days have actually increased my profits to new highs, since I opened the paper trading account.
One of the best things about trading this way is the preservation of capital. My approach always takes profit in a timely manner, and reduces the risk routinely by rolling over shorts month after month. I always have capital in my account, ready for the next opportunity.

Do you want to learn now to do this? it is not a bad time to start because regardless of what the markets do from here, we will be able to recognize the opportunities and enter the positions which in all likelihood will become profitable in time.

You can choose to read the articles I have written in this blog, or you may choose to participate of my Google e-mail trading group, and take advantage of numerous tutorial articles, videos and now even Webinars on a weekly basis. Please contact me at paperprofit1@mac.com for further information.

Please, if you find the information in this blog useful, understand that what I have done is given to you generously, expecting that you PAY IT FORWARD by doing something really great for 3 other people in your world. Just be sure that you ask them also to PAY IT FORWARD so that the chain of good will continues and make the world a better place!

Book Review - “Trading Option Greeks" by Dan Passsarelli

2008-09-24T05:40:00.000-07:00

Probably like most option traders, I started trading options for its leverage back in the 1990’s, when I thought I was a genius of directional trading. Since, I have learned that I was merely at the right place at the right time, I have come to understand that the power of options goes beyond leverage and risk management. In fact, I have come to understand that time decay and volatility can be important factors in the pricing of an option and that they can too be exploited for profits, as we would exploit directional change in the underlying.

The Greeks measure the factors that determine the price of an option. Delta measures the effect of change in the price of the underlying. Theta measures the effect of the passage of time. Gamma measures the effect of the change in Delta. Rho measures the effect of chance in the interest rates. Vega measures the effect of the change in Implied Volatility.

Your risk, and reward, depends on your exposure to the Greeks, understanding them is paramount in guiding you to success in options trading. Today, I have come to understand that Vega can be quite powerful, particularly in times of uncertainty. The Greeks are usually covered in most option books, but hardly ever as the subject of the book, yet focusing on the Greeks can lead you to trade better, recognizing opportunities and pitfalls. Dan Passarelli’s book “Trading Option Greeks: How Time, Volatility, and Other Pricing Factors Drive Profit”, takes exactly that approach, revealing to us how the Greeks function in an enjoyable yet thorough and direct approach.

I classify trading books in two categories: Sunday reading and consultation books. The Sunday reading books are those that I can read easily and enjoy, while imagining myself using the strategies in my own trading. The consultation books are those that I would rather read in portions that are full of theoretical material with profound knowledge. I have a hard time classifying Dan’ book in either category. It was certainly pleasant for me to go through the book cover to cover, but I can easily find myself going back to the book for consultation. I kept marking the book for some nuggets of information that I think will serve me well in my trading. I found a series of quotes that I can probably drop in some of my articles to explain in a few words what I would like my readers to remember in their own trading.

When we first start trading options we are keen on finding out about the different types of strategies. We are sold on the idea that learning a few spreads is all we need to know. As most traders come from a stock-trading background, we just think of Options as an instrument for vertical trading. We fail to see that options are complex and powerful at several levels. Suddenly, in one day of clarity we come to realize that an option is a chariot pulled by the Greeks. Go grab a copy of this book, even if you are a beginner. Once you have a grasp of the Greeks, then you’ll see how each different spread is the better choice in different situations. It is the Greeks that determine the best approach. If the different spreads are the tools at your disposal to make profits, then the Greeks are the factors that determine which tool to use in a particular situation.

Dan recently approached me to see if I would review his book. I have never been asked to do something like this. I have been trying to keep independent because my credibility depends on it. I think I would probably would do you a disservice if I did not recommend this book. It is important for me that you understand the subject well so that you can see the reasoning behind my own trading.

http://tinyurl.com/3o93q8

Too Good to be True

2008-09-22T20:50:00.001-07:00

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.

Where to Next?

2008-09-20T10:31:00.000-07:00

With the “unprecedented”, “historical” events of last week, people are using terms such as “capitulation”, “oversold” and “extreme”. Granted, the fear was in everyone’s face, and the move of the last two days appeared more of a short-covering rally, rather than a willingness of beaten down investors to bring their money back in.

It is hard to say whether the panic in the Street is an indication of capitulation, as they would call it. Personally, I would make no commitments of my money one way or the other. I just keep on trading my PCCRC strategies, if a real candidate shows up. However, I would attempt to use my favorite indicators to try to make some sense of what has occurred and to make a forecast of what may come, and how to take advantage of the opportunity.

First, let’s look at the $VIX. The CBOE volatility index of the S&P500. Indeed the $VIX spiked well over 40, to settle down back to the low 30’s, in what appeared to be a climax in volatility the likes of which we have not seen in years, exceeding the previous peeks of Aug. 2007, and Feb and April 2008, and a minor peak in July. But this is hardly what you would call a historical event.

[Please click on image to enlarge it]

If you go back to the early 2000’s you’ll see a few more dramatic spikes. Let alone the 1987 spike. Markets DO recover, and stability returns from the ashes of events like this weeks. However, this is not in itself an indication that “the worst is over”, for all we know it may only be the beginning, as the repercussions of the bail out begin to be felt in Main Street with inflation, fear, and collapse in consumer confidence.

As traders, we cannot rely on hope that things will get better, let alone “trust” in America, and other rallying cries. We have to look for opportunity, wherever it may arise, dust our selfs off from our loses (if any) and prepare for the next trading day. Only those that can keep a clear head and can have a confident believe in his/her system or approach to trading will live to trade another day, and perhaps even thrive when others despair.

As it is often the case in times like this, I go back to my roots as an Elliott enthusiast and try to make sense of the chaos that is the stock market. I am seeking some understanding of what is the real meaning of the events last week, from an Elliott wave perspective. I’d try to be as unbiased as I can be, using a time honored method of making the best case and worst case scenario Elliott counts and establish invalidation points for these two counts.

As Mr. Spoc (start Trek character) used to say, when all the possible alternatives have been eliminated, what ever is left, no matter how improbable, must be the truth.

I am assuming that the peak of the market in Oct 2007 represents a mayor high, and that the pattern that has developed since should be a discernible Elliott pattern that may or may not be completed, but with clearly readable, and complete patterns of a lesser magnitude. My policy with the Elliott wave theory is that the smaller completed patterns should be air tight and that they should give us reasonable indications of what the larger patterns would be. Below I have created my best-effort counts. I believe strongly on each one of the smaller waves, labelled here with cyan blue numbers or letters. I will use R.C. Beckman’s terminology and call this “Minuette” or multi-day waves. Completed Minuette waves give rise to Multi-week waves called “Minute” waves, which in turn give us an indication of the complete or uncompleted Multi-month “Minor” waves. We can only be certain that the bear market is complete if we can conclusively demonstrate a complete pattern. Still, even after having a complete Minor Wave pattern, we must be vigilant for an alternative count. Only if and when we can invalidate the best possible alternative count would we be able to forecast the continued decline or reversal of the market.

Day traders talk about pivot points, support and resistance. We can use two extreme road marks that I would call Elliott invalidation points. This are points that if broken would invalidate the count, and perhaps validate the alternative. There are not entry points, in fact one might even take profits at such points because the markets will tend to reverse at those points, but the invalidation of the count would indicate that a new multi-month “Minor” wave is in place, or the alternative, which is that the current Minor trend is still in place.

The bearish alternative, suggest that the downtrend is intact even as the 20dMA (red curve) is broken and the 50dMA (green curve) is being tested. The 200dMA is usually an indication of the larger trend until broken (blue curve). But we are not about to wait until the 200dMA is crossed over to make that decision. Instead we rely on the Elliott wave invalidation points.

[Please click on image to enlarge it]

Only if the likely Minor wave 3 (currently in progress) is invalidated could we positively rule out a continued decline. Perhaps at that point, the 200dMA and the price action would meet. Once this alternative count is invalidated, we must then assume that the bullish alternative below is the correct one.

[Please click on image to enlarge it]

Here again I have placed an Elliott invalidation bar in red. The count below is a double zigzag, counting from the top of the market in October 2007. This count implies that the pattern is now completed and a rally to test the October highs would now be in place. If this count is wrong, the market will decline and break through the red bar in the chart below, before the red bar in the chart above is broken.

Please do not rely on this forecast to make your trading decisions. I can only recommend that you trade delta-neutral strategies and only in situations in which such strategies are indicated. If you decide to trade directionally, be sure to limit your risk with options.

The market will do its thing, always catching us by surprise!

Luck to Everyone

2008-09-19T05:27:00.000-07:00

I have been telling you for a while that I do not own any stocks. This is not entirely right because I DO have 2 positions that include long stocks. However, the goal is not to hold the positions indefinitely, they are meant as short-term trades. In essence they include the stock and long puts with sufficient contracts to cover 2x as many shares. It is like married puts, only I own 2x the number of puts.

This form of trading takes advantage of the swings of the markets, as I can adjust the puts in the following ways:

1. I can roll down the puts by selling high strike prices to lower strike prices, if the stock declines.
2. I can roll over to next month as expiration approaches.

The idea, however, is not to panic buying puts because I think the stock is going down, but rather as an approach to judiciously maintaing Delta neutrality. If the stock continues to go down, I do step 1, if expiration approaches I do step 2.

If the stock rallies, then I can do two things:

1. Sell stock if I think the rally is temporary.
2. Add a ratio back spread if I think that the rally is for real and may last long.

The objective here is to keep Delta neutrality, and only modify the trade as we go along, taking profits, but keeping neutral.

I have two of this positions, one in AAPL and the other on ISRG. I will post these two trades shortly.

S&P 500 Falls to New Yearly Low

2008-09-16T02:57:00.001-07:00

I suppose I must add my opinion to the many that have already been given. First, I see this only as a continuation to the down trend that started back in Oct. last year. Almost a year ago now. According to Robert Prechter, the market should test the lows of 2002 at some point, which implies a lot of pain before this is over.

If I was 20 years younger, I would be continuing to add to my 401K plan by buying an indexed fund. But since my father died by the time he was my age, I don't have the appetite to put my money in long-term investments, I'd rather enjoy my money now while trying to make a contribution to this world. Unfortunately, the leadership in the US have no interest in making the world a better place, so I must do like Ghandi used say and "be the change that I want to see in the world". If I was holding stock or some kind of mutual fund, I would be in panic now, but my knowledge and believe in the Elliott theory, have kept me out of the markets since 2000, and I am not about to change that. Right now I may appear smart to some of view but I had plenty of agonizing days from 2003 to 2005, when I saw the markets run up without being able to take advantage of the move. I was just too fearful of the possibility to have the markets that we have now.

During that period, I struggle looking for an approach to investing in the stock market. I have no appetite for Real Estate investing, so I had to make money the only way I new how: trading options in the stock market. Yes, incredibly, I was against the conventional wisdom that options are risky. I believed then and even more strongly now that options are an instrument of risk management if done right. Implied Volatility can in fact be used to our advantage to reduce risk and maximize reward in periods when every one else is in a panic. L. McMillan has said that Implied Volatility can in fact be more predictable than stock movement. It follows that positions seeking to profit from Vega or Delta profits or both, should be OK in any market condition.

I understood this by 2005 as I implemented my PCCRC strategies. Following my instincts at first, and my progressively acquired knowledge and experience trading option greeks, I came to the conclusion that I could trade without fear of days like yesterday. I was right. In fact my account increased moderately as a result of the increase in volatility of the financial markets. The other guys fear is my gain. Thankfully, the other guy is usually the fund manager that can only legally buy puts to stop the bleeding and when that happens volatility spikes. Perhaps I am profiting from those young people that can afford to wait 20 years to see the markets rise above current prices, in which case, I will be alright and so will they. Truly, though, I don't think in such terms because the PCCRC can also profit to the upside, and the markets efficiency in taking out the Lehman Bros. and Bear Sterns of the world, will in the end produce more profitable companies capable of adapting to the reality of the economy. It is capitalism at its finest.

I have been saying for years now that I do not trade stocks because I regard them as risky. You can probably see that now much easily. But I never thought I would say that I am concerned with my other investments which are mostly in Certificate of Deposits. As for my PCCRCs? that I can handle.

So the fall of the S&P is no big deal for me and it shouldn't be for you either. It is a good feeling not to be in panic. In fact, I have been raising cash by selling puts, as part of the management of my positions. At some point, sooner or later, the markets will rebound and a few stocks (the rare exceptions, to be sure), will come to my attention, and when others may shy away from touching the new heroes with a ten foot pole, I will be entering my regular PCCRC.

I invite you to read my earlier posts that include complete descriptions of my strategies, and many examples that were real life at the time. Alternatively, you may consider to join my private group. Simply send me an e-mail and paperprofit1@mac.com and request information. I remind you, however, that all you need to know is in this blog already.

Skills, Nerves of Steal, Luck, and Experience

2008-08-28T11:29:00.000-07:00

Do you want to be a trader? Which of the above do you think is the most important factor for you to succeed in you trading career?

Let’s start with skill. This is certainly something that can be taught. You can get together with a successful trader and he can tell you everything he knows — or at least everything he is willing to teach you. He/she may sell it to you as a part of a course for, say $1,000.00, and this would be relatively inexpensive. There are courses out there that approach $10,000. Now if you are a beginning trader, you probably would not be willing to spend that much money on “education”. You’d probably be wise because it is not even clear you could reproduce what the instructor tells you to do. I have taken expensive seminars, courses and subscribe to newsletters and I have found that they either do not tell you all that you need to know to succeed, or that there is an intangible component that cannot be taught. Perfectly reasonable approaches have easily fallen apart in my hands, even if I follow the systems to the letter. There may be several reasons for the discrepancy, here are some: The markets change and the system no longer applies. 2) I started to trade the system at a time when the markets are not suited for the system. 3) The system is not specific enough so I am lost as to what to do when the market go against me. 4) In the case of newsletter, I cannot follow the entry and exit points as stated in the newsletter because of timing. 5) I lack the perseverance necessary to make the system works for me. Perhaps my expectations where too high, or the pain of the drawdowns forces me to reconsider the wisdom of trying someone else’s approach. Within weeks or even days of trying the new system, you’d probably give it up because “it is not suited for you”. We tend to give more credit to others than to ourselves. It is the same with responsibility: We may easily say that the system does not work when you have not given it a fair chance. I would say that it would take 1 year or 2 before you can truly say that the system does not work. It takes that long for the markets to go through a period best suited for any system.

I think that traders probably fail to understand that to develop appropriate trading skills one needs time, intelligence and most of all perseverance. I define perseverance as active patience. When a system is “not working” it is time to actively seek to understand why not. Take apart the components and study them, for example, the greeks on the PCCRC techniques I use. I have to confess that it was only after some time trading the PCCRC that it occurred to me the metaphor of the Chariot with the 3 (4) horses. Suddenly, I had a clarity that could only had come from a combination of perseverance, study and repeated observation. This is the way I developed my skills. Are these skills transferable? Yes of course, but the recipient must have the same active patience as the developer. I have published hundreds of articles, dozens of video clips, and many tutorials, as well as a whole year’s worth of records of a paper trading account that I grew by 75%. Yet, I continue to publish more and more of these around the same trading strategy, even though my whole strategy can be summarized in a 3 page document in the form of recipes. I have people ask me questions that seem to reveal that not all the material have sunk in. It simply takes perseverance to carefully go through every paragraph of every article, to make notes and to understand the material well enough to reproduce it, first with paper money and eventually with real money.

Nerves of steal is probably not needed. I would suggest that it is probably dangerous to ignore your fears and stay in trades that you are not happy about. I remember in the early 2000’s when I started trading with the Optionetic’s methodology. I just could not get anything to work. They teach vertical spreads, calendars, butterflies, etc, etc. But I made the mistake of thinking that any of these would work. I would start with a bull call spread, only to be scared by a move against me, I would close the position and try another, only to see the original actually work. Eventually I would jump to another strategy, like Calendars. Then jump to the next, and then the next until I have ran out of strategies, never staying long enough to make them work. Of course trading like that is unproductive because you never figured out what would work and when. Nerves of steal would probably not be the solution either. Staying in a trade to test your guts is not a wise approach either. I think that if you are two nervous to stay in one trade, two items are probably at work: 1. You are not knowledgeable enough about the form of trading you want to experiment with. 2. Your risk is probably well above your comfort zone. If you think nerves of steal are needed, I would suggest that you don’t know enough about the trading you are trying to do. If you are too nervous to go through the drawdown periods, you probably do not have a plan to limit your risk. Limiting your risk is the specialty of Options trading. I do not place a trade that exceeds 2% of my account’s liquid value. Yet, many traders go as high as 5% of their account on a single trade.

I heard Rich Swannell (Elliottician.com) once say that if you lose 30% of your account, you should immediately stop trading, and go back to the drawing board because there is something fundamentally wrong to your trading. I did that in 2000 when I lost only 15% of my account. I stop trading for years, only to begin again in 2002, when I went to my first Optionetic’s seminar. One of the best things I ever did was to purchase a subscription of Optionetic’s Platinum, most importantly because it allowed me to back test strategies and ideas over long periods of time, well into the past. I was becoming knowledgeable as a substitute for nerves of steal. During the 2002-2005 period, I remember one particular time when despondent, I said to my wife: “This just doesn’t work, I very much doubt that anyone can consistently trade the markets day in and day out. I was simply at the right place at the right time in the 90’s using the right strategies. Today is a different time”. My frustration is not atypical. A drawdown period can last months. Then suddenly, your account bounces back strongly and you are back in the profit zone. How do you know you are doing the right thing! how do you know that your system is not actually leading you to the total collapse of your account? It won’t if you limit your risk. I don’t think I would trade again as I did in the 90’s, yet it was a robust approach. I just did not adapt to the new reality that came with the collapse of the stock market in 2000-2002. My approach was perfect for a resounding bull market. I came out a winner because I followed my 2 basic portfolio managing rules: 1. Stop trading when your account goes down 15% or more. 2. Do not risk more than 2% of your account on any single trade. 3. Trade your system consistently unless it would violate rules 1 or 2 above. Doing this would preclude the need for nerves of steel. I would suggest that if you feel you need nerves of steel, you are probably violating one of the rules above. I would suggest that there are many systems that do not lack logic and that could probably be hugely profitable over a certain period, let’s say 6 months. Understanding what to expect, become knowledgeable about that approach would probably take months of paper trading. You could try the PCCRC, or any other system for that matter, first by paper trading. Understand the basics, the risk and money management for the approach, before you actually risk $1 of your real, hard earned cash. Then you would slowly begin to actually trade following the basic rules of portfolio management, and do not make up your mind about the validity of the system until 6 months have passed. Now understand that to you need to make that commitment to that single form of trading, before you even begin, and despite steep or long drawdown periods. You have to give it a chance to work in YOUR hands, with YOUR biases and YOUR nerves of steel or lack there off. If you go back to my first few articles and original rules of entry, you’ll see an evolution of my approach. I recent go this e-mail that illustrates how a form of trading can evolve in your hands and how one can make it work:

I am very impressed with you PCCRC system but I think you are too modest in attributing the idea to Larry McMillan. I can see how Larry's ideas led you into this but as far as I can tell two unique and critical features originated with you: 1) using the 1:2 short to long ratio to structure in those nice long delta curves in the PL graph, and 2) waiting for an easily detectable 10% move before initiating the trade.

John

What John noticed is that I found my own way, my own selective situations in which the PCCRC works most effectively to the point that I develop “nerves of steel” because I have come to know my techniques so well that I do not fear the drawdowns. I now see them as part of the process of making a profit. Of course the PCCRC is very well hedged of the fear is controlled by the very nature of the trade. So let’s look at another example: The Elliott wave trading. I have found that this is in many ways the opposite to the PCCRC. It is more discretionary and even subjective in the selection process, and it may not show profits right away. A forecast may take months to develop and a forecast may change along the way, leaving you with a 100% of the capital at risk. I would think that you’d need nerves of steel here, and over a prolonged period of time! well, here again, you have to have a 6 month period of trading for honest and complete evaluation. In addition, you need to sharpen your skills and pattern recognition and have faith in your own abilities over prolonged drawdown periods. To the extent that you become confident in your abilities and keep the rules of portfolio management, you will eventually begin to see progress. The problem, I believe, is that beginners feel that they are missing out, and fail to see that they must first sharpen their skills before they can become efficient traders. One bad turn of the markets and their strategy goes out the window, and they panic and become gamblers, not skilled traders. Take a look at the movie “21”. An iron-clad system can go out the window when the unexpected happens. We very quickly break our rules and become discretionary traders, which is an euphemism for gambler. The nerves of steel are your knowledge, and your trust in your system, but most of all, your ability to walk out when your approach is not working, or even trading according to your system even when it is not turning a profit. At the lowest point in your drawdown you may be fearful of committing new money when your approach is not working. So long as you are not breaking the portfolio management rules, would you enter a new position, based on the rules and keep with it according to your rules? Would you easily give up and start the search for a new system when the first drawdown shows up? Here are my suggestions for the beginner:

Find a system that fits your personality first. From Day trading to swing trading to position trading, or just long term investor.
Makes sure that it makes sense to you! This is extremely important. You MUST believe that the system has a good chance of working, or else you’d leave it at the same sign of trouble.
Make sure that the vendor gives you a good annualized rate of return if you follow the system to the letter. Don’t be persuaded unless the vendor can offer third party verification of their claims. If vendor can actually produce gains upwards of 30% per year, they would only be excited about shown you such results. If not, then there is no reason for you to try it out! that simple.
Paper trade the system for a few months. I would say 6 months. I am amazed how the new comer jumps into a system that they have not paper traded themselves first. This is not much different than flushing cash down the drain.
Back test the approach, if you have a software such as platinum, under different market conditions, if you can. I know this is difficult, but if you can do it, it puts your learning into warp speed.

It may appear to you that today’s market is the greatest time for trading, but I would say you are wrong. The sooner you jump in without preparation, the sooner you’ll bail out with a loss. Nerves of steel come from preparation. Preparation comes from knowledge and a set of rules to follow consistently. “Luck” as the uninitiated will call it, is what happens when preparation meets opportunity. Opportunity, in the stock market is happens every minute of every day, if only you learn to recognize it.

I recently got this e-mail:

[...] the day trading discipline is a young man's game, requiring nerves of steel and the reflexes of a fighter pilot.

Proost

Well not necessarily, if you have the proper instruction, set of rules and have tested that approach sufficiently. Yes, I can see why you’d have some trepidation at first, but with time, there is no reason why you cannot turn any form of trading in a wining system. This is why it is OK to take your time to find a system that would fit your personality. I can’t imagine myself spending countless hours by the computer for a single trade. I have other things to do!

I already hinted at what I think is the rule of Luck in trading: Luck is what happens when preparation meets opportunity, and opportunity is there all the time. So YOU make your own luck with your preparation. Take the time to test your approach as I have outlined, following the rules of portfolio management and the suggestions for beginners above. Then proceed with caution, write down your own set of rules and learn from your own experience. Yes, Experience, the final item in the list. This is what is going to take you from a good trader into a superb trader, with an income of 6 figures or more a year. Constantly modify and polish your trading techniques. Sharing with others, amazingly, serves that purpose. I have learned much about myself and my own trading by telling others how I trade. Talking it out with others has a way of sedimenting the strategy in your mind so that it becomes second nature. Try that some time! share with others and before you know it you’ll be rewarded with success, unexpected in common hours, as Earl Nightingale might say.

How do I Manage my Profits?

2008-08-23T16:37:00.000-07:00

If you have a job or business that is unrelated to trading, you probably have an IRS or 401K to keep for retirement. I remember no long ago, when I had a job in the pharmaceutical industry, I had a 401K to which I saved the maximum allowed. The company matched a good percentage of it. Now that was a free lunch! I did not trade with that money, I kept it in a growth mutual fund, which was a great move during the 90’s. Today, I would only do that if I was 20 year’s younger in my early 30’s and a 30 year horizon to wait for the markets to grow my capital for me.

Today, I have rolled over my retirement accounts in a single IRA from which I do not withdraw a penny. I could select stocks for the long-term and keep a diversified portfolio of at least 10 stocks from various industries. However that seems silly when you can buy indexed funds or even the Spiders (SPY) with little or no commission. If I was a young man with a 401K, I’d probably add to my position on the SPY with every paycheck and thus dollar-cost-average for the distant future. Today 10 years is a long time for me, and I do not have the appetite for another downturn in the markets like we saw in the early 2000’s and which will surely occur again, if we believe the Elliott wave predictions.

I am happy to report that I keep my entire IRA account on PCCRC positions with the occasional discretionary or experimental position. The growth over the last 3 years in that account has been great, so I intent to follow my plan for years to come, regardless of what turn the major indices take. I have lost my interest in stocks as a form of trading and in indexed funds, although I would certainly recommend that approach to the early investor and trader.

No, I am not completely mad. In fact, I have grown to trust my PCCRC strategies much better than owning stocks or the S&P 500. I understand that most traders may view options as risky, but I don’t. That confidence comes from almost 2 decades of experience trading options, and 3 years trading the PCCRC. This is not for everyone, but once you reach a point in which you are comfortable doing what I do, if you decide to copy my techniques, you’ll come to see how safe you feel with the PCCRC.

I DO have a cash account in which I trade options, and the results have been good in that account too. Which brings me to the main point of this article: how do I manage the portfolio, the account, and the profits I may have in that account:

I place 10% of that account’s liquid value (cash) into a single PCCRC. No more, no less. If the account grows, I increase the cash per trade, if the account cash decreases, I reduce the cash per trade. This assures scalability, particularly in the IRA account, which grows month after month. This way, I have to keep track of 10 positions (or slightly more — rollover and profit taking frees cash for new trades).
I limit the risk on each trade to 2% of the account’s liquid value. At any one time, I have 20% of my account at risk. If I was to have a row of 10 losers (this has not happened yet), I would lose 20% of my account. I would take a break of several weeks and try to figure out what went wrong and start over with a paper trading account. Trading the PCCRC for several years now, I have not experience a single loss of 2% of my account (20% of the cash in a trade), ever. This speaks volumes about the safety of this form of trading. Compare that to a stock that can fall 30% or ore overnight.
I pay myself a salary. This is very important for me. Naturally, I cannot do this in my IRA account, but I make a point of doing it in my Cash account. Every time my account goes up over 3% of my original account’s liquid value, I withdraw the exact 3% and wire it to my bank account. Of course, if I remained under water, then I would not be rewarding myself with any cash. This has been a very powerful approach. My spouse sees the results of my trading, I can pay for my trips abroad and actually SEE the results of my efforts.

Ok so it is still my money! so who cares whether it is in the bank account or in the trading account?

I think there is a big difference. The bank account is spending money. I subscribe to Dave Rampsy’s policy of not buying anything you cannot pay cash for. So it makes sense to separate these accounts. I still have a savings account in which I place the cash from my checking account.

I DO keep track of how well I am doing as well. I do this every 6 months. I need to see growth that exceeds the S&P 500 by 5% or more (usually a lot more), so that I know that I am running a business of trading that is making more money that having a job and putting my savings in an indexed fund would bring. Examining my growth against the S&P500 every 6 months keeps me motivated and serious about my business of trading.

If you are a beginner, don’t rush it, though, it has taken me years to come up with a consistent, non-discretionary, profitable business of trading. I am offering a huge leg up by sharing with you my techniques of trading PCCRC. Eventually, the goal is freedom, wealth and hopefully the satisfaction to know that you too can Pay it Forward! and contribute to make the world a better place.

Buy Low, Sell High..... Implied Volatility

2008-08-01T10:19:00.000-07:00

One of the most difficult concepts to grasp when trading options is the effect that implied volatility have in the value of your trade, be it a simple call, a vertical spread or advanced trades like the Calendars, or the Condors and Butterflies.

Vega, measures the potential change in the price of an option relative to the change in implied volatility. If implied volatility is to rise 1%, Vega tells you how many dollars will your position appreciate... or depreciate. Because implied volatility may increase or decrease instantly, with one single piece of news or lack-thereof, beginners are encouraged to trade vertical spreads, condors and butterflies, because they neutralize Vega, allowing you to trade as you are used to: vertically or sideways. We understand a stock going up and down, but do we really need to understand Vega?

I often compare an option position as a chariot pulled by 4 horses: Delta, Theta, Gamma and Vega. I like to say that if one falters, the others pick up the slack. As most metaphors, this one is inexact, because the strongest horse of the 4 is Vega. Yet, we routinely seek to avoid it, when we should be looking for situations in which Vega is low and likely to rise. Just the same as we would buy a stock when it is low and likely to rise. I have found that Vega is most likely low and likely to rise among momentum stocks, preferably after earnings when good news tend to relief investors and thus cause them to lower their guard, sell the protective puts in order to get the maximum bang for the buck.

Only days ago, BIIB jumped after good earnings, as the stock had rallied with the entire biotech sector, which has been very hot as of late. So you could have entered a stock position with a mental stop. Let's say that you have about $125,000 in your trading account, although you can scale down these numbers to fit your case. So you decide to buy 178 shares to approximate 10% of your account in the stock. Cautiously, you set a mental or actual stop to 2% of your account, so you are willing to lose $2,500 approximately. Accordingly, you place a stop that is $14 below current market price, at $55/share. This is very low, but you are quite bullish right now, so it seems reasonable to do so. Here is the trade:

Click on image to enlarge it.

If you were a cautious investor, you would have bought sufficient puts to cover your position, in case something went wrong. However, this "insurance" adds to your cost and cuts into your profits. If you look at the chart below, your risk is limited to $708, but your potential profits are also limited. If you manage a fund, your investors would probably say: I pay this guy to pck the good ones, not to limit my potential. Big money managers buy the insurance when stocks are likely to fall, not when they are rallying strongly, so following the earnings release, they remove their puts as the exhale in relief! As they do, the demand for puts (and calls for that matter) reduces, and this is reflected in a drop in implied volatility.

Click on image to enlarge it.

Ironically, this strategy, known as "married puts" is the synthetic equivalent of a long call, without all the capital overlay, so if one was to do the married puts, wouldn't it be a better position to buy a number of calls to match the $708 risk? Someone may say that with the married puts, we "build wealth" around the stock position. In fact, we could not manage 50 call positions very well, because that is how many we would have if we were to risk 2% of our account on every trade.

With the PCCRC we could limit the number of positions, maximize the profits and limit the risk to 2% of our account. Further, we are not protecting ourselves against Vega, we embrace it!!

Click on image to enlarge it.

In this PCCRC position, entered for BIIB just a couple of days after earnings, we are trying to take advantage of the apparently bullish outlook for the stock, as it outperformed the rest of the markets in recent days, and it actually broke up to new highs. At least one of the members of my private group suggested that by cutting the number of puts we could reduce the cash outlay to profit from the clearly bullish profile in the stock. When stocks appreciate, the PCCRC benefits from Delta, while Vega seem to get in the way, as implied volatility declines in rallies. However, I would argue, no one has a crystal ball and what may appear to be a very bullish scenario may be reversed just days later. in the case of BIIB the stock did just that! For stock traders, what happened to BIIB today could not have been pleasant. Right at the opening, the stock declined to $51.66, which would have triggered the stop loss and cause a loss of $3173.74, or 26% of our investment, or 2.54% of our account, which exceeded our projected max loss. An that is assuming that the your stop-loss order would have filled at the opening. In addition, who is to say that the stock could not have opened even lower?

Click on image to enlarge it.

Nevertheless, assuming that we could have sold the stock right at the opening, here is the result:

Click on image to enlarge it.

So, what if we have had the insurance of a couple of long puts to protect us?

Click on image to enlarge it.

You could have certainly have limited the loss to only $708.20. In fact, because of implied volatility, the puts appreciate a little more than just by price movement, so we lose about $20 less... Perhaps good enough to cover the commissions.

What I think the greatest loss for the trader, however, is the impact to our ego. This kind of loss can only mean one thing: we are ill prepared to handle the loss and/or we just don't know about stocks to predict their performance, even with a couple of days after earnings. Mind you, I have been doing technical, fundamental and Elliott wave analysis for years. I certainly could not have predicted the fall in BIIB. It seems almost a random event in the history of the company what caused the fall. I can tell you by my own experience that recovery from this kind of hit is usually long and difficult, making it almost impossible to recognize opportunities in the Biotech sector, let alone any other industry.

That's right. Let's say that you had positions in the banking sector towards the end of 2007. Would you have been willing to close your losers in that sector and put your money in the oil sector? Recently, the rotation has been from Oil and Gas to Biotech, did you close your oil positions and bought some Biotech? probably not. We tend to stick with what is working and when it ceases to work we go through depression and lose our interest, ignoring the next movers. Very seldom do we let the markets tell us where to go and where to stay. I like to say that we are usually "proactive" rather than "reactive". This is a habit we learned when we were investors: buy low, sell high! go look for value. Even Elliott wave theory favors the contrarian behavior, as we look for stocks that are at the bottom of wave 2, hoping to catch wave 3's rally. When we see a stock going up from $55 to $73, like BIIB has been doing since early July, we'd probably say: oops! too late, the stock is high. Today's drop in the price of BIIB, would only have served to sediment your believe that you need to be looking for the next big mover, rather than trading the big mover itself.

No, I have learned to be REACTIVE. To only trade the stocks that are moving, the big fat pigs with lipstick on them, or the darlings of Wall Street if you will. Only I am ready for what may happen. This is why I entered a variation of this trade on BIIB, strictly following my rules that I have laid out in this blog as well as documents that are free for downloading:

Click on image to enlarge it.

You are probably thinking: I would not go around parading my trades like this if I were you! particularly if they were losers. However, I want to take this opportunity to show you what really happen, and how is it that I have large winners, but only small losers, and sometimes even profitable trades from among the losers (that others would have to swallow).

The thing is, my PCCRC depends not only on Delta. Even though I have as many puts as I do calls, and they were all entered at the same strike price. You see, I have a huge Vega exposure. Which means that I can easily lose money as I can profit if IV goes down or up respectively. Note that my trade has a Vega of $326.06 which means that I would lose $326.06 for every 1% decline in implied volatility. So if the stock goes up, that is great because I have 108.96 positive deltas. Mind you I have more long than short calls, so I should make good money as the stock climbs. So my rationale for entering the position is decidedly bullish, but I am also ready for any eventuality, should bad news hit the stock, as it happened today with BIIB.

To be sure, I profit from strong rallies, and from Theta decay of the front month options, however, by far the most powerful force in the PCCRC is the fear of others, specifically fund managers, who buy puts when a stock declines strongly. Otherwise, the PCCRC would be a wash because as you see in the chart above, my max loss would be $2000, at about $60/share.

There might be some of you with more Vega experience that might be thinking, yeah but you are about to lose your shirt because of volatility crush!! Not really, I specifically design my trades to "Buy Low and Sell High...... Implied Volatility". Take a look at BIIB's IV on the day of entry:

Click on image to enlarge it.
Following a set of simple rules, you can easily select to enter PCCRC's at time when IV is likely to rise. This protects you against volatility crush. But you are still OK if IV does not change or even goes down, as long as the stock is rising, which makes you a Delta winner. If the stock goes sideways up to 4 days before expiration, you may be a Theta winner. So the hard part of this for of trading is to find those Vega movers that happen to have low IV at this moment. BIIB was one of them.

So what DID happen to the PCCRC today? A winner!

Click on image to enlarge it.

BUt not just any old winner. We got close to 100% return on our risk, and about 15% return on cash. The stock would have had to go up about $10 for the stock to make us that much money. As we know, stocks don't move that fast. But the real value of trading this way, and the very reason why my paper trading account is up about 70% in the last 13 months is because I transformed the big loser into a winner. If I had traded the stock, my account would have taken a 2.5% hit, instead it got a 1.25% increase. But what I consider most significant is that I am able to calmly observe the result, exit my position and move to the next winner, without dueling on BIIB any more. I think that this is what has really made the difference in my trading since 2005.

One last thing. Do you want to see where the fear of others went? take a look at todays spike in IV!

Not that I find joy in someone else's fear, I am just glad it is not mine.

Click on image to enlarge it.

Only 15 Memberships Left

2008-07-29T20:20:00.000-07:00

My group has grown to 85 members and the discussion is quite lively!

I believe that the members are quite happy that I answer their questions about the PCCRC on a daily basis, and I have been posting videos also fairly routinely. However, the group is getting quite large, so I think I need to limit the numbers of participants in order to give each one my full attention.

Now I cannot deny people the right to participate, and I certainly feel fulfilled when I know that they are willing to Pay it Forward! that to me is sufficient reward.

So I thought of a compromise. I will admit 15 more members with the current one time contribution of $100 and as soon as I reach the 100 members, I will increase the contribution to $200. Hopefully this will filter everyone but the most committed.

I had the suggestion to charge an annual fee of $100 from everyone, but that to me sounds like a paying service rather than a contribution, and I am simply not doing it for the money. I want to keep my motivation grounded on my desire to teach without expecting anything for myself. I thought of placing the money from the new fee of $200 in a fund and when there is sufficient money there, we could organize something to promote the Pay it Forward philosophy, or perhaps organize a get together of participants. I just don't want to make a business out of this. I have seen plenty of good people turn greedy and begin to make unrealistic claims and promise what they cannot fulfill the moment they run an "education" business.

Remember, I am perfectly happy with the profits from my trading and my Pathology consulting business. I don't want to make this my main effort, and I want to have the freedom to travel as I please.

Remember also that what you need to know is in written format in the pages of this blog, so feel free to explore and if you think that this approach to trading is for you, Do join us!

Just so you know. I have been showing the members of my group my paper trading account, real time using nothing but the PCCRC over the last 13 months or so. Here is the progress of the account with drawdowns and all.

Please click on the image to enlarge it.

IF you'd like, here is how the account is doing today.

Please click on the image to enlarge it.

Elliottician has gone too far

2008-07-22T15:39:00.001-07:00

Starting in the 1930’s Ralph N. Elliott formulated from his convalescence bed, the tenets that we know as the Elliott wave theory of market behavior. Much has been written about it, but not many have dared to ask the question. How good could this theory be when it was all formulated by a man whose only tools were pen and pencil?

Today, the power of computers can be put to great use to test the theory upon millions of chart patterns. Rich Swannell has done just that, and his research has resulted in a very expensive, yet prodigious software called the “Refined Elliott Trader”or RET for short. I know Elliottician well, because at the very same time Swannell started the early version of RET (then called WinWaves), I was doing my own Elliott wave counts using a simple charting software in my Mac, downloading data from Yahoo financial. All through the 90’s, I traded a group of 30 stocks, for which I had a very clear understanding of their wave patterns. So I had no use for WinWaves, although I did have the chance to test a demo copy.

By the end of the bull market, I lost faith in the Elliott wave, mostly because the corrective waves suffer from too much ambiguity to make it practical to profit. The advantage of trading options with the Elliott wave that proved to be so profitable in the 90’s was no longer valid, in my opinion.

That did not stop Swannell. You have to admire his tenacity. While I took a 3 year break from trading, Elliottician continued its progression. I focused my own research into the PCCRC and other trading strategies.

By 2005, I found out that much research had gone into the new RET software, which indeed refined the Elliott tenets and actually quantified the frequency of the Elliott patterns to the point that one could selectively recognize tradable patterns. The Zigzag, lacks the ambiguity that other patterns have, except for the impulse pattern. But because the recognition of both patterns as they progress through the 2 first waves (1 impulse and 1 correction) is the same, and because the outcome is also the same (1 final impulse), one needs not be concerned in differentiating them, the result is the same: an aggressive 3rd wave, this time in the direction of the trend.

Ironically, this simplification, necessary to make the RET software valuable, makes other approaches to identify the first 2 waves, just as valid, perhaps rendering the RET software unnecessary. The issue is, how much computer time and processing power is necessary to identify an impulse and a correction in sequence from among the thousands of possible stock patterns that may occur at any given day?

Searching through the S&P500 to located such patterns with RET takes me usually 2-3 hours, and it usually results in the identification of several dozens of potential candidates for trading. You still have to go through these individually to select the ones you would really trade. Unless you are willing to pay an exorbitant amount of money ($5000 additional) to buy an upgrade to the program that would automatically go through the selection process. I have not tested this portion of the program.

I bought my copy of RET back in 2005, and last year I was ask to shell out another $700 to buy a “powerpack” that would make sure that RET could deal with the specific markets I trade, the US stock market. Buying more packs would be needed for other market such as currencies and commodities.

Now, I still think that Swannell deserves a lot of credit for attempting to crack the nut, which is the Elliott wave theory. You can certainly not compare the work R.N. Elliott wave have done with paper and pencil with the untold number of computer hours in a network of computers around the world that Swannell used to create the databases behind RET.

To me, RET has become nice to have, hard to test and more like wishful thinking. Hard data is difficult to generate because the advantages that RET might offer are mostly statistical. Even Elliottician would tell you that most trades (not all) might turn a profit, you’d be stopped out of the failing trades. There is nothing new about this, but hardly worth thousands of dollars to locate stocks with an impulse and a correction in sequence.

Yet, the Elliott theory is still close to my heart, just because I made so much money at least in part, to my knowledge of Elliott theory (or at least that is what I thought it was). This and my scientific nature is perhaps the reason I have been willing to go with Swannell to, as he puts it, a journey of discovery. In essence, we pay, he discovers.

This is perhaps why I am quite dismay at the latest marketing stunt Elliottician has pulled on us, long time supporters of his efforts. I received an e-mail informing me that if I could still belong to his elite group, I was going to have to joint as a “founder member” for the “modest” fee of $3,000, or else, I could never, ever take advantage of the new super duper version of RET. Why? Because RET is no longer going to be marketed to the public, like you and me. You have no time to waste, you only have until the end of Aug. to make up your mind and pay up.

Now, this is a hard question for me. It really is. It has me quite upset since yesterday. Should I once again shell out another few thousands of dollars in the hope that this time the RET would be perfect and meet all of my expectations? Or should I feel concern that I am in a suckers’ list? After all, I paid for many “improvements” along the way. I took the basic and advanced courses, and bought the power packs, and I was even tempted to take the upgrade that was going to automate it all, just a few months ago. Now, I just have to pay up just to make sure I have the latest upgrade?

Or should we even believe that RET is truly going to be taken off the market? After all, only 2 months after I bought my copy back in 2005, I was told that they were going to do just what they are going to do now: take RET out of the market to be sold to big financial institutions, not the general public. Only 3 months later, they were there, marketing it again!

I am hereby officially asking Elliottician to cut it out. Stop the high pressure tactics targeted at the very people that have made it possible for Elliottician to get here and offer all of us a reasonable upgrade path. Convince us that there is a really good reason why we should upgrade out of what we have told millions of times was the perfect trading systems. Convince us that the new version does not take hours to search through the S&P500, only to leave it up to us to select through dozens of patterns to “guess”, which one is worth trading. Give us what we were promised in the first place: a program that would make us trade well and be free.

E-mail about the bear market!

2008-07-12T18:15:00.000-07:00

Robert said:

My question to you is: Seeing as all testing was done in a bull market, can we now use PCCRC in a bear market, or do we use other option strategies?

Cheers, Robert
===============

Hi Robert. Prepare to think outside the box.

The PCCRC allows you to trade Options, not so much their underlying let alone the markets. This is strange for most who are used to thinking "buy low sell high" stock price. I suggest you think of this trading as "buy low sell high" Volatility.

The price spike after earnings with good guidance, is merely a situation in which IV declines strongly, and it is likely to rise. If the stock moves up strongly, so much the better, because we also depend of Delta to profit. If instead, the stock goes sideways month, after month after month, we simply take credit with rollovers, until that trade either becomes hugely profitable with Vega or Delta gains, or simply you lose interest and you exit with a small gain due to Theta decay or a small loss.

Worried about the markets going down? With the PCCRC you need not worry. Spikes in volatility usually are associated with the panic and fear traders and institutional manager experience. They buy puts by truck loads. Arbitragers take advantage of any imbalance in the put/call relationship by selling stock and buying calls. Bottom line, your long-term options appreciate as volatility rises: you make money.

Please take a look at my presentation at the Trader's Expo in Ontario, California, about a month ago, it will make my approach clearer.

http://tinyurl.com/5o38es

BTW, I have the full video presentation in my private Google group for members only!

King Cash?

2008-06-26T09:17:00.000-07:00

With the Dow Jones breaking below its March lows, it seems like Robert Prechter’s predictions are finally coming true, the bear market is in full force. The S&P 500 and the Nasdaq are not much better off, as they are all below the 200dMA.

So does this mean that we are supposed to hold our assets in cash and wait out until the markets hit rock bottom or Prechter changes his views?

This would not be advisable either. As the Federal Reserve does not make any effort to strengthen the dollar, cash is a depreciating asset. Sure, you could buy Euros, or Pounds or Yens, but then, aren’t you back to the chart reading, or guessing game you wanted to avoid by staying in cash?

I have been aware of Prechter predictions for year, in fact, I started trading options and the Elliott wave after his book “At the Crest of the Tidal Wave” back in 1995. I was so fascinated by the book that I begun to read about Elliot’s theory and found a book with the insights to take advantage of the Elliott wave in my trading. The title was “Elliott Wave Explained” by Robert C. Beckman. My early experience with Beckman’s techniques was so great, I sought more leverage and begun to trade options. It became clear to me that bearish forecasts were a lot harder than bullish forecasts. As the end of the bull market approached, a parabolic growth in the Nasdaq developed. I was lucky in that I decided to stick to options and sell stock positions, simply because the options, at least, had a limited risk.

From that early experience with the Elliott wave and options trading, I learned some valuable lessons, specially not to buy stocks and to limit my risk trading options. Instinctively, I knew that there had to be a way to use the two main features of options: limited risk and leverage, to take advantage of the markets, no matter what direction they took. I searched for years, first avoiding the markets, then taking seminars, as though the answers were in the knowledge of others. This search from the answers elsewhere was a long journey, but eventually lead me to a few pages in Lawrence McMillan’s book “Options as a Strategic Investment”, and what I now call the PCCRC: Put Call Calendar Ratio Combination.

My discovery, testing actual trading of this approach has lead me to believe that I don’t have to be in cash, barely surviving inflation, and having my assets depreciating in comparison to other currencies. I am moderating my risk trading the PCCRC, and I could actually profit from a collapse in the stock market, if this is to happen rather quickly, as it usually does (see the 2000-2003 decline).

I am not investing in Real Estate, I am not buying stock, and no, I am not trading more than 10% of my assets in the stock market. I have my assets in CD’s, which barely keep me above water when I factor inflation. Yes, I am losing compared to the Euro dollar, but I figure, I will spend my money where I live. If I ever decide to move to Europe, then I worry about that. In the meantime, I am growing my portfolio with the PCCRC, regardless of the market direction. You see, one of the most remarkable features of the PCCRC is that the rollovers, profit taking and exit moves, usually result in the freeing of large amount of cash, so I am always looking for the next candidate. This is really foreign to stock trading. When the markets are down, investors are in shock, with little cash, and unable to exit the losers to enter new winners. At market bottoms, investors are absolutely not in the mood to reenter the markets. In fact, very often they refuse to sell their beaten down positions, hoping that they would eventually go back up. Imagine those that were “fully invested” at the top of the market, and refused to accept the truth as their assets decline.

I don’t want to make light of the misfortune of others. In fact, I want to illustrate how I was in the same boat years back in Sept 2000, when I held AAPL as it fell about 50%, wiping out 17 months of gains. Perhaps this very loss was what kept me motivated to find a form of trading that could not only protect me against this catastrophic loss, but actually profit from it. After all, Prechter is projecting the DOW to go to 500 (currently at 11,600). Ironically, from 2003 to 2005, I had to see the markets perform well, without my making a dime. I wanted very badly to be in the markets, but I found I had lost my touch. Whenever I entered a bullish position, the markets would reverse, whenever I was bearish, the markets bounced back. Still my sentiment remained bearish overall.

By 2006, I was back. I made 30% trading the PCCRC, and last year I made 70-75% trading almost exclusively the PCCRC. The beauty of this form of trading is that I lost my fear of market gyrations. In fact, I found myself ignoring the markets, CNBC, and everyone’s opinions, including Prechter’s. I no longer need to be in the gloom and doom camp. I have found my way.

Money and Portfolio Management with the PCCRC. PART III

2008-06-07T19:34:00.001-07:00

By far, the most elegant approach to money and portfolio management I have seen is possible when one trades the PCCRC. Yes, this is an unconventional approach to trading, but as it is often the case, thinking out of the box is what generates the $1,000,000 idea.

If you are to make $1,000,000 starting with $100,000, it will take you 10 years at a rate of 30% per year to succeed. If you trade stocks, let’s say 10 positions at a time, you cannot afford to have a stock fall 30% at any point, yet you are very much aware that any stock can easily fall 30% overnight, without you being able to stop the loss until the market opens. If you trade options, you can hardly limit your risk to 2% of your portfolio, or you’d have to trade 50 positions at any given time, to maximize the use of your available cash. All that is changed with the PCCRC.

If you hold stocks, you cannot exit the position unless the stock has reached its maximum potential. If you have an options spread, you have to wait until the position reaches its ultimate conclusion, or exit when you feel there is no further profit to be had by continue to hold the position until expiration. All that is changed with the PCCRC.

The power of options is in the leverage, but its secret is in the risk management. Only a few option’s strategies take full advantage of the leverage. A long call, for example, allows for an unlimited reward if the underlying rises to unsuspected levels. With a vertical spread, you’d make about 100% on your trade, whether the stock goes up $5 or $10 or $20 per share. The PCCRC takes advantage of the leverage of options in either direction, making it difficult to lose money, while maximizing profits, should the stock rally or collapse well beyond your expectations.

Here are the rules:

1. Enter 10 PCCRC’s at a cash overlay of 10% of your account each. For a $100,000 account, that is a $10,000 position. Yes, 10% capital but NOT 10% risk.
2. Limit the estimated risk of each trade to 2% of your account. Yes, this is right. The estimated maximum loss of each PCCRC is about 2% in most cases. This is assuming that IV will not decline, but if you follow my rules, you will not lose as much as 2% in any position. I have not experience a 2% loss in any PCCRC after > 3 years of trading them.
3. Take profits by selling a portion of your long calls as the stock rallies. This is a unique an elegant approach because as you sell long calls, your risk graph begins to change to take advantage of a potential reversal. As a stock rallies, the chances of continued rally decrease, the chances of reversal begin to increase. In either case, you can still profit further. This is something no other strategy can do.
4. Profit from each Greek alone or in combination. Delta positive or negative, Vega, Theta and even Gamma profits are all possible with the PCCRC. Most other strategies profit from one or two of the Greeks, but are exposed to the risk from the other Greeks. That means that only one or two outcomes turn a profit. With the PCCRC 5 out of 6 outcomes may turn a profit.

There is one final point I want to make. If your purpose is not to become rich but to create a stream of income, the PCCRC strategy, as I have outlined, brings with it a nice surprise: There is always cash available for one more trade. Unlike stock trading or most other option’s strategies, you are constantly generating credit. Besides the obvious profit taking describe above, every month you can roll over your shorts to the next month options. By buying back the front month options and selling the next month options, you effectively take a credit of about 10% to 15% of the capital invested in the position. One week before expiration, your rollovers bring you a credit from most, if not all of your PCCRC. You may decide to discontinue some. The result is that there is always cash available in your account.

If you goal is to grow your account to $1,000,000 in 10 years, you can easily accelerate your growth by opening a new position when the cash becomes available. However, if you goal is to have a steady source of income, then it is easy to take a “Salary” of your cash account, every time your account grows by 10%. I do that routinely. For a $100,000 account, a $10,000 “paycheck” may show up once every one or two months. Paying yourself a salary is a reminders that you are doing well, and that you are entitled to a nice vacation! And that is what trading is all about, isn’t it?

Money and Portfolio Management with the PCCRC. PART II

2008-06-03T21:14:00.001-07:00

For traders, money management is as important an issue as the selection of candidates. In fact, some experienced traders go as far as to say that the may have as much as 60% losers, and still make money, thanks to their money management strategies. Stock day traders may be out of a trade before the day is out because precisely because they fear holding stocks overnight. Swing traders may place a stop loss order right with the entry order to avoid an intolerable loss in any individual trade. A 10% loss in a $10,000 position in a $100,000 represents a loss of 1% of your account, which should be easy to absorb. So lets start with the premise that we will place a stop loss at 10%.

One of the most important features of options trading is risk management. If it is true that you could lose all of your capital in most options trades, it is also true that you can limit the cash overlay. If your risk tolerance is 1%, then you can just as easily place a bullish vertical spread with a $1,000 maximum risk. You don’t even need to place a stop loss because you have already stipulated ahead of time that a 1% risk in your $100,000 account is easily absorbed. However, at a $1,000 risk per trade, it may take a lot of effort for you to put all of the $100,000 to use. Ultimately, if we are to get rich, we are not going to make it with 10 x $1000 trades. However, 1% may be an adequate starting point, and you may increase it to 2% or 3% or even 5%, as some would advocate. Placing a stop loss with options makes little sense because options have a defined risk, and the goal of a stop loss is to define the risk!

The second aspect of money management is the exit strategy. Some place trailing stops. Under the conditions of a trailing stop, the stop order price of your stock would rise with the stock price but not go down with any pull back. Again, if the stock goes down 30% overnight, the stop loss will simply be triggered but filled at the market price, leaving you with a 30% loss. You can also use you knowledge of stock technical analysis to make the decision to exit a trade. I like using candlestick reversal patterns in combination with Bollinger Bands to exit my positions. However, this requires that you monitor the chart of your trades at least once a day, if you want to make the most of every trade.

When trading options, trailing stops may not be that useful. After all, the price of an option may be more volatile than the price of a stock, and you may be triggered out prematurely. If you trade spreads, then such orders are not very useful either. I have been experimenting for several months now with call debit vertical spreads + 1 call. For example, I might buy 11 calls and sell 10 calls. Once my target is reached, I can exit the either the spread, leaving the call for a surprise move up. If the stock does not follow through, at least I have a profit. Because I use Elliott wave analysis to trade vertically, and because my risk is defined, I don’t mind leaving the trade to do its thing, without me monitoring it daily. I am prepared to lose all of the capital in the trade, since it does not exceed 2% (this is my preference) of my account.

By far, the most elegant approach to money management and portfolio management is obtained with the PCCRC. This will be the subject of the next installment of this series.

Money and Portfolio Management with the PCCRC. PART I

2008-06-02T11:55:00.001-07:00

In a recent video clip, Howard Gold of “The Money Show” recommended “Don’t buy stocks”
http://tinyurl.com/4866mm
His point: Trading individual stocks is risky. Take Bear Sterns for example, many people lost as much as 90% of their investment in just a few days!

His bottom line: Invest in a diversified portfolio.

But what about those of us who want to trade for a living, beat the market and even get rich in the process?

Sure, we can all buy a S&P500 indexed, and wait 30 years making 12.5% a year and “grow” our portfolio, but that is not going to make us rich, let alone make for a very profitable business.

If we want to be profitable traders, we have to beat the S&P500 by, say 10% or more. We have to make money in down years to justify trading as a profession. This is quite a daunting task, isn’t it? even if we spend countless hours of “homework” a week. Not to mention the capital outlay to trade stocks. I know because I did this for a long time, during the 90’s. Yet, all the time and effort did not save me from big losers. And I don’t mean stocks like Bear Sterns or Enron. I mean Apple Computer, Intel and Scholastics. These stocks regarded as good stocks today, did have their >30% fall in price overnight at some point in their history. These three happened to me, all within a 5 year period. So don’t think it can’t happen to you, with one of those stocks that you regard as heroes today. Some might say that owning stocks is OK as long as you have stop loss, but it is quite disheartening to see your profits accumulated over months and sometimes years vanish overnight, in such cases, a stop loss won’t save you from the collapse.

If you own stocks, the main tool in portfolio management is diversification. However, the more you diversify, the more difficult it is to manage your portfolio, the larger the number of stocks you most own, and the larger the hours of homework. This is hardly the way to reach the freedom to travel and escape the daily routine. In fact, you’ll just be changing one job for another. Assuming that you DO diversify, and do your homework, are you protected against the collapse of your stock? Not really. I certainly would not have expected anything bad from AAPL, INTC and SCHL at the time they caused me huge losses. Just days before the collapse of Bear Sterns, Jim Cramer was saying that it was OK to hold the stock, and he lives and breaths that industry!!! Further, in the late 90’s, you would have noticed, as I did, that any portfolio that was not heavily invested in technology, grossly underperformed the markets. Remember, your goal here is to outperform the markets. If you cannot do that, then you may as well get a day job and buy an S&P indexed fund.

Using options, you can certainly create defensive approaches to stock trading. You could sell “covered calls”, but this is not a protection against a catastrophic collapse in a stock overnight. It is more like a way to take some profits during a sideways market. Buying puts is a strategy known as “married puts”. This is more like buying insurance on your house or car, but there is a deductible, and it would only pay off if the fall is significant. Not to mention that buying puts routinely is going to cut into your profits. There is a time limit to any options, they are like melting ice, so you have to renew them often, unless you buy LEAPS, but these are expensive. You can reduce the cost by selling those covered calls. This is the “Collar” strategy, but if the stock rallies strongly, you will miss out on most of your profits. Ironically, the covered call is the synthetic equivalent of a short put, the married puts is the synthetic equivalent of a long call, and the collar is the synthetic equivalent of a bullish vertical spread. So you could actually use these options strategy and obtain the same result without the big cash overlay of stocks.

Options are not without risk. I was once told that when you go from one option’s strategy to another, you are merely shifting the risk from one Greek to another. Therefore, understanding the Greeks and how they affect your options is paramount for the appropriate management of your portfolio. The different option strategies provide ways to DEFINE your risk in advance. While a stock position may go to a value of $0, people more often think that they could probably absorb a 10% loss, before exiting the trade. For a $100,000 stock portfolio with 10 stock positions, a loss of 10% in one of the stocks represents a 1% loss in the portfolio. This is easily absorbed by the individual investor that may say to himself: “I am a long-term investor, I can wait until the stock comes back”. AAPL did come back, and the fall from $63 to $28/share and then eventually $12 during the early 200’s seems like nothing because AAPL is now trading at $184 after 1 split. That is little comfort for Bear Sterns and Enron investors. It took AAPL 5 years to exceed the highs of 2000, and that was a good stock!

Managing each trade is usually called “money management”, implying that if you have profits, cash your money out and move on. Portfolio management implies that you need to reduce the risk across your portfolio, so that you are not suddenly taken off guard by a global event such as 9/11 or black Monday and lose a big chunk of your profits accumulated over months to years. Money and Portfolio management become critical issues for someone like me, who wants to have the freedom to go to Africa and disappear for 20 days or more, without access to the internet or a telephone. The day is coming when you’ll have access from remote places, but who needs to worry about his/her trades when on vacation? What if a catastrophic market event hits your portfolio and you do not have access to exit your trades?

I will continue to develop this subject in upcoming articles.

How to Keep Psychologically Fit as a Trader

2008-05-27T11:59:00.000-07:00

I am often ask: How do you keep yourself psychologically fit? Well, for a long time I didn’t. I would say between 2000 and 2005, all that kept me going was sheer determination, or perhaps the belief that there was really little else I could do to make my money grow at better than 4% per year. Taking courses, reading books, and buying “trading systems” did not offer me more than a possible path to making money on favorable market. I had done that in the 90’s using what I believe is the best approach to directional trading: the Elliott wave theory. By the end of the bull market, it became clear to me that trading corrections is a lot more difficult than trading in a raging bull market like that of the 90’s. Yes, I believe that the Bush years has been no more than a long-term bear market. I buy Robert Prechter’s theory that the bull market since 2003 is no more than a “B” wave of a long-term correction. This market is totally unpredictable.

Once the Elliott wave theory was almost invalidated as a good trading approach during this corrective market (2000-present), one could expect anything. A sudden move of any market in any direction (including sideways) could easily ruin any systematic approach to trading, and for me it did. I avoided the markets between 2000-2003, and struggled to keep my head above water between 2003 and 2005. It was frustrating at best. First, I had to convince myself that I had to do it all my way. Convinced that the markets could go down strongly at any time, I had to find an approach that would allow me to hedge my positions against a catastrophic event. I tried several approaches, some actually quite good, such as the CRC, the PRC, the “dragon fly” (see my earliest posts in the blog), but in the end they did not appear consistent enough to aspire to grow my capital and be able to sleep at night. I realized that I had been psychologically impacted by the decline in the markets between 2000 and 2003, and that no system, reliable as it may have appeared would give me peace of mind enough to risk large sums of money. Yeah, I could have risk a $10,000 account but that was not going to make me rich. My system had to be robust enough for me to trade $30,000 or more in one trade, if I was to aspire to making $1,000,000. In fact, you’d need to have a $100,000.00 account if you aspire to make $30,000 a year. That is not a lot of money to make ends meet!!! Fortunately, I have my consulting pathology business at home so I DO have independence, but my dream is to travel around the world while making enough money trading to pay for my adventures.

Trading requires that you learn to handle defeat on a routine basis. That is hard to take for a high achiever that is used to reaching goal after goal, let alone if you are used to lose and went to trading because you could do nothing better. Yet, it is necessary to believe that even if today was a bad day, tomorrow may be great. Even if your system is not working today, you have enough trust in it to carry you through the drawdown days. The question is how do we know that we are not engaged in wishful thinking? After all, I could have stubbornly adhered to my Elliott wave approach through loss after loss. Well, perhaps by now I would have grown extremely pro efficient in trading these corrective markets, who knows! Perhaps out of my own doubts, I learned to trade an approach that appeared better suited for any market. If that is the case, then it is clear that my psychological well being is self-created, and my results reflect that state of mind. Doesn’t it make sense to say to yourself: sooner or later I will succeed!

In a teleseminar I asked famed author and motivational speaker Jack Canfield: I always though that to get what I wanted out of life, I had to work really hard, and that I could only get these things through sacrifice. Am I not creating my own obstacles this way? Some of you may remember that Jack Canfield was mentored by W. Clement Stone, who in turn was an associate of the famous Author of the best seller “Think and Grow Rich”, Napoleon Hill. Jack Canfield is one of the participants of the movie “The Secret” based on the principle that we get what we expect, that our thoughts become reality. In reply to my question, Jack Canfield did not want to minimize the effort that it takes to succeed, but he added that is that much easier to succeed if we enjoy very much what we do, so we may as well choose to do that which we very much like to do.

Along the lines of “The Secret”, which is indubitably based on Napoleon Hills message: We become what we think about! I like to listen routinely to the recorded thoughts of Earl Nightingale. He has been of great inspiration in the last 15-20 years of my life. With a routine examination of our habitual thoughts, we can actually construct our outcome. There are very simple steps we can take to assure us the life we want, sooner or later. Amazingly, how sooner or how later also depends on your beliefs, which you put in your subconscious mind. I encourage you to read the books and listen to the thoughts of these great modern thinkers because, at the very least, they will sustain you through the days of doubt.

Goal setting is important because this is the way you evaluated your progress in your path to success, but also because it helps you visualize where you are going. This is what I have done:

Long-term goals: I have a list of my goals posted in a printed sheet of paper on the wall directly above my computer screen. I have 9 of them, written in large font and phrased as if they had already been accomplished. For example I have written “7. I am making the world a better place by “paying it forward”.

Intermediate tem goals: Knowing that there are protracted, drawdown periods, and accepting them as such requires that we adapt our measurements of success. I have an expectation of 30% increase of my account per year, or 15% every six months, even if I have exceeded these limits by far in the past (last year I increased my account by 70%). The reasonable expectation of 30% / year will keep me in a good psychological state, but I don’t rule out the possibility that I could make 70% again. Keeping my goals realistic will allow me to objectively examine my progress without regrets. Results will vary from month to month, but you should check your performance every 6 month and try to correct course if you fail to meet the 15% target. Otherwise, keep on doing what you were doing with faith and the expectation that you’ll succeed.

Short-term goals: A trader should simply keep doing what he is doing until the 6th month. To help me keep going, I have images of the risk graphs of some of my best trades of the past. This helps me visualize my success as a series of steps, a series of successful trades that return more money than my average loser, and that are more common than my losing trades. This brings me to one of my favorite quotes from Earl Nightingale with which I would like to close this article:

“Happiness is the progressive realization of a worthy goal”
––Earl Nightingale.

Since you are already in the path to what you seek, there is no reason why you should not rejoice in the process. Just make sure that your goals are worthy of you and your intellect.

The PCCRC: A trade for all seasons?

2008-05-04T20:30:00.000-07:00

Right from the outset, I want to make it absolutely clear that I don’t believe that there is a perfect trade that would work every time. I DO believe that with knowledge comes power and that with experience that power can be translated into consistent profits. The PCCRC, as an option’s trading strategy is not a substitute for clear understanding of fundamental and technical analysis of stocks and Options’ theory. What I DO believe is that the PCCRC can be used to exploit a series of market patterns such as the decline in implied volatility right after earnings, or the strong rally in stocks following increased guidance in earnings or revenues. The PCCRC offers the flexibility I need to survive and even thrive in confusing markets.

Even a few months of observing the stock markets should be sufficient to arrive at the conclusion that markets change daily. This is a huge challenge for traders that dream of making money regularly enough to live a life of freedom, producing a habitual income. Even if one manages to generate great profits one month or one year, or even one decade, this is no guarantee that he/she will make a good profit next month, next year or in the next decade. When Tim Bourquin asked me in my trader interview when did I become comfortable with my trading, I said that If you feel comfortable with your trading, there is probably something wrong. That we must be always on our toes, looking for ways to make money consistently because what works today, may not work tomorrow. I know because my early success of the 90's trading long calls using the Elliott wave theory in the 90's came to a screeching halt in the early 2000’s. I even stopped trading for many months recognizing that I needed to adapt, not quite knowing how to do it.

For the last 7 years I have been observing the markets, evaluating and learning from books, seminars, and from others. The explosion of the internet has been of great help to me because we are reaching a golden era for the independent trader with resources such as back testing, paper trading and complex option strategy trading that were not available just a few years ago. Within seconds we are able to learn about significant news and the consequent movement in the underlying stock. We can react quickly, in ways reserved for the professionals only a few small years ago. I have been reporting to you for numerous months the results of my strategies using the PCCRC as the standard approach under diverse market conditions. When I first started doing that, Volatility was low, but by mid 2007, volatility was breaking out to new highs. When I first started putting my strategies into practice, the stock markets were rising. By late 2007, the markets were entering a crisis of confidence under sub-prime lending practices. Surely, I’d have to adapt to this new reality, either changing my strategy in some way, or modifying the PCCRC itself.

What became clear is that the PCCRC is a highly adaptable form of trading and that my rules of entry apply regardless of what the overall market trends are or the VIX is doing. It became abundantly clear that the combination of the PCCRC with my rationale for entering trades will work in a changing markets because I am able to detect the heroes of the day, even when those heroes are hard to find and the exception, rather than the rule. Finding the trades is only the first part. The second part is the management of the trade. When we enter a long call, to cite one example, we expect a single outcome: stock appreciation; and nothing else will do. Even if the stock appreciates but volatility declines, the long call may produce little or no profit or even lose value. With the PCCRC, 5 out of 6 possible outcomes turn profits.

Unlike other option strategies, the PCCRC profits from changes in Vega, Delta, Theta and Gamma, individually or in combination. Option strategy theorists would tell you that to take advantage of options, one must expose his/her cash to risk. Vega exposure, for example, means that you can make money if volatility goes up, but also means that you could make money if volatility goes down. The same applies to Delta. Fortunately, time always advances, so it makes sense to enter Theta positive trades. Most trades become profitable when they fulfill our expectations, but the PCCRC has very often worked in my hands when the unexpected occurred. This is a very unique feature of the PCCRC precisely because it is Vega, Delta, Theta and Gamma sensitive. Understanding how the Greeks work on the PCCRC is critical to the success of each PCCRC trade. I have come up with several situations in which the PCCRC is the right trade, regardless of market conditions.

Option theorists would tell you that you need a good understanding of the Greeks and a good arsenal of trading strategies and understanding of when to apply them. To me, the PCCRC is powerful enough to dominate my trading style, and risk-limited enough to substitute all and any stock positions in my portfolio. I can show you dozens of examples of how it works, many are posted in articles in this blog, many others are presented in my private discussion group blog in the form of video clips, .pdf files and discussed extensively, real time, with all participants that can bear witness to the accuracy of my statements here. Just the same, I wanted to show you a trade that produce great profits, despite of market conditions that would have scared me away at another time and place.

First, let me set the stage. The S&P500 had been declined for months starting in early October. By mid February, very few stocks were rallying, let alone jumping >10% in stock price.

Just the same, EOG came to my attention as the stock had rallied from $77/share to $98/share around earnings. It is very important that you recognize that market conditions were quite adversed to trading stocks. An important feature of the PCCRC is that you can often take profits by selling portions of your position, or by simply rolling your short options to the next month. Having cash available when markets are going down is rare unless you are skilled at calling the trend. I heard of no one that was trading bearish positions at the time, so the availability of cash is certainly a welcome feature when the markets are down. Consider that most traders would be either defending the bullish positions or licking their wounds from the bruising markets, rather than collecting profits from bearish positions. The lucky ones that were in the sidelines after collecting profits at the top of the markets, were probably staying in the sidelines, awaiting for signs of bottoming process.

Many would have thought that entering a position like this, at that particular time would be foolish. With the confidence I have developed on my style of trading, I entered this PCCRC:

Less than a month later, the stock jumped to $130/share.

Now, compare the statistics of the trade at the opening on Feb 12th, and on March 3rd, after the jump to $130/share.

At the entry, the stock was Delta positive by $105.45. This implies Delta risk if the stock goes down and reward if the stock goes up. But in addition, the trade is Vega exposed by $449.27. Because Vega usually goes up with declining markets, the loss in Delta would be tempered or even exceeded by my profits in Vega. Theta and gamma are also positive as you can see. The reason I am able to confront this large Vega exposure is the low IV in my long options. Very rarely have I seen volatility decline below 30% (although it does happen). By entering the position right after earnings, I safely assume that IV will climb from this point, so I accept this risk in the expectation that IV would stay the same or increase towards the next earnings report.

Note also that the risk estimate is $3597.22. I would only recommend that you place this much capital at risk only if you have an account with $180.000,00. But you can easily reduce the cost to 2% of your account by reducing the number of contracts, if your account has a smaller liquidation value.

By March 3rd, in addition to the jump in price, which generates Delta gains, EOG options had also jumped in volatility. I remember that the stock received a downgrade on valuation concerns. Perhaps this explained the jump in IV. Whatever the reason I had now accumulated Delta and Vega profits equivalent to 200% of my capital at risk, and 50% of the capital in the trade. At this point, I closed my trade because IV can change very quickly. Note also that the Max Risk had decreased. This is because the calculated max risk is not an accurate estimate because it assumes a constant IV. However, I have not seen any situation in which my max loss has exceeded my max risk over the last 3 years that I have been trading this way. The chart below shows the IV on March 3rd. This is my justification for leaving the trade early, as the IV was at the higher end of the 6 month range.

With the strong rally in EOG, you would think that this rally was reflective of a change in the greater the market conditions to a more favorable bullish tone.

You'd be wrong. Some of my more experienced colleagues would have urged me to exit the trade, as I well did. But IF against my better judgment I would have place my profits at risk. The expectation would either be that the stock would decline with higher IV to match the greater market's fears of the moment, or the stock price would continue to rally. In either case, profits could continue to increase.

Week after week, EOG continued to rally against market conditions, and continue to accumulate Delta gains as Vega held at first, but even after it began to decline. Some would have thought that volatility 'crush' of any sort could badly sink the position. I wanted to show you how the decline in IV did not do any harm to my position. The Delta gains far exceeded the potential loss with IV decline. Here is the volatility chart in the following weeks.

With every passing month, one could have simply rollover the shorts to the next month, thus accumulating credits by virtue of Theta decay, reducing my overall debit and converting my max risk into a min profit. In the end, I could have made almost 100% of return on capital or 350% return on risk.

The main criticisms I have heard about this form of trading usually are:

1. There isn't such a thing as a trade for all seasons.

In this article I have shown that the PCCRC comes very close to fulfilling this ideal because you can place this trade even when market conditions are not ideal, so long as the entry rules I have outlined are met. I have profited with PCCRC's in low volatility, high volatility, bearish and bullish markets, and also sideways markets as the one between mid Jan and mid April.

2. Volatility risk is too high both from the long straddle as well as the calendar components of the trade.

My experience is that the risk only materializes into a loss in one out of 5 possible outcomes: Decline of the stock price with decline volatility. When that happens, I might hold until the stock declines low enough to reduce my loss to a minimum, or the stock rebounds. I don't usually rollover to next month in such circumstances. The truth is that I have been able to minimize my losses in this way. It is reducing losses to a minimum that we assure continued profits month after month after month.

3. The PCCRC depends on one's appetite for risk.

Well, I don't much enjoy risk. What I have discovered soon after I begun to trade this strategy routinely is that risk is low, this is most easily explained with my metaphor of the Greek chariot being pulled by 4 horses (if you include Gamma as a horse) when one of the greeks falters the others pick up the slack.

Most conservative traders would play iron condors and butterflies on index options. To me this represents more of a risk because Delta can ruin your trade at any time. You only have Theta in your favor, although presumably you locked high Volatility when you enter the position. Wouldn't you rather have all greeks working for you? I do. Remember, 5 out of 6 possible outcomes would turn a profit.

The criticisms I hear seem to come from people who have not really thoroughly tested my strategies as outlined. It is important that you give it a chance! Join my group! I'd be delighted to answer any question you may have as you implement this great approach to trading. If you do, I hope that you commit yourself to "Pay it Forward"!

Do you want to participate in my personal blog? how about the discussion group around this experiment? You will receive the 3 DVD's where I explain all my secrets. You will have access to my videos past, present and future.

How much do I charge? Nothing! I make absolutely no money. You only pay for the cost of delivering this highly successful trading system education for what it costs me to produce and deliver. And, yes, there is a catch:

You MUST pay it forward by doing something equivalent to the effort I have put into sharing this system. You pay it forward by creating a chain of good will, by getting the commitment from those who you help to also pay it forward.

My goal? to create good will in the world! and I am not the only one. I am not even the inventor of this hopeful idea. Want to learn more? it is all in the book by Catherine Ryan Hyde.

Check this site:

http://tinyurl.com/2rubv2

You can also get the movie with Kevin Spacey, Helen Hunt and Haley Joel Osment

http://www.imdb.com/title/tt0223897/

A Post from a Beginner and my response

2008-04-25T07:17:00.000-07:00

Hi Juan,

I came across your blogspot, and heard your interview at traderinterviews.com. I was quite impressed at your work and that you are willing to teach people. Believe me man, people like you are very scare, who learn and share what they learn.

Now for me I am a starter. Have learned quite a lot in the past 3 months. I came across the Elliot wave market theory, and am studying it. I'm looking at trading stocks but not options (as this is quite complicated for me as of now, would do it in the future). Are your DVDs explaining the options only or do they focus strategies for longing and shorting too.

I would also like to subscribe to your blogspot, please let me know of how to do it, and at what cost can I get the DVD's for .

Regards,

Ghaffar Ahmed

Hi Ghaffar. Thanks for your comments. I suppose there is a typo and you meant that "people like me are very scarce", which by the webster dictionary means

deficient in quantity or number compared with the demand : not plentiful or abundant

The truth is that few people are willing to teach what they know unless they have the heart of a teacher. To me what I am doing is the fulfillment of a lifetime desire to make a contribution to the world. The internet has provided me with the opportunity to use one of my most underused skills, the vocation for teaching. Ironically, I believe that those who charge for teaching are telling us that their trading is not that good, otherwise, why would they spent time creating a business instead of trading. I trade, I run my pathology business and teach. That is how I am happy.

Be aware, though, that there are strings attached. Although I don't expect to profit from sharing my knowledge, I DO expect people to continue the chain by paying it forward.

About the Elliott wave:

I have been trading the Elliott wave since I read Robert Prechter's book "at the crest of the tidal wave". The Elliott wave attracts scientists like me (I have veterinary pathologist by training), because we like to think of the universe as having an order. If it is true that biology is not mathematics, we can still model some processes mathematically. As a pathologist, I am very interested in morphometry and pattern recognition. I use image analysis routinely in my work. So you see, it makes perfect sense that there would be patterns in the markets too. After all, we are measuring human emotions, and that can be plotted in charts. As long as you have a sufficiently large population, there is a level of predictability and the Elliott wave taps into that.

The Elliott wave theory has serious flaws, and you have to be very mindful of them. The ambiguity of the corrective markets is probably the strongest. A market can correct in several ways, and that sometimes creates unpredictability.

f you want to trade the Elliott wave, here is what you do.

A. Learn to recognize the 7 most common patterns:

1. Impulsive.
2. Zigzag.
3. Flat.
4. Contracting Triangle.
5. Double Three.
6. Double ZigZag.
7. Ending Diagonal

The remaining pattern, such as the expanding triangle and the leading diagonal are rare.

B. Learn to recognize the historical pattern on any stock you intend to trade on. This means to go to the beginning of the stock IPO. You'll recognize one of the patterns above. This will allow you to forecast the most recent, incomplete pattern.

C. Don't rely on any software. Many of the softwares do not obey Elliott's basic tenets, so what you are trading is not really the Elliott wave. However, if you truly learn to recognize the patterns, you can use good software like the Refined Elliott Trader by Elliottician.com to accelerate the analysis and confirm your suspicions. If you want to really DO the work, and profit from it, you are going to have to learn forecasting yourself. This may take years.

D. Understand the market trends. Since the late 90's, the mayor indices have been following a corrective pattern (FLAT for the DOW, ZIGZAG for the Nasdaq and D3 for the S&P500 (in my estimation). Unfortunately, there is a lot of ambiguities in the corrective patterns, and therefore they are quite hard to forecast. That was easy back in the 90's, though. Realize that you need to avoid corrections and stick with impulsive patterns.

E. Learn my approach. I DO have my own approach searching for recognizable and reliable forecast patterns: Zigzags and impulses. For that I use simple, traditional T.A. Techniques and visual inspection of dozens of preselected charts using the "Slide show" facility that comes with Telechart. I then select 5-10 charts, and then evaluate for Zigzags using the Refined elliott trader. It is really up to me to accept or reject the software counts. One of my DVD's describe my approach using Telechart. The use of the Refined Elliott Trader software is optional. If you learn to recognize the patterns, the RET is not that important.

You may start with my approach. Read plenty of books about the Elliott wave, try to do the counts yourself. Eventually, you could invest is software like RET (Elliottician.com) but these things are expensive, and not always reliable. Elliottician offers a system of recognizing zigzag patterns when they are at the end of the "B" wave, which are really not distinguishable from the end of a wave "2" of an impulse.

I suggest you also visit my Basic Option trading website, and post questions there. I'd be delighted to make that site more active. There you'll see many examples of my strategy. You should consider ordering my DVD about the Elliott wave.

http://stockofthedayii.blogspot.com/

If you are just starting with stocks, it is really premature for you to think of the PCCRC, but you should really consider trading with options. For example, you could reduce your risk by buying protective puts during periods of uncertainty, such as just before earnings. We could discuss this in my Basic option trading Strategies. Eventually, you could trade calls or vertical spreads, once you are more comfortable with the Elliott wave. Eventually, and this is far down the line, once you are clear about options, you could consider learning my PCCRC strategies, that require no forecasting at all, just reacting to the markets moves.

I look forward to hearing more from you.

68.7% and counting

2008-04-10T21:11:00.000-07:00

Last June, I created a paper trading account that I have been trading LIVE, under the watching eyes of my bloggers. I started it describing each step of my strategy in my DVD's, which can be easily verified by my followers. Every trade I have entered and the rational for entering it has been posted in video clips in my private blog and viewed immediately by my private blog participants. They could paper trade each trade I entered too.

More recently, I created a Google discussion group where participants have asked questions, even suggest ideas of their own, and share their thoughts. We have created a small community, and I am very proud of the effort because they all have agreed to PAY IT FORWARD!!! They have understood that my effort is not about profiting from their enthusiasm, but rather to generate good will in the world. I DO believe that "what goes around comes around" and when that is abundance and good will, then the main beneficiary of your good will is YOURSELF!

I have revealed all my secrets in this blog, in my private blog, google group and videos. Please take advantage of it all. I am truly doing only out of my desire to change the world for the better. Let me show it to you right now.

First, here is the cash balance on the fictitious paper trading account on the starting day back in June 2007:

So what is the account doing today? 68.7% in less than 1 year:

Let me give you more details. Here are the trades filled and closed in 2007 in this account. Again, this is not made up or down after the fact, as a backtesting exercise. These trades were done in the paper account prospectively, under the vigilant eye the participants of my group:

What about this year? we went from a screamingly bearish situation to a sideways market, it seems like we are not making progress here. In reality my system did, and very good profits so far in 2008. Here are the trades:

To download a .pdf file with a month by month performance of my strategies over the last 8 months, download it here:
http://homepage.mac.com/paperprofit1/.Public/PCCRC8month.pdf

OK, but what were the actual trades, could I reproduce them with my own software? yes you can, and I will make the entire list of transactions in my paper trading account available to you. All you have to do is send me an e-mail:

Paperprofit1@gmail.com, and I will give it all to you absolutely FREE, all I ask is that you PAY IT FORWARD. Please join us!!!

Do you want to participate in my personal blog? how about the discussion group around this experiment? You will receive the 3 DVD's where I explain all my secrets. You will have access to my videos past, present and future.

How much do I charge? Nothing! I make absolutely no money. You only pay for the cost of delivering this highly successful trading system education for what it costs me to produce and deliver. And, yes, there is a catch:

You MUST pay it forward by doing something equivalent to the effort I have put into sharing this system. You pay it forward by creating a chain of good will, by getting the commitment from those who you help to also pay it forward.

My goal? to create good will in the world! and I am not the only one. I am not even the inventor of this hopeful idea. Want to learn more? it is all in the book by Catherine Ryan Hyde.

Check this site:

http://tinyurl.com/2rubv2

You can also get the movie with Kevin Spacey, Helen Hunt and Haley Joel Osment

http://www.imdb.com/title/tt0223897/

Be Reactive, Not Proactive

2008-03-20T10:40:00.000-07:00

Over 17 years of reading, investing, trading and searching for the best approach to profits, I have seen it all. There are the Fundamentals and/or value investing or trading. I have seen Traditional Technical Analysis tools from candlestick patterns to Bollinger Bands. I have seen Science-based approaches, such as the Elliott wave or mathematical and statistical systems. I have even seen black box approaches where you are told when to get in and when to get out through proprietary systems that you’d never know, let alone understand, hidden in the depth of software codes. One thing is true for all of these approaches. They are always “yes, no, maybe-so…” or 50-50 propositions. Even with careful evaluation of each opportunity, it always seem like you are at the mercy of luck or the pressures of the markets.

Most approaches involve the search for value when a stock is down, in the hope that it will come up, or the opposite, to look for bloated stocks that may come down. I have used the Elliott wave to identify short-term corrections against the trend to identify opportunities as the stock reinitiates the trend. Isn’t this like proactively looking for potential opportunities in the land of the fallen, in the hope that they would rise again? After all, we want to “buy low and sell high”, right? Being proactive in this way ignores the winners of the moment, just because we don’t want to buy when they are high in the hope to sell higher.

How about those traders that see a stock jump significantly and decide to wait until the stock declines, at least just a bit, so that they can assure themselves that they did not enter the position at the top of the market? Jim Cramer often says, wait until the stock pulls back a little. Frankly, this requires that you keep a watch list and keep observing the behavior of the stock for a few days or weeks, and very often you lose the opportunity, anyway, as the stock continues to rally in the days following the initial jump. Here you had the opportunity to react to the markets, and you decided to pass.

In essence you proactively looked among the losers for a reversal, and ignore the winners in the hope that they will pull back, instead of reacting to the opportunity when it is obvious, in front of your eyes. We have been conditioned by the buy-low-sell-high crowd. We don’t want to “follow the heard”, and we don’t want to buy options in hot stocks because the options may be expensive due to high implied Volatility. By being Proactive we stay away from the high reward opportunities.

Following the great bull market of the late 90’s, when I made good money trading calls, I have been obsessed with one idea: There must be an options strategy that would provide me with limited risk, maximum hedge and yet give me the potential for unlimited reward using the leverage of options. This strategy would allow me to safely invest large sums of capital, yet allow me to sleep well at night. This strategy would allow me to trade reactively, picking the stocks that are on the move, rather than proactively searching for the ones that might move. The PCCRC is that strategy.

Understanding options Greeks is essential. It is the Greeks that make options tick. Learning to control that Theta, Delta, Vega and to a lesser extent Gamma we can moderate the risk, maximize reward and increase the number of successful trades, and reduce the loss on each losing trade. Knowledge is power, without a doubt, and with the PCCRC knowledge is profit.

Please go through this blog’s articles. If you wish, you can join me in my private blog. I only ask for a token amount of money to cover my costs. However, once you join, we could have access to dozens of video tutorials and to check out a paper trading account, which as returned 65% in less than 9 months. All trades in this account have been PCCRC’s and they are all shown in video tutorials from entry to rollovers to exit.

Why would I do this? Because I am so confident in this system, I really don’t need to make money from teaching it. I already make all I need to live my dream life with my own trading. I do it so that you will Pay it Forward by doing something great and special for 3 other people. I want to generate good will in the World, so you must keep the chain going by asking that the 3 people you help also Pay it Forward.

I hope you’ll join me.!

Feeling like a loser?

2008-03-14T13:48:00.000-07:00

I don’t blame you!

The VIX was up 14% today alone, reaching closing highs that we have not seen in years! That could only mean fear, if not down right panic!

If you were a put buyer, you are probably smiling now, but truly, who could have predicted today was going to bring such fear when only days ago, the Dow rallied >400 points?

I have been following an Elliott wave strategy for several weeks now, and I am confident that it is the best strategy based on predicting markets. Yet, I don’t seem to get ahead at all. The rollercoaster that we have been submitted over the last few weeks is enough to make any cool-headed trader go mad trying to figure out whether to take profits or wait until we break even.

Yet my PCCRC paper trading account seems to be going steadily up. It is now 67% higher. Mind you, I started this account with $100,000 fictitious dollars in late June 2007. That is 8 ½ month ago. Wouldn’t you like to get that kind of performance?

Yeah, I know what you area going to say: “surely you are lucky, you could not reproduce this again”. But the opposite is true. My own account is giving me very similar results and I know that you can also reproduce these results, if you follow one or more of my 4 strategies.

It does make a huge difference when you are calmly observing the markets decline rapidly, imagine the panic among investors, and yes, even among experienced traders. This allows me to see the situation with a clarity that I never had in the past. I no longer panic, or hope that better times arrive soon, nor do I try to go short at precisely the wrong time, when capitulation is at hand. It really does not matter to me.

As a long-time believer in the Elliott trader, I have been bearish for years! Understanding the rally between Oct. 2002 and July 2007 was only a “B” wave and the “C” was about to happen. As I saw the markets go up, I had to come up with a method that would allow me to trade the markets without having to rely on Elliott forecasting because even with all my experience (since 1995), I could simply not pinpoint the top of the market, and the beginning of the “C” wave. In fact, I don’t even care much whether that “C” wave is already underway in the major indices. Even if my wave counts suggest so, I am not about to bet my trading capital on that assumption.

Notoriously, when a stock goes down, implied volatility of options rises, in about the same way that the VIX goes up as panic fills Wall Street. It is not hard to imagine that everyone that holds stock is either selling or buying puts to protect their stock assets. Could you imagine what Mutual Fund managers are doing now? The value of options rises to unreasonable levels. Great, but what if the stock market bounces back? Well in such cases, we are happy with collect Delta profits as the long calls appreciate.

The PCCRC is a “reactive” rather than “proactive” approach to trading. I have heard traders talk about their ability to recognize the right point to enter or exit the markets. They convince themselves that they could call tops, bottom and direction in general either by experience, or by some indicator such as Fibonacci numbers, etc. I know, I used to do that, and still do. But I don’t care to be the best stock forecaster in the world, I just care to make money consistently. So, be proactive. Don’t try to predict what the market is going to do, act retrospectively. If the underlying stock goes up, sell some calls. If Volatility goes up, begin to close your position. Don’t try to “predict”, do “research” or look at 10 indicators before making up your mind. Follow a series of steps of select your picks and then “react” taking profits whenever appropriate. No need to look for the top or bottom, no need to follow “the trend” or feel that if you did not enter the markets in Oct. 2002, you missed out on the opportunity of the decade. There are always good candidates to play the PCCRC, and if there is none at the moment, the next trading day may bring new heroes, and those heroes is what you should be trading, shouldn’t you?

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I am not losing my mind

2008-03-10T15:33:00.001-07:00

One of the best and unexpected side effects of the PCCRC is my new found ability keep cool while everyone else seems to be losing their mind! Some try to call the bottom, others see no capitulation, others don’t want to use the “R” word (recession), others are in denial, others don’t even want to admit that the trend is down.

So far this year, my paper trading account is UP from $145,000 to $165,000 since January 1st. This is a $20,000 increase or 12% yes, INCREASE. The irony is that traders I know are not making money because they are in denial, failing to recognize, or admit that the market is in a down trend. This from people who would tell me: “Juan, the trend is your friend”. The truth is that most traders simply cannot manage their emotions well enough to make transitions from bullish to bearish, and are usually caught with too many bullish positions and unable to close them in favor of new bearish ones.

I don’t fault them, this is what happens to most traders. I know, I was one of them until recently. The syndrome probably manifest itself as a paralyzing fear leaving the trade with a glimmer of hope that the market would rebound quickly so the could recover some of the losses, and perhaps free some of the tied up cash in stock and bullish spread. And this may well happen, and then it will be the turn of the bears to cover shorts in a panic. For most of us, we’d go from bullish to bearish to bullish again, leaving profits on the table and our confidence on the floor.

I am not saying that I am smarter than the rest, I cannot say that I called the top and now am rejoicing on my bear profits, not at all! What I am saying is that I am prepared to see the market go UP or DOWN at a moment’s notice. What I am saying is that my approach has proven profitable has demonstrated by my paper trading account, regardless of market conditions, and that I do not have to “forecast” the markets. In fact, I have been reading Elliott wave charts since 1995, and I can see with great relief: “I am glad I don’t have to be right all the time”. In fact, I don’t have to be right at all! As long as I pick momentum stocks with the potential for huge Delta OR Vega gains and the protection against Theta decay. What I am saying is that the volatility of the market, which is the reflection of the fears of others, cause me no fear whatsoever. It seems like my profits are the result of the fears of others, but if they suddenly come down, the fear subsides and they start buying stock, I will be here to collect profits from my PCCRC.

I am sharing all this information with you, so that you too profit, even during periods of uncertainty and fear. You should believe me when I say that the control over my fear gives me a clarity of thought, I never experienced before in a market like today’s. I invite you to share my experience. When you do, please understand that profits could only come to you if you share the abundance by Paying it Forward!

Record breaking 61% returns since 6/23/07

2008-02-28T09:53:00.000-08:00

To download a .pdf file with a month by month performance of my strategies over the last 8 months, download it here:
http://homepage.mac.com/paperprofit1/.Public/PCCRC8month.pdf

Last June, I created a paper trading account that I have been trading LIVE, with the watching eyes of my bloggers. I started it describing each step of my strategy in my DVD's, which can be easily verified by my followers. Every trade I have entered and the rational for entering it has been posted in video clips in my private blog and viewed immediately by my private blog participants. They could paper trade each trade I entered too.

First, here is the cash balance on the starting day:

So what is the account doing today? 61% in less than 1 year:

Do you want to participate in my personal blog? how about the discussion group around this experiment? You will receive the 3 DVD's where I explain all my secrets. You will have access to my videos past, present and future.

How much do I charge? Nothing! I make absolutely no money. You only pay for the cost of delivering this highly successful trading system education for what it costs me to produce and deliver. And, yes, there is a catch:

You MUST pay it forward by doing something equivalent to the effort I have put into sharing this system. You pay it forward by creating a chain of good will, by getting the commitment from those who you help to also pay it forward.

My goal? to create good will in the world! and I am not the only one. I am not even the inventor of this hopeful idea. Want to learn more? it is all in the book by Catherine Ryan Hyde.

Check this site:

http://tinyurl.com/2rubv2

You can also get the movie with Kevin Spacey, Helen Hunt and Haley Joel Osment

http://www.imdb.com/title/tt0223897/

Here is a list of recent picks using the Refined Elliott trader, along with my own method of picking potential candidates using the Telechart 2007 scanner.

The performance of this system is already showing good results. In due time I will present them to you.
If you want to see a complete list in a single place, go to my alternative blog site:

http://stockofthedayii.blogspot.com/2008/02/how-do-i-trade-elliott-wave-part-i.html

Any comments here are welcome.
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Any comments here are welcome.
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Any comments here are welcome.
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Candidates for Thursday, Feb 21st

2008-02-21T15:43:00.000-08:00

Please do not try to reproduce this trade. This is not a recommendation, it is merely an exercise and test of the RET. In due time, I will reveal the results of my test trading and the paper trading account I am using to follow these trades as option trades.

Any comments here are welcome.

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Click on this image to expand it.

Candidates for today, Tues 19th

2008-02-19T15:29:00.000-08:00

What makes you lose money with the PCCRC????

2008-02-18T11:20:00.001-08:00

I will be on your face and say:

1. Not following the rules.
2. Impatience.
3. Experimenting.

Yet, if I had not done any of these three things I would have learned nothing. So free yourself from the 3 items above once and a while, but be prepared to lose money. By the way, it is a lot easier to lose in one trade when you are winning in most of your trades, so be free to experiment, but also implement the PCCRC strategies I have outlined and see if you can reproduce them first.

Now, here is a theoretical answer that would apply in most cases when the trades do not work out:

Options depend on the GREEKS. That is Theta, Delta, Vega and Gamma. I have said that Theta, Delta and Vega are three horses pulling a carriage. Let’s use the Greek chariot, instead. You can include Gamma if you will. Greeks may work individually or in combination to generate profits. The way you may lose, of course, would be if ALL of the 3 Greeks work against you at one time. That is: the stock goes down in low volatility. You still have the hope that the stock may continue to go down sufficiently to give you profits or IV might spike or the stock may go back to your striking price. In most cases, you just as soon get out with small loses, rather than stay indefinitely in a trade that may or may not fix itself.

By far, the most influential of the Greeks is Vega. A 5% increase in Vega can be sufficient to produce a 200% return on risk. Most option trading strategies AVOID Vega. With Condors, you want to make money from Theta decay while avoiding the impact of a Vega impact, although your trade remains susceptible to Delta. With vertical spreads, you neutralize Vega, but you expose yourself to a decline in Delta (for bullish spreads) or a rise in Delta (in bearish spreads). The only one of the common trade strategies that benefits from Vega spikes is the straddle, but we know how susceptible it is to time decay. Only the PCCRC takes advantage of the 3 Greeks, and even the forth Greek (in some scenarios).

When you place a PCCRC you decide not to control Vega, take it by the horns so-to-speak as if it were a bull, but rather to ride it. So instead of a bull out of control that needs to be tamed, I think of Vega as a powerful horse pulling my Greek chariot. For that, though we need to “buy low and sell high….” VOLATILITY! To be specific, we need to buy low Implied Volatility and sell high volatility.

But you need to control Delta and Theta. When you enter one of my strategies, you anticipate that the stock is going to go UP. In fact, the configurations of my risk graphs appear to be more bullish than bearish, but that is only apparent because Vega is likely to reduce in an up-trending market while increase in a down-trending market. Even if your up-trending market surprisingly reverses and goes down, you can count on Vega to carry the day, and make you profits when you expected losses.

Occasionally, however, IV may decline and the stock might move sideways. In such cases the decay of the front month options may decay sufficiently to justify your staying in the trade month after month until finally Delta or Vega move sufficiently to give you strong profits. As expiration Friday approaches, I make a decision to exit the trade or rollover my shorts to the following months. My decision should be based on the merits of the resulting trade, and not on the past performance of the trade thus far.

So what could cause me to lose money? A decline in stock price with a simultaneous decline in volatility could. In such cases, all three Greeks will work against me as Theta would not be of much help, since the front month puts may increase in value with the decline. I have also experienced sudden IV declines following news releases. Imagine a balloon being filled in advance of a news item, which it then deflated once the news are out. The news, such as earnings released, must be anticipated as to their occurrence, if not their content. One the news is out, uncertainty is removed and so is the fuel for Vega.

Now you may say, I am not a full time trader, I cannot be watchful of Vega, I need to be at work. Well I designed my strategies to be able to go out on vacation for extended periods of time in far away places and still make money. In advance of my trip, I may rollover my short options to the next month, assuming that I will be back 1 week before expiration. If earnings is to occur while I am away, I may as well exit the trade. I prefer to enter right after earnings because then I will have 90 days for the trade to work, without my constant watchful eye. Besides, right after earnings, IV will decline in most stocks, so I known Vega will be on my side. If you the IV of the underlying you are interested in does not decline after earnings, Avoid that trade!

You may say: I have seen you adjust many of your trades, you obviously watch your trades every day! Now remember, I am a full time trader not because I must, but because I want to. If I go on a long trip, and come back and see that I missed to top of profits in one trade, let’s say 200% return on risk, and it is now 50% return or risk, I just have to say to myself, what could be better than earning 50% with a minimum effort? This is important, because the 150% difference between the two trades would be my salary if I were a full time trader, and then you’d have to subtract whatever the S&P500 would have made me during the time I was way. So yes, I have given you many clues on what to do to luck in profits they accumulate during the life of the trade, but I assure you, you’ll do just fine, even if you don’t change a thing.

There is one more, VERY important thing: The PCCRC strategy has very natural decision points, both to enter and to exit: earnings and expiration. Be aware of those two dates for every trade you place. Be sure to exit in advance of either, and you’ll do fine. It is at these two points where you should be ready to realize your loses (or profits) and move on!

More cendidates

2008-02-17T18:36:00.000-08:00

More Elliott wave candidates

2008-02-14T10:36:00.000-08:00

Please do not try to reproduce this trade. This is not a recommendation, it is merely an exercise and test of the RET.

Click on this image to expand it.

Click on this image to expand it.

Click on this image to expand it.

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Click on this image to expand it.

The Greeks and my 4 Strategies for Fearless Trading

2008-02-09T10:02:00.001-08:00

The way I look at the PCCRC is as a carriage pulled by 3 horses (theta, vega and delta). When I enter a trade, I want to presume that either of the three may help me make my money, I don’t pre-judge which one would be, I just want to make sure that all of them are on my side to begin with.

Thus, I look for momentum stocks. Stock that have performed exceptionally well over the last 3 months that I call high fliers. If your software allows you to locate stocks that are at a 52 week high, or that are the best performers (% wise) over the last 3 months, then you have a high flier. Delta is likely favor your trade, either because the stock continues to rise or because a strong reversal is likely to happen. Delta negative or delta positive, you win if the stock moves strongly over the live of your trade. In other words, you are putting Delta on your side. All that I need to check to enter this trade is, what are the chances that IV will increase in the coming months. When a stock falls with high volatility, or even if it just moves sideways, I make money, even if IV increases as little as 5%. All I need to do is to confirm that IV is low. What is low? The IV is at the low end of the chart and/or IV/SV ratio is below one and perhaps hooking up. Now you have Vega on your side. So how do you put Theta on your side? Simply by selling a front month straddle. It is true that Theta won’t make you much, but I’d rather make little than lose money. So if the stock does not change much in price and IV stays the same for the first few week of the trade, you are still OK, because Theta is on your side. This is my “High Flier Strategy” in a nutshell.

My second strategy, needs a strong catalyst that would cause the stock price to rise 10% or more with declining volatility. This catalyst, I have found, may come in the form of raised guidance in earnings going forward. Yes, I don’t care whether the stock beat expectations, that sort of news is usually expected (more or less), but the raised guidance is truly new news and have the potential to make the markets move. Nevertheless, it is still quite possible that the stock may go down thereafter, but that may occur after some negative (or perceived negative) piece of news, even after good earnings and guidance. Take MSFT as an example, how a stock that had performed very well in the last few months, suddenly tanks as they bid to acquire Yahoo! Delta helps you to the downside. Vega helps you too, though, if you enter the trade at a low point. This deflation in volatility is quite remarkable right after earnings in stocks that jump 10%. So you are entering at a low IV. Entering the long portion of the IV at a month that goes beyond the next earnings season assures you that they will increase in volatility as the next earnings report approaches. This is my “Post-Earnings Spike Strategy” in a nutshell.

Occasionally, you’ll find stocks with a volatility skew. These are easy to find if you have Optionetics platinum. Here I expect the front month IV to go down or the back month IV to rise. My assumption here is that IV’s will tend to even out. These is a rare trade, and you must be ready to exit if and when the IV changes and you accumulate profits. This may actually occur very quickly. Here, I’d take my profit as soon as the skew disappears. If the skew is due to rumors of a take over, for example, the take over may cause the IV to collapse in both front and back month. However, it is quite possible that Delta shoots strongly enough to give you an instant profit. If there is a definitive agreement of takeover, and your stock jumps 20%, let’s say, after the announcement, IV will dry out. Then I need to exit the position immediately, because no further profits will be expected after the move. This is my “I.V. Skew Strategy” in a nutshell.

Some of you may have heard of the strategy of entering a straddle one month before earnings, in the hope that IV will increase, or earnings will move your stock strongly. The straddle is a terrible way of trading because you are paying too much for the luxury of not carrying which way the stock will move, but you disregard the Theta decay risk. If IV increases toward earnings, it may appear that you are doing well, as profits may accumulate by virtue of Vega. However, as soon as the earnings are out, and unless the stock price moves strongly in either direction, you will lose your profits as Vega declines. You can certainly exit the trade BEFORE earnings, whether you make 25% or 1% or 100%. My guess is that the straddle will leave you frustrated with much effort and not much to show for it. However, if you incorporate the PCCRC to this strategy, you may do very well. Why? Because you’ll have Theta on your side. By shorting the front month straddle (which you’d be buying in the traditional strategy), you are making sure that time decay (which is more acute in the front month options) works for you. Now here you have a Vega play. If Vega increases towards earnings, it would do so both in your front month and back month options. BUT because you are long more options than you are short (by 2:1 in my strategy), IV increases work in your favor while at the same time Theta is with you, not against you. Delta, just like in the original straddle strategy, is still with you. You may decide to go over the earnings period, if you still expect Delta to govern your profits more than Theta or Vega. This is my “Pre-earnings Strategy” in a nutshell.

Elliott wave candidates, so far....

2008-02-06T06:29:00.000-08:00

The Question of Assignment

2008-02-05T07:34:00.001-08:00

I will cover this issue in detail here, so as to demystify the assignment of short options. My discussion may appear complicated, but I assure you it is not. My intention is to comprehensively cover your alternatives and to view assignment the way I see it. I see assignment is as a minor inconvenience that is easy to handle, when it comes to the PCCRC.

In more basic credit spreads, assignment would mean that your spread is ruined. For example if you had a 35/40 Bull Put Spread in MSFT, your short is now deep in the money, and as we approach Feb expiration, you may end up with long stock at $40. In that situation, you could exercise the long put, and end of story.

With the PCCRC is a little different. My PCCRC in MSFT at $35 has a Feb $35 short put, and as we approach Feb expiration and the stock being at $30/share, it's becoming susceptible to assignment. A quick scan through your positions should make you aware of this possibility, starting 10 days before expiration. You can easily prevent assignment by doing an early rollover of positions that you want to keep, but that are deep in the money.

I have said that the PCCRC should give you the freedom to travel because is not a short-term trade, not even a swing trade, but rather an intermediate term trade that should he held for 2-3 months, or more. To go on a 10 day trip could be hazardous to your account if you do not have sufficient cash to handle any potential assignments. What would happen? if you are assigned and now have stock instead of a short put, you are fine, as long as there is enough cash to cover the long stock position. It is truly equivalent to the short put, at least in the short term. But if you are like me, you want to put your capital to work, and not let it sit around just to cover a potential long stock position. So before you go on your trip, and regardless of how close to expiration you are, rollover your shorts. If you don't think it is worth doing the rollover, then close your position. The way I see it is that not every position is worth keeping, and when I travel, I understand that my performance is not going to be the same, but I know that with the PCCRC I have peace of mind, and that when I come back I can actually have profits.

Early last year I had an account with Interactive Brokers, which had several PCCRC's as I went on a 10 day trip to Perú. If you go to third world countries (like I love to do), you may not have access to the internet. Taking your lap top makes no sense. However, I was able to use the Hotel's internet service while in Cusco, early in the morning. As it turns out, I had been assigned short stock (which is unusual - more on this below). I was only able to get to the computer about 20 min after the market opened. Interactive brokers had arbitrarily closed my most profitable PCCRC (on AAPL I remember well), in lieu of my assigned short stock. In panic, I close that position too. I over-reacted, but Interactive Broker's policy of liquidating positions at random right after the opening did not help at all. I tell you this so you know that interactive brokers is not PCCRC-friendly, and that when traveling, you can avoid this problem by closing positions that are deep in the money, or roll them over to the following month. Also, know that TOS gives you the whole day for you to figure out what you want to do. There are several alternatives to what to do when assigned, base on the performance of your PCCRC, which should really be the only consideration. Assignment should NOT be the traumatic experience I had in Cusco.

1. Close the stock position (short or long, whatever that may be) and reopen your short. Same strike price, same expiration. If you do this, you may be assigned again the next day. Although in theory, this keeps the position exactly as it was before assignment, you'd be just play a game and you'd slowly lose in commissions and slippage. So don't do this one.

2. Close the stock position and reopen the short but at the next expiration month. This assumes that you want to continue in the trade. You have now extended the life of your trade for one more month, and you are much less likely to be assigned because the buyer of your short is not going to give up the time value so easily. However, you should consider that you were assigned because the stock has move strongly in either direction, so you should have some profit already. If you have no profit, then the more serious question would be, why would I continue on a losing trade for one more month. Volatility may be low enough so that the difference between the stock price and the strike price is very close to the value of your shorts. In other words, there is little or no premium to be had by shorting again. So consider this alternative carefully. Take it as an opportunity to examine the trade critically, and decide if it is worthy of more of your time an effort.

3. Close the stock position and SELL an equivalent number of your long contracts. This is probably the best alternative, since it could slowly and progressively unwind your position. Let's say you have a -5c,-5p,+10c,+10p in MSFT at $35 strike price with Feb/May expirations, respectively. After the MSFT deal with Yahoo was announced, the stock begun to decline despite dissent earnings. Volatility, despite the drop in stock price is fairly low, so my profit is fairly marginal. Then this morning I am assigned 300 shares of stock and 3 of my shorts have disappeared. I decided that MSFT is not going to go down much further, and that the low IV is not favorable for me to continue on to next month. I could simply SELL 3 the stock and immediately thereafter, sell 3 of my long puts. This would leave me with -2p, and +7p, which is actually more bearish that the original position. It would even be OK to sell 4 or 5 or up to 8 of my long puts, depending on how bearish I feel. Unwinding my position in this way is not a bad idea, as you will not pile up commissions, and you may be taking a small profit or a small loss as you go.

In many ways, the PCCRC is self-limiting, and instead of having stops, there are critical points at which you should ask yourself whether is worth keeping the trade or closing it. Being assigned is one of those times. In the case of MSFT, the low IV is the main reason why I may be assigned. This is common when you trade PCCRC with blue chips (Dow components). If you stick to momentum stocks, assignment is less probable because IV is usually high in these stocks.

I said that being assigned short stock is unusual. This is because it would only happen when the stock has moved strongly higher, and your short calls are now deep in the money. Even still, your option should have sufficient volatility to cause the extrinsic value of the option to be significant. Since that episode in Perú, I have not been assigned short stock. In fact, I rarely get assigned much at all. Doing my rollovers 10-7 days before expiration goes a long way to prevent assignment. But viewing assignment as an opportunity to critically examine your trade and exit with a small loss or small profit may be a blessing.... Consider that next time you are assigned.

Finally, Think or Swim offers you a feature that should help you deal with assignment in an elegant manner. You'll find that Stocks have a much narrow bid/ask spread than options do. So it makes sense to fill the option first, at a limit price. It really matters little what price the option is at when you place your trade, but make sure that the limit is favorable to you, understand that you have all day to close your long or open a new short (whatever of the 3 options you decide to do), Place a 1 trigger's sequence order to close the stock position at market once the option order is filled. This makes sure that the nature of the trade is not changed by the adjustment, living you with the burden to close the stock position at a good price.

Is the Refined Elliott Trader worth the money?

2008-02-02T14:30:00.002-08:00

I have been using my own search criteria to select potential zigzag candidates using Telechart 2007. Out of about 30 pre-selected candidates, I narrow it down to a handful that I then tested using the Refined Elliott Trader (RET) from Elliottician.com.

I am posting the charts here. Note that each chart has a big plus sign near the bottom right. This is the point in time the target (shadow area on the top right corner of every chart) is likely to be reached. Note that they all are within a month. It makes sense to enter Bull Put Spreads with March expiration, on a paper trading account and see how good the RET really is.

Please do not try to reproduce this trade. This is not a recommendation, it is merely an exercise and test of the RET.

Click on this image to expand it.
ATVI may be forming a "C" wave of a zigzag (ZZ) with a target price of about $33/share (currently trading at $26.43), to be reached in about 15 days (note the +15 number near the bottom left of the chart), which corresponds to the location of the + cursor near the bottom right of the chart.

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PRGO may be forming a "C" wave of a zigzag (ZZ) with a target price of about $45/share (currently trading at $31.28), to be reached in about 38 days (note the +38 number near the bottom left of the chart), which corresponds to the location of the + cursor near the bottom right of the chart.

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SVNT may be forming a "C" wave of a zigzag (ZZ) with a target price of about $27/share (currently trading at $20.03), to be reached in about 14 days (note the +14 number near the bottom left of the chart), which corresponds to the location of the + cursor near the bottom right of the chart.

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