Total's trades net me $400+

As a short-term trader, one of the things I love are news events that are guaranteed to move the market in some fashion. Events such as those allow me to bet one or the other, and the leverage of options really allow me to profit off of those quick moves.

Today is a good example. I knew early today that the minutes of last month's Federal Reserve would move the markets. Traders and analysts would be scrutinizing every word to see if another cut was on the horizon.

Feeling optimistic, I bought 30 October 53 QQQQ (Nasdaq-100 Index) Calls and 15 November 54 QQQQ Calls, as well as 10 October 158 SPY (S&P 500 Index) Calls. Around mid-day, the calls were about even, but the market had been fluctuating up and down for a while.

Right around 1:30PM, 30 minutes before the minutes were to be released, volume picked up, and the price started to trend upward. After the news was announced, that all the Fed governors were unanimous on the rate cut decision, the Nasdaq actually went negative while the S&P continued upward.

I wasn't phased. It always takes a bit of time for the market to digest Fed news.

By about 3:30, the frenzy started, and both Nasdaq and S&P ended up, pushing my Qs and SPYs to, so far, a $414 gain. I expect another good day tomorrow, but I will sell off some to decrease downside risk. By Thursday, I plan to dump it all.

Apartment found, sold, and moved all in one weekend

I officially start at my new position on Oct. 15, which meant I had to find someone to take up the rest of my lease, find a new apartment, and me moved prior to October 15. Somehow, I managed to do all that this weekend, even though everything came down to the wire.

For a while, I was contemplating forgoing the $2500 security deposit, figuring my sign-on bonus and better job satisfaction would more than make up for that small financial hit.

Thankfully, I'm getting that back. Add to that my relocation bonuses and my old company paying me for unused vacation time, I've got some large checks coming.

My plan is to save a large portion of it, but still have money to buy a new LCD TV and a cheap sofa set.

At the same time, I have to come to grips with living by myself, which means I pay for 100% of the utilities, rather than the 3-way split I had. For utilities like cable, that was a great deal. For now, my way to cut back is to decrease my monthly discretionary budget, until I see how much utilities actually end up being, and then I can readjust accordingly.

Options Trading, Part III

Yesterday I wrote about figuring out your comparative advantage. Today, I will discuss where this advantage will be applied.

First, we have to understand why options are valuable. Options have five basic characteristics:

(1) Underlying asset (ie. Google stock)
(2) Type of option, ie. Call or Put
(3) Strike Price - price at which option will be converted
(4) Expiration date - date when contract expires
(5) Volatility - how much periodic movement there is

So now you just have to pick at least two of the five characteristics that you have a comparative advantage in. The more you can be good at, the better your outcome will.

Of course, just because you are good at two of the five, doesn't mean you don't have to either explicitly or implicitly choose all the other five characteristics.

For instance, knowing that Google is going to go up, doesn't mean you can just go out and buy a Call option on Google. You have to consider the current price of Google, and pick a future price you think is obtainable.

The characteristic you can make the most money on is of course strike price. After price will be volatility plays and then duration plays. The last two of course will make you much less money.

Options Trading, Part II

The key to any kind of trading is thinking of every trade as a negotiation. When two sides sit down across from each, rather you are the buyer or the seller, both have weaknesses and strengths. Both have reasons they want to participate in the trade, and if you want to make abnormal profits, you need to know why you are capable of making those profits.

Quickly though, let me first explain what abnormal profits are. Abnormal profits are as it the term suggest, profits that are unusual. For example, if you suddenly find gold, you would profit off selling them. But no one will pay you more than the market price for it. That is a normal profit. An abnormal product would be say, gold is going for $100, and normally is costs you $80 to dig up gold, but all of a sudden, you discover a cheap process that finds you gold for $50 and you still sell it for $100.

Abnormal profits occur from having a comparative advantage. If you don't have an advantage, you aren't going to make abnormal profits.

So why do you care to make abnormal profits? Because with the increased riskiness of options, and the sheer amount of extra work you need to put into it, what's the point of getting a 15% return at year end when you could have just bought say the Nasdaq index and just let it sit there for a year for the same return?

I will continue posting for the rest of the week my views on Options Trading. But if you want to profit from what I post, you first have to ask yourself, what comparative advantage do you have over other traders?

Maybe you are smarter, or have a keen analytical sense, or perhaps Greenspan is your next door neighbor. Any of those are fine, but you have to know your advantage so that you can tailor your strategies around it.

[Update] I wanted to add as an incentive to consider your comparative advantage, the difference between me knowing what it was and just playing the market. Last year, I obtained a 10% return over 6 months following classic investing strategies, while this year I have so far obtained a 21% return in the last 2 months (I only started trading again in the last two months).

Options Trading, Part I

Recently, a reader asked a question about how to trade options. I thought about this question, and I realized I needed to explain a lot of background before we can get into the nitty gritty.

First, I do assume you understand what a stock is and the various drivers of stock price.

Second, I assume you have the understanding that investing is inherent risky and options even more so.

Third, I assume you have some fundamental math skills and can use Excel.

Now, rather than explaining what a basic option is, I will link to the Wikipedia article that already explains it pretty well. You only need to read the intro, section 1 and section 6 of the article. The rest is either useless or will be explained by me.