This weekend our new trader training room, my office, at Propex is receiving a bit of a makeover from graffiti artist Andy Steel from “As One”. Here are a few shots: Before: These next few pics show the background design: Continue Reading

May 25 (Bloomberg) — David Siniapkin, a postal worker in York, Pennsylvania, uses some of his retirement money to trade options. After three years and being down as much as $10,000, he’s broken even. Siniapkin, 46, said Continue Reading

It’s interesting to see how the Aussie market has performed compared with the US. The chart shows the S&P (black line) and the ASX200 futures adjusted for the change in the currency. From the recent peak, the S&P has lost Continue Reading

Here is a really interesting article from our broker in Chicago, Craig Turner. Craig writes the ‘Turner’s Take’ newsletter. Trial details at bottom of article. GOLDMAN SACHS NEWS & ANALYSIS On Friday the SEC announced they are charging Goldman Sachs with civil fraud. As many of you know, I got my start professional right out of college with Goldman Sachs (New Associate class of Continue Reading

It is worth revisiting how far the Australian sharemarket has come from the lows of March 2009, as shown in the chart below. The chart compares the six worst bear markets to the current sharemarket recovery to 31 March 2010 Continue Reading

There are a few reasons I love the calendar from www.forexfactory.com:

1. It has broad based coverage of data from most countries.
2. It gives rankings (low, medium, high) to the market significance of data releases. Continue Reading

I’m having a good read of Van Tharp’s latest book: Super Trader: Make Consistent Profits in Good and Bad Markets. It’s quite a good read and captures some key trading principles including what he sees as the five components to trading well: 1. The trading process. The things you need to do daily to be a good trader. 2. The wealth process. Exploring your relationship with money, how you deal with it and how it deals with you. 3. Developing and maintaining a business plan to guide your trading. Entry into the world of trading may be very easy. All Continue Reading

My latest toy just arrived – the Amazon Kindle. I have to say I absolutely love it. It’s an electronic book reader available through Amazon. This is a fantastic tool for downloading eBooks (including the free eBooks from this site).  You can read them anywhere, anytime, show them to friends and share them with the person next to you on your flight who is constantly bugging you for a look at this great gadget. The cool feature is that is has built in wireless that allows you to search the Amazon site and download books. The wireless is free, but of course the Amazon books are not. Details here:

Kindle Details – click here

The positives:

• The wireless internet works really well. It comes preconfigured so there is no messing about when you get it. All Continue Reading

(as published in Active Trader magazine)

In the last article we started looking at the concept of change and how it affects an option’s fair value. Specifically we used discussed the delta and the gamma – concepts used to quantify the behaviour of an option given a change in the underlying market itself.

In this article, we move a little further down the track and look at how changes in other factors can affect an option. For any option trader, it is interesting information, but more importantly essential in understanding the risk in a position.

In the last issue noted four factors that can impact the fair value of an option position. These are:

1. Market price
2. Time to expiry
3. Volatility
4. Interest rates.

Changing levels in the underlying market price is what we looked at last time. Here we will look at the rest, starting with time.

Time Decay and Theta

Continue Reading

(Originally published in Active Trader magazine)

What a boring game all this would be if option prices showed no fluctuations! The price, or premium, of an option is constantly changing for whatever reason. As an options trader you must be prepared, armed with the knowledge of how an option price can react in certain scenarios. You can look at that from a reward or a risk perspective.

If you are relatively new to options, you may have heard the terms “delta” or “gamma” or several of the other Greek letters. These terms are used to measure how an option price can behave in certain environments.

This two part article (this being part one) seeks to explain “the Greeks” and more importantly give perspective to their relative importance in day to day option trading.

Continue Reading

An important consideration in any trading strategy is how many contracts to trade or how much money to allocate to a particular trade. This article answers this very question. There are two parts to this question: Continue Reading

Not long after options became available, there were the seminars and the books and the systems that come with any new financial product. These things tend to come from ‘experts’ with opinions as to which option strategies are the best: Continue Reading

(Note this article was first written in 2003, so the data is a little old but the concepts remain the same.)

The concept of hedging has always been a controversial one. There are some investors that would not enter the market without it. Then there are others that just do not see the point of hedging and that the whole exercise is just too expensive.

Before being able to develop an opinion however, one must know the options. That is, one must understand what hedging actually is. There are a greater range of hedging strategies out there than just selling futures or buying a put. Some strategies will have an outright cost, like buying a put. Other strategies may cost less but instead somehow limit your overall return.

You can see this in some capital guaranteed products in the market. Some capital guaranteed products will put a cap on your potential returns. That in essence can be considered the cost. Now as long as you are happy with this cap, then this type of product may suit you.

So too with options. That is, you can use options to place a stock or portfolio hedging strategy at the cost of capping your upside.

Most people are familiar with buying puts as a hedging strategy. The put works much like an insurance contract. Sometimes however (maybe even a lot of the time) this cost of insurance is too high. A hedging strategy that simply involves buying put options may turn out to cost more than it’s worth.

Buying puts however is not the only strategy around to protect your stock or total portfolio. This article will show you a very simple options strategy that can be used not only for a cheap speculative play, but as a low cost and effective hedge.

Let’s say you have a portfolio of German shares. Up until about late December, we have seen some pretty good gains as measured over the course of the year or even just the previous few months (see Figure 1).

After gains like these, it would be quite reasonable to build some protection against a fall in the market. One thing to consider is a hedging strategy using options.

Figure 1: shows the DAX Index. Some great gains over 2003 could leave the average investors thinking it may be time for a correction.

Source: eSignal (www.esignal.com)

Current volatility, while not at its lowest level, is still quite low and therefore the first option would be to look at buying puts. It is a simple strategy Continue Reading

Question: What is seasonal data? Answer: Seasonality refers to a pattern that depends on, or is controlled by, the time of the year. Seasonality appears in many places. For example, sales of Christmas cards logically peak before Christmas. Accounting business peaks Continue Reading

For many years, when I have told people I’m involved in futures trading, a common response has been “Oh, that’s where they do those hand signal things. What does all that mean?“. If you’ve ever wondered what they all mean, Continue Reading

Here is an article that looks at the concept of contract allocation and active portfolio management from the point of view of a high frequency trading desk (prop desk). It’s a subject that is taking on greater significance among hedge funds and alternative asset managers. There are two main parts to creating a quant approach to money and risk management: 1. Analysis of Individual Traders 2. The Portfolio Allocation Model

1. Analysis of Individual Traders

The simplest of examples of a trading system and an approach to capital allocation (trading limits) is with a game of coin toss. Consider offering this coin toss game to your traders. Tossing heads means they win two units and a tails means they lose one unit. Suppose they were each given $10,000 as a starting bank roll and can bet as much of as little as they like and play the game many times over. Now it is clear the odds are stacked in the player’s favour. $2 for a win versus $1 for a loss. That’s a ‘good trade’. But how much of the $10,000 should they bet? Once knowing the potential win is double the potential loss, most people would bet a large amount, perhaps half of the $10,000. The key to making the most money from this coin toss game is to calculate the optimal percentage allocation. This is not an arbitrary or gut feel amount. It is science and the difference between one choice and another can be significant. Suppose we pick three individuals to trade this system: Andy, Brett and Chris. The only choice we give them is how much to bet on each trade based on a percentage of the $10,000 starting capital. Andy thinks of himself as conservative and chooses to bet 10%. Brett thinks of himself as a ‘middle of the road’ risk taker and bets 40%. Given Brett is trading four times the amount of Andy, you’d think the results would be significantly different and you’d estimate in the long run Brett would come out well ahead. However, the reality is different. Here is the equity curve after 100 trades: Continue Reading

Introduction

This article provides an overview of using Eurodollar spreads as a low risk instrument to trade economic news and interest rate cycles. We’ll look at two types of spreads: bull spread and bear spreads. We’ll also look at Continue Reading

With a more bullish fundamental setup for next year and a movement by fund traders and investors to own commodities and shy away from owning the US dollar, the coffee market appears poised to attract significant new buying interest in Continue Reading

Introduction

While around for many decades, pivot points have grown in popularity since the 90’s with what has been an increasing focus on intraday trading. Pivots are derived from a simple calculation based only on the previous period’s data and are designed to provide traders with potential support and resistance levels for the coming session.

While pivots certainly do not fall into the ‘Holy Grail’ category, I have found them very useful for intraday trading, both as a signal for short term direction and as entry and exit levels. This article will set out the calculation of pivots and some ideas on how to use them.

Calculation

For one sessions’ data (high, low and close), there are five calculations. The first is the mid pivot (MP):

MP = (H+L+C)/3 The MP is simply the average of the high(H), low(L) and close(C). From here four more levels (two support and two resistance) are derived from this figure:

As you can see from this calculation, pivot levels assume some sort of trend or correlation is readable from the previous session’s data. That is, after a bullish session, where the close is the nearer the high, the next day will hold a bias for further upside by way of higher pivot levels. Likewise for a bearish day (lower close = lower pivot levels).

Charting Pivots When I first started using pivot points, it was a matter of tapping Continue Reading

Here is an interesting tool I have been using in my browser. It’s a custom made toolbar I have set up with various links to market news, podcasts and other handy things. It’s really easy to set up and customise with your own features. Best of all, it’s free to use.

The one I have designed looks like this:

One thing I like about the toolbar is many of the features will display in a drop down box, rather than directing to a new window, so it’s quick and easy to use. The Bloomberg podcast window below is a good example.

INSTALLATION It’s easy to install (and uninstall). Just go here: http://guybowercom.ourtoolbar.com/

CUSTOMISE Once installed, you can Continue Reading

The wheat market has been a featured mover to the upside of late. Traders who have concentrated on the genuinely bearish world and US supply fundamentals are licking their wounds and wondering why the rally is still going strong. The Continue Reading

The Euro is not normally a market covered in this website but I was asked about it, so thought I would write a little something. That said, the US Dollar still has a strong impact on markets such as Oil, Gold, Eurodollars and other markets we normally look at, so there is some relevance. THE TECHNICALS Last week was another quiet one for the Euro, with small ranges and very little changing on the technical front. On the weekly charts, we still see the trend signals pointing to a continuation of the bullish trend (Chart 1). Chart 1: On the daily charts (Chart 2), trend indicators are closer to neutral with the choppy range bound market over the last few weeks. It is interesting to note the well formed wedge pattern. This suggests a near term break and increase in volatility in the very near-term (the next 1-2 weeks). Given the longer-term trend, that break will more than likely be higher. The key level right now remains 1.500. The market has seen some strong selling here, however a break above may well trigger buy stops from all and sundry and help fuel a move higher. A sustained break above 1.5050 will be seen as significant for the near term direction and suggest that flag has turned into a continuation pattern. Resistance after this would then be expected towards 1.5150-1.5200. That would be a good place to take some profits. Chart 2: Continue Reading

With the US Federal Reserve backed into a corner by a mountain of toxic assets and soaring US deficit spending, the easy way out is to invite, foster and perhaps even beg for inflation. With the world currency markets, foreign Continue Reading

As a trader, author, etc I often get asked what are the best ‘getting started’ books on options trading. I have literally boxes and boxes of books on options trading. The collection includes everything from the basic Continue Reading