trader’s journal

Disappointed by the stock market’s failure to always go up after the nationalization of Fannie May and Freddie Mac, as well as pouring hundreds of billions of taxpayer dollars into the black hole formerly known as AIG, President Bush announced today that Treasury Secretary Hank Paulson would be using the remaining TARP funds to purchase all outstanding common stock in the market. The new plan will be known as Finally Up exChanges and marKets nEver Down, or FUCKED. President Bush stated, “I am the decider, and I have decided markets will go up!”

Intrepid reporter Trader Vic managed to get a few quotes from alleged leaders for Trader’s Journal. Ben Bernanke said, “This is a brilliant plan that will stabilize markets and taxpayers even stand to profit.” How they will profit was not mentioned. Clueless Senator Charles Schumer (D-NY) and hopelessly misinformed Representative Barney Frank (D-MA) both stated, “we’re thrilled with this bi-partisan effort to impose a socialist regime on the backs of hardworking American suckers taxpayers.”

President elect Barak Obama was busy picking out color combinations for the Oval Office and unavailable to comment.

Position: WFC July 2008 $32.50 Put
Size: 8 percent*
Opened: 11/23/2007
Closed: 01/22/2008
Profit (Loss): 56%

trade thesis

When I was a broke ass graduate student, I had the pleasure of living in an apartment in Texas with several thousand unclean and unwanted roommates. With the lights on, I might see one or two of my uninvited little guests. When the lights went dark, the rest of them came out to play.

By November of 2007, the meltdown in the housing market was in full swing. While the usual cadre of idiot talking cement-heads was busy calling the bottom on CNBC**, I was trying to guess the first money center bank to blow up. While the train wrecks known as Countrywide (CFC) and Indymac (IMB) were not complete at the time, both had derailed and the end result was easily predictable.

Based on my experience in the Lone Star State, I figured there were several others scurrying around the banking sector. So I decided to short Wells Fargo (WFC) using puts. The key to my decision was WFC’s large book of home loans in California, where declining home prices had given CFC and IMB fits. I was wrong about the bank being the next to blow up, but I still made a profit.

mistakes, flashes of brilliance, and lessons learned

This trade turned out quite well, despite my lack of a brilliant exit strategy. When the trade showed a decent open profit, I bailed.

Luck is important - even though my thesis did not play out, I was able to get out of the trade with a decent profit. Additionally, expiration makes options tricky. There have been several red flags in WFC’s conference calls***, but the share price has not imploded as of this post. Had I held through expiration, the put would have finished in the money and the intrinsic value would have been slightly less than what I paid for it.

notes

* Of total account equity.
** This channel is guaranteed to cause brain rot. Turn it off.
*** E.g. redefining non-performing as 120 days past due instead of the traditional 90.

Trading successfully is about probability, not being right. Traders lose money on a regular basis.

Money management is an important strategy for minimizing loss and controlling risk. The first rule of money management is don’t trade the rent money. Or the grocery money.

I set up and funded a separate brokerage account specifically for short term trading. This is money I can afford to lose. When that account is empty, I’m done trading.

Position: UNP May 2008 $120.00 Put
Size: 15 percent*
Opened: 11/20/2007
Closed: 01/04/2008
Profit (Loss): 17%

trade thesis

The United States appeared to be headed for a recession, if not already in one, and container volumes at the ports of Long Beach and Los Angeles were declining year over year. Also, Union Pacific (UNP) appeared to be a poorly run railroad when compared to its peers, based on fundamental analysis.

mistakes, flashes of brilliance, and lessons learned

This was a successful trade and my first profitable one at Optionsxpress. A key mistake was committing far too much of my account equity to the position. However, in this particular trade it worked out because I was nervous and took a profit when it was available, in contrast to a similar trade in CSX.

In this particular case, UNP proceeded to rise from when I took the profit through expiration. Had the opposite ocurred and UNP dropped substantially, I would have missed out on a potentially substantial profit by closing the position too early because I was worried about the large size.

notes

* of total account equity.

After several profitable options trades, I became frustrated with the limitations of Sharebuilder’s platform and fired up Google to find a better one. I came across the 2007 version of Barron’s Annual Ranking of the Best Online Brokers and read the reviews. At the time, Optionsxpress was the top ranked browser based platform, so I checked them out and opened an account.

Optionsxpress is recommended as a browser based options trading platform. In addition to options, equities, mutual funds, and bonds can be traded. With a futures account, several futures products and futures options are also available and are conveniently integrated with a securities account.

experience with the platform

I have used Optionsxpress since 2007 and made roughly 200 trades as of this post.

the good

Providing tools for options traders is the core business of Optionsxpress. The Optionsxpress platform is very good for options traders who need to be able to trade from a browser (e.g. trading from behind a firewall at the day job) and also require access to powerful tools.

options chains

Optionsxpress provides several key tools in addition to standard options chains. Chains can be sorted by spread type, which I find exceedingly useful.

One of the most powerful tools offered is rollovers. Rolling over the strike price in an options chain shows the intrinsic and time values for the associated call and put in a convenient graphic. Greeks can be accessed by rolling over the option symbol, as can a quote book that shows bid and ask prices by exchange.

charting

Charting tools provided by Optionsxpress are exemplary and extremely useful for technical analysis. A full menu of upper and lower studies is available. Time frames range from daily to 10 years.

Optionsxpress offers the ability to save chart settings. I find this useful, as I follow about five favorite indicators.

Charts come in two flavors - Xpress, which work in any browser, and Flex, which are Java based and streaming. With either of these charting options, there is no need for a separate charting package to perform technical analysis.

real time quotes

Real time information is critical for trading options, where the bid/ask spread can get fairly wide. Access to real time bid and ask prices is provided free of charge, as are streaming quotes. I especially like the streaming quotes, which make it easy to follow prices for watch lists or account positions.

the ugly

After using the platform for a year, I have no complaints about Optionsxpress. Even on days with heavy trading volume, the site has not gone down and orders executed perfectly, even though site responses were frustratingly slow on two occasions. On one of those occasions, index futures were lock limit down when the market opened.

This review will be updated as Optionsxpress adds features in the future and as I learn about and use more of the currently available features.