OptionInvestor.com - A Brief Review

October 30th, 2006

OptionInvestor.com Logo

I just found OptionInvestor.com this morning using stumbler (a excellent firefox plugin). They offer a free report on an options strategy. Their 5 page document discusses the bull put spread in terms of risk / reward, return on investment, and position management. This is a great place for a budding options trader to get started. Of course you have to trade your email address to get their report, but what else is new? Since you have to give them your email address anyway, you might as well try the free newsletter that they offer. I just signed up today. I haven’t read it yet, but I’m always interested in new content in my search for options exptertise. I think that the free report and the free ezine are the bait for their fee based subscription services, but you can’t blame them for that. If you also decide to sign up, let me know what you think.

Cash Value Life Insurance

October 30th, 2006

Last night we met once again with our financial advisor. I’ve got to say I’m really liking this situation. It’s great to have someone whose coming around to explain taxes, retirement savings options, and insurance. It’s like having a coach for anything, he keeps us on the ball and continuing to plan our savings.

I learned about something I had never heard of until last night, Cash Value Life Insurance. This appears to be a combination of an insurance policy, mutual fund, and savings account. In this product, you make monthly payments, of say, $125. $25 of this payment goes toward the cost of insurance. Perhaps you can get $250,000 of life insurance for that premium, if your young and in good health. The rest of your payment, $100, goes toward your own account balance. This balance is invested by the insurance company to earn a target rate of return. Hopefully this rate of return is around 8%. At least, that’s what the insurance firm shoots for but does not guarantee. The money that you contribute to this account is post tax money. You are able to withdraw the balance at anytime. I believe that this money also grows tax free. In addition, these funds are not considered when your assets are reviewed for government programs such as tuition assistance for higher education. So to me this seems like a dual purpose vehicle. On the one hand you are getting life insurance. On the other, you are saving for longer term needs such as buying a house or sending the kids to college.

Take my advice for what it’s worth because I have yet to use the product, but it does sound good to me.

“Sun Tzu Was a Sissy”

October 27th, 2006

Sun Tzu Was a Sissy

Conquer Your Enemies, Promote Your Friends, and Wage the Real Art of War

Stanley Bing

ISBN 13: 978-0-06-073478-7

ISBN 10: 0-06073478-7

Sun Tzu Was A Sissy

Bing writes for a real laugh at office politics. He uses classic business ‘art’ to describe things such as “some of the various weapons at your disposal in the average corporate situation, and their respective utilities in warlike corporate situations in which you may routinely find yourself” The image he uses to compare these “weapons” is a fairly bland looking bar graph. The graph is the kind that, if you’re in business, I’m sure you’ve seen many times before. That’s what makes the whole thing funny. It’s a kind of sick satire on the savage nature of business and politics.

 

He’s talking about deciet, sabotage, and systematic aggression as if he was talking about the fine points of a merger or acquisition. It’s quietly hilarious. He discusses the methods for undermining a coworker and graphs the effectiveness over time. It’s hilarious to imagine a meeting between professionals in which they discuss how to effectively attack other businesses, or divisions within their own business, and use charts to explain their opinions of the best method.

 

The sad part of this satire is that Bing’s probably right. There is a lot of infighting, betrayal, sabotaging that happens between people of the same company. Luckily I haven’t come up against this in my career yet. I do feel that If i do I will now be better prepared to handle the situation having read Bing’s book.

Options Seminar at the Waldorf-Astoria

October 27th, 2006

Tonight I went to a seminar at the Waldorf Astoria on 51st and Lexington, New York, NY.  It was a pretty good review of concepts I had already studied.  After listening to Freddie Rick’s Market Essentials there really wasn’t much that surprised me at this session.  Our instructor went over the usual strategies:

  • Bear Call Spread
  • Bear Put Spread
  • Bull Calll Spread
  • Bull Put Spread

and their pros and cons without much fanfare.  I was actually surprised at how fast he went through the strategies.  I have a feeling that most of the people in attendance must have left being either curious for more or scared off.  I think there were only a few people in the crowd that had any real experience with options trading.  About 25% of the class raised their hands when he asked if anyone had traded options before.

He showed an example of the Iron Condor Strategy, which involves two credit spreads, from 1999.  In that year it was possible to use the Iron Condor strategy to collect $1,100 per contract.  Now the average is around $100 per contract.  It appears that the Iron Condor strategy is in some dull days now.  As our instructor said, “If the iron condor isn’t dead, it’s on life support.”  The strategy isn’t nearly as profitable as it used to be.  This is primarily because the volatility we’re experiencing now is at a relative low point, roughly one third of the 1999 figures.  Apparently volatility really increases the premium that can be collected by selling options and thus the value of spreads.  From the other perspective, high volatility makes buying options expensive.  Why?  Because the stock underlying the option could go anywhere in volatile times!

Our instructor also spent some time explaining recent developments in the market as well as potential future changes.  What I thought was really exciting is that options contracts may be quoted in penny increments after the new year.  This is not a definite change yet, but if it happens for any options it would certainly happen for the QQQQ ETF.  This is exciting because a smaller spread between the bid and asking price for an instrument means less draw-down when entering a position.  If the spread is only a penny, the instrument only has to move 2 pennies your direction before you start making money (minus transaction fees of course.  This is much better than having to wait for a 10 cent move in the contract.

Unfortunately he spent a lot of time on the exotic VIX and its associated options.  These options are a little unusual in that the underlying instrument is actually a futures contract rather than the cash VIX index.  This was surprising to learn but really not useful at all.  I would maybe use volatility options if I was an institutional investor, but as your average retail customer, I think I’d be crazy to try them out.  They are more volatile than the most volatile stock.  I might use volatility in my trading decisions, but I don’t think I’ll be using it as a trading vehicle alone.

Another interesting development that he discussed with us was Weekly options.  So far these are only offered on the SPX and OEX instruments.  The strike prices are established each Friday for the following Friday.  They are incredibly short term instruments.  I don’t think I’ll ever buy these because of the extreme time decay that they are subject to, but perhaps I would sell them on the basis of technical analysis.

This seminar was good for a brush up on concepts I had already studied and used lightly.  I also heard of a few new things to boot. It was offered free by the Chicago Board of Options Trade and OptionsXpress and I was glad to attend.  I’d recommend a session like this to someone interested in learning about options.  Perhaps even better, and more indepth, is Freddie Rick’s Market Essentials CD set.

“A Whole New Mind” by Daniel H. Pink

October 18th, 2006

A Whole New Mind

Why Right Brainers Will Rule the Future

 

Daniel H. Pink

 

ISBN 1-59448-171-7

 

I love this book. I am a programmer. I work in the financial district of New York City’s Manhattan. I’m constantly flexing my left brain muscle with “L-Directed” thinking. Pink’s book has some real meaning for a guy like me.

 

 

In the first part of “A Whole New Mind” Pink discusses three big topics: Abundance, Asia, and Automation. Yea yea yea… Haven’t we all read that in “The World Is Flat” by Thomas Friedman? I read Friedman’s book before I got to Pink’s. I can’t say who inspired who or if the books were conceived independently but I can say that the first couple chapter’s in Pink’s ‘Conceptual Age’ felt like a compressed Friedman. Actually that’s a good thing because not everyone wants to pick up Friedman’s 600 page tome. Pink does a good job of getting the facts and the story of global change across. These first 50 pages are essential to someone looking to learn more about globalization and its potential affect on individuals.

 

 

Pink’s Part Two, ‘The Six Senses”, is awesome! As a technical professional I feel a yearning to flex my right brain muscle. I love music & art, but I just don’t make time to enjoy it. I’m not going to guess at the reasons for that, but Pink encourages a guy like me to take the time to learn more about the arts that I love. It’s encouraging to feel like creating or enjoying art is “productive”. Pink discusses the numerous benefits of arts in our lives and even the necessity of becoming more well rounded people. His “Whole New Mind” is a mind that uses both its left and right hemispheres. A whole mind is a mind that exercises analysis and creativity regularly. It’s a mind where logic and empathy coexist.

 

 

So far I’ve only read through the ‘Design’ and ‘Story’ Chapters of the book’s second part, ‘The Six Senses’ but I already feel inspired. Yesterday I made a quick still life sketch at work and I’m planning to visit some of the design museums that he mentioned soon.

 

 

I highly recommend this book!

Teaching Inspiration

October 18th, 2006

It was totally unexpected. I found myself in the basement of the Boston Museum of Science holding the first of 10 daily itineraries for a two week learning experience. I was about to instruct 24 high school sophomores in the virtues of collaboration. Collaboration, I found to be one of the most important skills. There was something about my graduate year of study that brought me to that conclusion, and I felt compelled to relay that message to this kids.

I can’t begin to describe the anxiety I felt in the days before the summer institute. I was responsible for 5 solo lesson plans and several others that I would teach in collaboration with my colleague Justin. I had very little experience teaching high school age students. I didn’t know what to expect. What would the kids think of the lessons we had in store? Would their attitudes be eager, interested, and enthusiastic? Would they be able to make their final presentations successfully? There were so many questions floating around in my head. I had a very hard time falling asleep on that first night in Boston.

We had done so much work to prepare for these 10 days. We worked with several dozen people to pull together all the details on everything from classroom furniture to wireless networks, guest speakers, planetarium shows, and scavenger hunts. We were charged with teaching these students the basics of the amorphous wireless grids, space science, information retrieval, museum exhibit design. These subjects were the substance. They were the goals, the concrete conclusions and hard facts. My goal was something different. I wanted not only to teach these students the concepts of these subjects. I wanted them to leave the museum changed. I wanted them to realize that they have the ability to focus, to learn, and most of all to collaborate to achieve their goals.

These 24 students were the dream team. They came from 3 separate school districts in Massachusetts and were hand picked to participate in the institute. Some students even wrote applications and were interviewed. They came into the museum as three distinct groups with long histories. Each group of students had gone to school together daily. Initially these groups were the defined student relationships, but by the end of the institute they had crossed those borders and founded lasting relationships. In fact some of these student still keep in touch to this day. I am still in touch with the feelings of inspiration I found while watching these students learn and collaborate in the positive environment we created.

The Art Of Forecasting

October 15th, 2006

What does it mean to be a good forecaster? In short, it means that you are right more than you are wrong. That’s the most relaxed and most basic qualification for being able to call yourself a forecaster.

A good forecaster is someone who’s right significantly more than they’re wrong. Being right 80% of the time is a good place to start. So let’s say I’m forecasting the weather for you each night. Each night I tell you whether the following day will be sunny, or cloudy. If I’m right on Monday, Tuesday, Wednesday, and Thursday but get it wrong on Friday I’d be performing with an 80% success rate. Would you employ me as a weather forecaster if I could keep up that kind of performance? I would hope so because 80% accuracy is pretty darn good when you’re essentially telling the future.

Now when I’m wrong, how do we measure how wrong I am? It’s pretty simple when you’re just predicting sunny or cloudy, heads or tails. Most forecasting situations are a little more complicated. Let’s add a little more detail to the previous example and say that instead of just telling you that tomorrow’s weather will be sunny or cloudy I also tell you the expected high temperature. So it’s Sunday night I and I tell you that Monday will be Sunny and the high temperature will be 66 degrees. Monday rolls around and it is Sunny but the high temperature is actually 70 degrees! Whoops! I got the sun forecast but missed the temperature by 4 degrees. I was 100% correct on my sunlight call but only 94% correct on my temperature call. That gives me a solid average of 97% for Monday. Not Bad!

Let’s consider another example. It’s Monday night and I tell you that Tuesday is going to be sunny again, and the high temperature will be 72 degrees. When all is said and done, Tuesday turned out to be a cloudy day and the high was only 51 degrees. Now I’ve really done it. My success in the sunlight call is 0% and I was off by 21 degrees, 30% error in my temperature call. When we average the success percentages of 0% for the sunlight call and 70% for the temperature call we get an overall success rate of 35% for Tuesday. That’s not too great, but every forecaster will have those days. Every forecaster will be wrong. It’s part of the job.

Now I’d like to consider financial forecasting in light of the examples above.

I’ve been trying to understand the stock market for about a year now. I’ve read a bunch of books, looked at a lot of charts, and dabbled in some methods of technical analysis. I’ve learned about reading charts for short term trading, and long term trading as well. On August 14th I signed up for a forecast service which will remain unnamed for this post. Since I started reading their forecasts, they were by and large wrong.

I expect forecasting services to be wrong sometimes, but when I am a customer of the service, I would like to understand what went into the decision making process that lead to an incorrect forecast. I want to know what happened, and why the forecaster thought the way that he did. This is not because I want to see him hung for making a mistake, but I see myself as his student, and I would like to learn how he does what he does by understanding his reasoning. It’s useful to know what reasoning has lead to success and what reasoning has lead to failure. You have to know both sides.

So after reading these forecasts for two months and watching the predictions fail time and time again I wrote a detailed email to the people that run the service.  I cited sentences, phrases, and numbers from their forecasts and calculated the percentage of error they had shown on several occassions. This was all meant to show that I was earnestly trying to understand their work.  I asked what sort of percentage of accuracy they were aiming for and what success rate I should expect as a subscriber.  I also asked what went wrong in their reasoning.

I was very disappointed to see that the only email I recieved was a vague and defensive response cited that they “aim for 100%” accuracy and “all forecasters are wrong sometimes.”  They dropped the ball on that one.  I was expecting better customer service than that.  As a forecaster, when you’re wrong whoops isn’t good enough.

The joy of consulting

September 27th, 2006

How can I help you?
This is the continual question of my profession. I am a computer
scientist by training and a consultant by trade. My employer sells
complex software and service to go along with it. We provide
customization services to make each customer’s system unique as well.
We also provide live support to users of the system.
The software package is immense and has a steep learning curve. It is
my job to understand this software well and my ambition to understand
how it fits in to our customers’ business. I am learning more everyday
about what it takes to deliver a high performance software sysytem to a
customer.

Conscious sacrifice

September 25th, 2006

My work schedule is demanding. The work load has increased recently.  My work day lasts about an hour longer each day, which translates into an hour less at home enjoying the domestic scene. Is it worth it? Is it necessary? Will sacrificing those extra hours now pay off for me and my family in the future?  These are the questions I’m asking myself. I have not yet come to the conclusions. There is no doubt that the extra hours result in extra compensation. In certain ways, that makes our lives easier. At the same time, although I am compensated additionally for the extra hours, I am not as able to keep up with the household chores or get enough rest.  This puts strain on my relationships and health as I become less rested, less energetic, and have less time to get everything done. So how do I find the balance? I expect there to be some amount of sacrifice and toil in my life. From
what I hear, life is not just a walk in the park. Actually it’s quite hard to get by, even in a land of opportunity. So the question really is: how hard is too hard? I don’t want to sacrifice my health, physical or mental, for success and
comfort. I don’t want to sacrifice my realtionships either. Those things are worth much more than a salary. That’s definitely true. At the same time I accept gladly that life is not all peaches and cream. I take my work seriously and work hard to get it done. But how will I know when I am working to hard? I’m guessing it’s like love; when you know you just know. It’s nothing someone can give you a formula for. For the time being I am going to keep on working hard because I don’t think I’ve quite reached that danger point where work and personal life are imbalanced. I’m going to
be conscious of the trade offs and strains that I see forming. If I get too wrapped up in it I hope I’ll see it before it creates problems.

Lunch time crew

September 22nd, 2006

Here’s another picture of the lunchtime crew on the benches at battery
park. It took anither picture like this last spring.