Five Tips for a Fluxy Tape
There's something very powerful in being the master of your own domain.
Mick Jagger once sang that time was on his side. For many market players, those loose lips are sinking ships.
A few short years ago, traders could make a nice chunk of change with daily time horizons. Stocks would move dollars at a time as a function of systematic influences and free market forces. The transition to decimal spreads, along with the massive injection of liquidity, has morphed those daily dollars into frustrating dimes. And what once was a volatile profession has shifted to a docile progression.
One of our Ten Trading Commandments is that we must adapt our style to the market. Unfortunately, alotta traders have been reactive in their approach, increasing the size of their bets and, in many cases, the use of leverage to offset the muted movement of their underlying vehicles. That dynamic is called "compression" and it is ever-present, resting dormant until awoken like a sleeping giant.
With this landscape in mind, I wanted to share five proactive thoughts on how to properly position ourselves in the current marketplace.
Respect the Compression
The greatest trick the Devil ever pulled was convincing the world he didn't exist. The same can be said for the current state of volatility. We see complacency manifesting in many ways, including the proliferation of "income funds" that sell naked premium (options) to collect small sums of money. We spoke of the proverbial dimes earlier and these funds--and, by extension, those that invest in them--are attempting to pick them up in front of a bulldozer.
I started my career trading derivatives at Morgan Stanley in 1991. Through the years, I've shifted my positioning depending on the implied volatility of the options I traded. While I typically traded "long gamma" (long options), I've never shied away from selling premium that was "fat" or inflated. Suffice to say that it's been quite some time since I've sold a call or a put "to open."
That style has become the "in vogue" thing to do and, as is typically the case on Wall Street, folks have piled on in size. It'll work until it doesn't but, when it doesn't--when a pebble hits the pond--there are going to be a lot of funds unprepared for the verberberating ripples. Don't fall prey to the sirens of "free money." There is no such thing. Not on Wall Street. Not anywhere.
Stick With What You Know or Learn Something New
The commodity complex has become the hot spot for new money for two reasons. One, there is merit to the notion that secular trends support "stuff" we need to feed, energize and educate the world. I agree with that thesis in lockstep and it's the primary reason I've weighted my book to energy and metals and away from high multiple tech and financials.
The other reason, quite simply, is that that's where the action is. Fund managers have become frustrated with the slow meander of traditional leadership sectors and chosen instead to follow the volatility. Therein lies the inherent risk. When you're trading a complex because other people are, chances are they know more than you do. Understand the product you're trading before you assume risk. There is nothing wrong with shifting your focus. Just be educated, aware and in tune with the elements that affect the price action.
Elongate Your Time Horizon and Don't Allow Short-Term Noise to Shake Your Poise
My good friend Jeff Saut from Raymond James likes to say that where you stand is a function of where you sit. For many years and through many tapes, I was one of the more active traders on the Street. If a bellwether so much as blinked, I had multiple orders hitting the market in a matter of seconds. Different tapes call for different approaches, however, and I no longer hang on every word from the FOMC or each nuance on an earnings call.
With upwards of 9000 hedge funds in the marketplace, many traditional catalysts have the edge of a marble. Individual traders will have a tough time competing with the gorillas in our midst so I would suggest letting them stand in a circle and shoot each other. If you've done your homework and remain disciplined with your risk, taking a step back and a deep breath should benefit your portfolio once the dust settles. Just as active traders need not worry about big picture conundrums, longer-term investors shouldn't get caught up in daily noise.
When in Doubt, Wait it Out
The ability not to trade is just as important as trading ability. If I had a dime for every dime I've lost betting as a function of boredom, I would be one happy camper. If you don't know, don't go. If you're unsure, trade smaller, or "in between." It's not important to trade every day or make every play. It's only important that you manage your risk and remain selective on your perception of reward. Managing expectations is the first hurdle of this mental exercise. That, and not looking back.
I often offer that opportunities are made up easier than losses. I say that to remind myself not to press or attempt to capture lost moments of financial serendipity. I've come to realize that if I spend my time looking for what will be--rather than at what could have been--the investment of my time and energy is much better spent. Remaining proactive in your patience while staying alert is a tough trick to master. Tough, but profitable.
Just be yourself, Sir. No matter what happens, they can't take that away from you.
I don't know about you, but I take this market thing pretty seriously. For many years, my self-worth was dictated by my net worth which, in turn, was comprised of thousands of daily P&L's. If I saw the ball during the day, my post-market mood was a reflection of that self-confidence. When I whiffed mightily, I beat myself to a bloody pulp, leaving just enough energy to awake at 5:00 AM and do it again.
Having traversed both sides of that bumpy ride, I no longer go to extremes. Regardless of how I perform on any given day, I simply toss the ball back to the mound and jog to the dugout. I won't say that I'm completely balanced--that would be untrue--but my quality of life is no longer Dow dependent. There's something very powerful in being the master of your own domain.
And it begins within.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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