Tag Archives | bill luby

What other bloggers are saying

New Volatility Products

Bill Luby, of VIX and More, responding to my question:

Volatility has become a quagmire of products. I like your idea of taking advantage of opportunities that you see, but I don't have the time or patience to dip a toe into this pool. Is that a big mistake?

"I am a strong proponent of only trading what you are comfortable with and know the intricacies of. Unfortunately, these VIX-based ETPs require a fair amount of study to sort out how and when they should be applied. So in the generic sense, I'd say these are not essential products to the random investor.

Ultimately I think the VIX ETNs are going to be best utilized by short-term traders making speculative plays. They also have a place in the portfolios of investors who are looking to hedge their holdings against volatility. Now that a new generation of products are being unveiled, I think the potential for pairs trades in this space has just increased exponentially. I'm not sure how much I am going to get into this, but the opportunities here for the serious and determined student of volatility ETPs are very substantial, IMHO."

 

Leveraged ETFs

Jared Woodard of CondorOptions on leveraged ETFs:

"When leveraged and inverse ETFs were first launched, many investors weren’t aware of the negative effects that daily rebalancing would have on the long-term performance of those ETFs relative to their benchmarks. Those potential problems are now more widely known, and coverage of leveraged and inverse products often includes the advice that they are best used as trading vehicles rather than investment products…

There’s a larger point to be made here: the complexity of modern financial products clearly outstrips the ability of investors to understand them, even when relatively “sophisticated” (e.g. the kinds of people willing and able to trade inverse/leveraged products) and are presented with proper disclosures."

Jared quotes research suggesting that the message still hasn’t gotten through:

"We find that many investors hold their leveraged ETFs for very long periods, at times longer than three months. Further, we calculate the shortfall of such a behavior compared to creating the leverage in a margin account, is that some ETF investors lose up to 3% of their original investment in just a few weeks, the equivalent of a 50% annualized return. This indicates that investors do not fully understand the risks associated with inappropriately using leveraged and inverse ETFs as long-term investments."

MDW: I recognize that option strategies are attractive when owning ETFs.  Please don't own leveraged ETFs.

 

Technical Analysis

I don't use TA, but this advice from SMB Training is priceless:  [hat tip Derek]

"Don’t trust what you read or what you have been taught.  You have the same information that the authors did (price data: raw numbers and charts) and two eyes!  You can, and must, do the research for yourself.  Look at 500 examples of support levels on all timeframes and draw your own conclusions.  What you verify, and what you learn, from this process will be so much more useful to you than what you read in a book."

The age of viral information by Rick Bookstaber

"Information is moving from being the bedrock of market efficiency to a source of crisis…

The greatest concern lies in inconsequential information going viral. For those in the market who are on top of the news and its implications, the question no longer is simply one of when others will finally get around to looking at the information and see that it is important. It is also a question of whether something irrelevant will catch the fancy of the crowd…

The new, viral world means more surprises and more volatility; and not because of market shocks precipitated by content, but because of the randomness in what might happen to catch on and reverberate through the internet."

 

The Insanity of Bailouts: Barry Ritholtz offers this (The full post contains much more):

"What is more important than survival?  On planet Earth, nothing. The most basic rule of life is SURVIVE.

Entities that are maladaptive — corporations, nonprofits, governments — eventually succumb to their own mortality and collapse. This is as it should be.

This is especially true when it comes to financial firms — banks, insurers, investment houses — whose prime responsibility is identifying potential reward and managing risk. The failure of survival raises a compelling question: Why should firms that fail their most basic charge — survival — be bailed out? If on their own they are too incompetent to merely continue to exist, what other manner of disasters live within their balance sheets, legal obligations, managerial skill sets?

A firm that is so reckless and irresponsible as to have put its own survival at risk is not only maladaptive — it has failed its most basic duty."

860

Merry Christmas to all

Happy New Year!

 

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Trader Education: Essay by Bill Luby

This blog is devoted to options education.  I recognize that other bloggers emphasize education and I'll occasionally share some thoughts from these bloggers.

A couple of days ago, Bill Luby (VIX and More) published a piece that had already appeared in Expiring Monthly magazine (May 2010), and I'm sharing it with Options for Rookies readers.


Do
you remember from your school days those students who, when confronted
with a complex issue, would acquire a look on their faces somewhere
between consternation and dread, immediately thrust a waving hand up
into the air and blurt out in a worried voice, “Do we have to know this
for the test?” I can be fairly sure that none of these people ended up
as successful traders.

One only has to look at the history of
hiring patterns at Wall Street firms to get a sense of the evolution of
thinking about how to develop a successful trader. For many years, the
model for aspiring traders was considered to be a genteel Ivy League
education. Over time, Wall Street firms began to favor graduates with a
more humble socioeconomic pedigree who were considered hungry, hard
working and highly motivated to prove something to the world. In more
recent years, we have seen Wall Street seek out physicists and those
with exceptional quantitative skills. Lately, a desire for poker skills
has also come into play.

As I see it, all traders are ultimately
self-taught. There are no required classes, readings, homework
assignments or even a syllabus with recommendations. Tests are
administered on a daily basis, frequently with multiple tests on the
same day. Worst of all, everyone is graded on an unfavorable curve in
which there are more Fs than As.

Against this backdrop,
education counts, but skill and experience count even more. An
insatiable curiosity helps, as does a willingness to explore unfamiliar
territory. Great trades, insights and strategies present themselves in
somewhat random fashion and, as Louis Pasteur observed, “Chance favors
the prepared mind.”

But what kind of preparation is ideal?
Malcolm Gladwell [in 'Outliers''] asserts that 10,000 hours of experience is a
prerequisite for greatness in almost any field. In a normal career, that
level of commitment usually translates to five years, but on Wall
Street, 10,000 hours of experience can be crammed into 3–4 years. Of
course, all hours are not created equal. A trader’s capacity to
distinguish between random events and meaningful patterns is important
to establish a solid trajectory of growth and development.

For
my personal education process, unlearning was more important than
learning. My formal schooling consisted of an undergraduate degree in
political science and a traditional MBA program. After two decades of
business strategy consulting experience deeply rooted in fundamental
analysis, I was ill-equipped to excel in a short-term trading time
frame. In order to embrace technical analysis, I first had to jettison
my fundamental perspective on investments and build a new foundation
based on technical analysis and market sentiment.

In my opinion,
the best way to approach trading is to consider the educational process
to be a lifelong endeavor, crossing as many multi-disciplinary
boundaries as can be digested. In a way, I like to think of the
foundation of trading success as building a large idea stew and
developing an eye for spotting high potential new ideas. The trick is to
have the right breadth and depth of knowledge so that when one stumbles
on the next great strategy, it can be easily identified, captured and
developed. Call it opportunistic research and development, if you will.

As
luck would have it, some of the most successful trading strategies I
employ are based on areas in which I had limited knowledge when I first
encountered them. No matter how well things are going, I take the
approach that I never have the luxury of being satisfied with the status
quo and need to embrace the idea of getting out of my comfort zone. In
trading and in life, it pays to constantly refresh the pipeline of new
ideas and continue to tinker with them, because you never know what will
be on tomorrow’s test.


As options traders, there are some differences in our approach (longer holding period is the most obvious). However, all traders have some traits in common and Bill's story applies to us as well.

795

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