Three classes

Options gambler
Options speculator
Options strategist

Which are you?

What you see vs. what you get: The options risk curve

You are sitting there admiring your freshly-executed, income-generating options strategy.  What a beautiful risk curve.

You have positive theta (options decay) coming your way from one or more of the following:  calendars, butterflies, short calls, short puts, short verticals, short strangles or short straddles.

Your brokerage platform “Risk Profile” tells you to expect a significant mark-up in your profit-and-loss (P/L) tomorrow.  And an even bigger amount the next day.  Terrific.

Only it never arrives, at least not the next day. Or the next. You may be flat versus the expected gain or you may even have a loss vs. today's P/L.

How can that even happen?    What gives?  Where’s my theta?  Why isn't the market paying me my due?  I did everything “right!”

If you’ve tried a time or two or more to make profits out of options “decay,” you likely have had this unnerving experience, unnerving because one soon learns to distrust the “graphic instrumentation,” a.k.a., the risk curve.  So, we asked some seasoned options pros about this phenomenon:  the difference between what you see and what you get.  Here's what they said:

'OptionSellers.com' Goes Dark After "Catastrophic Loss Event" In NatGas "Rogue Wave" | Zero Hedge

'OptionSellers.com' Goes Dark After "Catastrophic Loss Event" In NatGas "Rogue Wave" | Zero Hedge

Mr. Cordier is a noted author in the field.  Clever turn of the phrase:  "rogue wave."  We had not heard that one before.  But for that "rogue wave".......all would be well.

Traders with even an initial sense of the market know that naked options selling works great --- until it doesn't......then it's not just loss, but catastrophe.....

It's that damnable hubris that brings (us all) down.....we hope every one affected kept their speculative portion of their assets small, and can move on from this debacle....

EXTRAORDINARY COMEdown: Hedge Fund Billionaire Rode the Worst Trade of His Life All the Way Down

Hedge Fund Billionaire Rode the Worst Trade of His Life All the Way Down - Bloomberg

Peter Schiff holds forth: what comes next in 47 words

Likely sequence of events:

1. Bear market;

2. Recession;

3. Deficits explode;

4. Return of ZIRP and QE;

5. Dollar tanks;

6. Gold soars;

7. CPI spikes;

8. Long-term rates rise;

9. Fed. forced to hike rates during recession

10. A financial crisis without stimulus or bailouts!

JP Morgan's Jamie Dimon cautions 10-year Treasury note rate to hit 5 %

JP Morgan's Jamie Dimon cautions 10-year Treasury note rate to hit 5 %

One person's story: a prop trading nightmare

Certainly the internet is the greatest "one thing leads to another" porthole ever designed by the mind of man.

This past weekend we ran into an associate with whom we had lost contact.  That motivated an outreach to another colleague, which turned into an hour-long phone conversation which yielded five or 10 major informational nuggets.  One such:  when queried about selling calendars as a strategy, my counterpart mentioned yet another individual who presented on this theme on an SMB trading site (2013).  (Turns out the presentation was on short butterflies ---- quite the memory and close enough.)

While listening to this presentation, I was led to a book -- One Good Trade -- catchy title, by the founder of the firm that hosted the presentation, and found the following rather remarkable, and sobering, words on Amazon.

Caveat emptor.


Top customer reviews
Michael
3.0 out of 5 stars

My review also describes their shocking Annual Report

April 24, 2014

Format: Hardcover|Verified Purchase

The SMB Training website reveals that "SMB is a division of T3 Trading Group, LLC, a CBSX broker dealer." I worked full-time in a non-finance job, and I traded at home during my personal time. I traded stocks, equity options, and forex before I saw SMB Capital on the second season DVD of Wall Street Warriors. About 16 months later, I bought the book One Good Trade on Amazon. One Good Trade made me believe that proprietary traders had an exciting and lucrative career. The book mentions the high failure rate of traders numerous times, but the book gave me the impression that failure was almost always the trader's fault. I decided to work at T3 Trading Group in Miami, and the experience was different than the environment described in One Good Trade. The combination of my experience and the financial statements reveals how T3 Trading Group really works.

The T3 Trading Group Annual Report (Form X-17A-5) can be downloaded from Edgar on the SEC website. In 2012, 99.89 percent of T3 Trading's revenues came from the monthly fees and the trading fees its proprietary traders paid to the company ($15,106,432). Only 0.106 percent of T3 Trading's revenues came from its share of the trading profits ($16,082). T3 Trading charges its traders for every share they trade. Traders are discouraged from trading a low number of shares per trade even if their trades lose a lot of money and even if they are placing the same number of trades.

T3 Trading charged each of my co-workers about $1,000 a month in trading fees. The $1,000 a month does not include the losses from the trades. On some days traders were profitable, but on most days they were not. Many traders are also charged several monthly fees. Total monthly fees can be as low as $120 a month. After one month at T3 Trading, one unprofitable trader was allowed to double the number of shares he traded ($2,000 a month in trading fees). Some traders may have trading profits that will offset some of the trading fees (and monthly fees). My manager told us on several occasions that many traders deposit additional money when the fees and the trading losses deplete their initial $7,500 capital contribution.

Turnover at T3 Trading is high. The Linked In website profile of CEO Sean Hendelman reveals that T3 Trading has more than 400 proprietary trading jobs. My manager told us that it takes 6 months for traders to become profitable at T3 Trading. If the average trader quits T3 Trading in 6 months, then 800 people held those 400 trading jobs in 2012. In 2012, each of those 800 traders paid T3 Trading $18,883 in monthly fees and trading fees. Some traders may have trading profits that will offset some of the trading fees (and monthly fees).

What are the odds of being a successful trader at T3 Trading Group? In 2012, all of the traders at T3 Trading had $53,607 in trading profits. The traders' share was $37,525 (70%), and T3 Trading's share was $16,082 (30%). It is possible that 799 out of 800 traders received nothing, and one trader received $37,525. It is possible that 798 out of 800 traders received nothing, and two traders received $18,762.50 each (the equivalent of a $9.38 per hour full-time job). It is possible that the top one percent of the 800 traders received $4,690.62 each, and the remaining 792 traders received nothing. No wonder most traders resign in a short period of time.

The T3 Trading website reveals why revenues from the paid training products are not on the T3 Trading Group Annual Report: "T3 Live and T3 Trading Group, LLC are separate, but affiliated companies through common ownership." The T3 Live website advertises two courses that cost $1,997 each. The Virtual Trading Floor costs $200 a month. T3 Live has many paid products. I never purchased any T3 Live training products. My manager's free training classes were vague. My manager's free training materials were skimpy. About two months after I resigned from T3 Trading, T3 Live sent me an email that offered me a yearly subscription to the Virtual Trading Floor for $999.50. I was also offered a package of one course (I had three choices) and one year of private mentoring for $1,199.

There may be proprietary trading firms that offer its traders an exciting and lucrative career. My description of T3 Trading is meant to help people avoid a situation where the fees the traders pay to the company are more important than the profit the traders make. I worked at T3 Trading for only two months, and each of my co-workers traded five times as many shares as I did. One day, I plan on reading One Good Trade again, and I plan on watching SMB Capital on Wall Street Warriors again. Reading the book and watching the DVD will be more interesting to me now that I have experience as a proprietary trader.

Summer reading:

Futures Magazine Weighs in on Bitcoin

Outlook shifting in predictable ways for bitcoin | Futures Magazine

All of the World's Money and Markets in One Visualization

All of the World's Money and Markets in One Visualization

Options Traders Expect Huge Moves in Chesapeake Energy (CHK) Stock

Options Traders Expect Huge Moves in Chesapeake Energy (CHK) Stock

Is gold on the verge of breaking out? - MarketWatch

Fans of the yellow shiny stuff have been wrong since 2011. Buddy Guy sings the blues with a song "Five Long Years," but this has been seven -- count 'em -- long years.

Are things about to change? Some people say yes.



Is gold on the verge of breaking out? - MarketWatch



What do we think?  So many false starts......Wake us when we clear 1500.......