I made a nasty crack here yesterday about Charles Schwab & Co. that should be qualified, since the firm is a very good one that does more things right than most firms, and not just those in the brokerage business. I have elaborated below, in the context of a response to a recent subscriber’s note. He wrote me as follows, under the subject header, A Subscription a Long Time in the Making:

“I first came across a column in the San Francisco Chronicle where at least seven years ago you wrote that prolonged lassitude in the markets often preceded precipitous declines. My wife and I had no money then but began to take notice of your subsequent columns. Early May of this year we noted your pivot point for gold at 710. We watched gold blow by to 730, then drop to 710, only to rise to 720 and drop back to 710. May 15, we sold most of our warrants in Agnico-Eagle at $18 bought at $3 two years ago and took $52k off the table.

Gold’s ‘Inside Battle’

“We then watched with great interest gold's next pivot point at 599. Watched gold sink to 540 then recover to 570 and then yesterday read a Comex pit trader's inside view on what's happening (you probably read it), an anomalous, one-time event out of character with the past market moves, an inside battle between gold longs and central bank commercial shorts (see A Remarkable Development in the Gold Market).

“We just subscribed to [Dr. Kurt] Richebacher's [monthly] letter and in January he had recommended shorting financials. We were looking at leaps on Goldman, Citi, etc. (if they even exist) when this morning we read your comment, ‘..as though we were some schmuck with a Schwab options account etc.’

“We just got off the phone with our Schwab rep (Martha calls him the broker of the apocalypse) and have just subscribed to your newsletter.

Signed,

Darryl & Martha S. --  S.W.S.O.A

(Schmucks With a Schwab Option Account)”

Helping the Little Guy

My response:

First, let me welcome you and your wife aboard as new subscribers. I’m flattered to learn that you’ve been following my rantings and ravings since the days when I freelanced a column to the Sunday San Francisco Examiner. Most Examiner readers must have thought I was a permabear because the column rarely struck an exuberant note, at least not where the economy was concerned. However, my daily predictions at that time in the late, great Black Box Forecasts were quite bullish and nicely in step with the 1990s bull and the dot-com boom.

Concerning my remark about Schwab – that the firm’s option customers are schmucks who can only lose money --  it wasn’t entirely gratuitous, and it could be fairly said  of nearly every other broker in America (the one exception I’m aware of is Benjamin & Jerrold). Let me explain. Years ago, when I traded options as a market maker on the floor of the Pacific Exchange (coincidentally, just a few doors down from Schwab’s headquarters on Sansome Street), I tried to interest Schwab's CEO, Dave Pottruck, in offering contingency-order flexibility to Schwab’s option customers. By that, I mean the following type of order, given to one’s broker: "Bid 2.40 for five July 35 AMZN calls as long as the stock is trading 36.52 or higher."

Turned Me Down

 As far as I'm concerned, and speaking as someone who has been trading options both professionally and as a customer for more than 30 years, if you cannot place such limitations on your orders, you cannot possibly beat the game. Period. Thus, I don’t look at contingency flexibility as a frill, but rather as a necessity – one capable of giving the retail customer a fighting chance to come out ahead. Schwab turned me down, but for reasons that surprised me. They said, not unreasonably, that allowing customers to place contingencies on option orders would dramatically increase their clerical errors, and therefore their costs. They undoubtedly were right about that, but there are ways -- which I explained to them -- that such errors can be held to a minimum. But it went deeper than that: An executive also confided that if Schwab could get out of the option business altogether, they would. He said the only reason they were in it, was because customers expected it of a broker of Schwab's size and stature.

Incidentally, some Rick's Picks readers noticed that I dropped out of the Robbins World Cup Advisors program. Not exactly. I simply stopped doing equity option trades, because, in making those trades myself in real time with real money, I was having difficulty executing on their platform. It employs a RealTick back end, one so clumsy and poorly designed that I often found it necessary to place orders on the phone rather than via much-preferred direct access. Robbins has a terrific program, one that benefits gurus and customers alike, so I’m going to give it another shot, trading commodity futures instead of options. I’ll make an announcement here when I’m ready to return. Truth to tell, though, I’ve been so busy with other projects during the last six months that I haven’t had much time to trade. I’ve just treated myself to a Herman Miller Aeron chair, though, and am hopeful it will make the staying-put-in-one’s-seat challenge of trading easier to surmount.

***

Learn My Secrets

Would you like to be able to forecast trends and price reversals as accurately and confidently as Rick’s Picks? Have you tried other trading systems, only to find them too complicated or otherwise unhelpful? Then don’t miss my Hidden Pivot Seminar this autumn in New York City. Plans are firming for a weekend session on October 14-15, so please let me know via e-mail if you think you might attend.

There will be just one more U.S. seminar offered after that, on the West Coast; and another in Sydney, Australia, but they will likely be the last for a long while. The course includes post-grad mentoring via a chat group that some of my former students have set up. If you’ve been impressed with the accuracy of my forecasts, this is an opportunity you cannot afford to pass up. Let me hear from you soon, since the New York seminar is within a few seats of being sold out.