ARCHIVED COMMENTARY
Trading Against
Savvy Machines
For edition of October 18, 2007
Even with a crystal ball it would be tough to make money trading options on such popular vehicles as the Diamonds and QQQQs. That’s because, when you are buying puts and calls on these securities, you are trading mainly against very smart machines, not people. If you were to monitor price fluctuations in QQQQ and Diamond (DIA) puts and calls very closely for a day, you might come away with the impression that they were being jockeyed around by traders who could see a minute or two into the future. In fact, a computer algorithm is doing the work, and it can run circles around most human traders.
(Click on chart to enlarge)
To take an example, let’s suppose you are trading DIA options on your desktop PC and notice there are a bunch of November 138 calls offered at 2.96 with the underlying trading at 138.27. Let’s also assume there’s trendline resistance at exactly 138.27, and that if the Diamonds exceed that price by even a penny, you are planning to “buy the breakout” by pouncing on the Nov 138 calls. The breakout occurs, and you react with lightning speed, hitting the “buy call options” button on your computer a split second after the 138.28 print. Alas, the options are no longer offered at 2.96, but for 3.01 – too pricey to offer any edge.
How Smart Art They?
Actually, the neural network program that removed the 2.96 offer from harm’s way (harm for the seller, that is) is far more sophisticated, even, than that. Consider another scenario: You were planning to jump on the Nov 138 calls if there was bullish news on the tape concerning some speech Treasury Secretary Paulson was giving at that moment at a Kiwanis luncheon in Los Angeles. But even if you had a friend stationed at the luncheon, reporting details in real time via a cell phone, you would discover that the bids and offers for Nov 138 calls would shift higher seconds before Paulson’s bullish words hit the tape.
Today’s commentary was prompted by our experience yesterday trading the Diamonds. They had been falling steadily all morning and were approaching 138.50 when I disseminated a Hidden Pivot bottoming target at 137.79 to those in the chat room. I suggested buying Nov 138 calls for about 2.60 if the forecast panned out. It did, and the Diamonds staged a very tradable rally after making a low just five cents beneath the predicted 137.79. However, when they were banging out a 137.74 low for the day, the November 138 calls never traded for less than 2.77, nor were they even offered for less than 2.72. We didn’t pay up for them simply because it is impossible to trade options profitably if you give up even a penny or two of “edge” on your trades.
Deck Stacked
To illustrate how heavily the deck is stacked against the retail customer, note that if you had paid 2.72 offer for the calls, you could not have sold them on the bid for that much until the underlying Diamonds had rallied 25 cents.
Bottom line: Options trading in the most popular vehicles is an extremely tough game to beat. If you cannot buy options on the bid and sell them on the offer, you shouldn’t play. And if the competition seems to be breaking this rule, paying up for options, assume it is only because they have already sold options against them for more than they were worth.
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Be Your Own Guru
Take a look at the chart below. See anything that might have led you to predict that December Crude would make a very tradable top at 87.97? Would you like to learn how to forecast stocks and commodities as accurately yourself? Are you tired of having some guru tell you what to do? If so, then read on.
Now, Rick’s Picks has been predicting $100-a-barrel oil for quite a while. Even so, and bullish as we are on crude, we don’t always trade it from the long side. Consider the following short recommendation that went out to subscribers the other night. It is based on Hidden Pivot analysis: “[My rally target for December Crude] is 87.97, and you can short there with a 14-cent stop-loss… Since the correction could be shallow and brief, don't be too ambitious about profit-taking if the opportunity to do so should arise.”
Now take a look at the chart again and see how things played out:
A lucky coincidence? Hardly. Hidden Pivot targets get hit so precisely so much of the time that it couldn’t possibly be due to blind luck. Moreover, visit the Rick’s Picks chat room and you'll discover that the basics of the Hidden Pivot Method can be learned by anyone in just a few hours. But don’t take my word for it. Ask some of the regulars who have taken the Hidden Pivot seminar. They will tell you not only that it's possible for “amateurs” to forecast stocks and commodities with astounding accuracy, but that it's great fun! And why wouldn't it be, if it freed you from ever having to ask an "expert" what he thinks about a certain stock, or about "the market". Who cares what he thinks when you can learn how to do it yourself – to do it better, even, than quite a few gurus who do it for a living.
If you’ve heard about this course but could not attend earlier sessions in New York, Sydney, San Francisco, Denver, Vancouver and other cities where it has been offered, there is good news: It will be offered online the first weekend in November. And there’s an additional incentive that has never been available until now: Register for November 3-4 class and you will have immediate, 24-hour access to the full, recorded version of the course. I will also ship you a copy of the 109-page course manual as soon as I’ve heard from you. And if you are not currently a subscriber to Rick’s Picks and sign up by October 21, I’ll throw in a free month’s subscription – a $42 value.
Only 14 Seats
Don’t delay if you’ve been thinking of taking this seminar, since there are only fourteen seats available. It could fill up quickly, and there are no other classes scheduled at this time.
For your convenience, the seminar will be held on Saturday and Sunday morning, November 3-4, in two three-hour segments. In addition, after you’ve had some time try out your new skills, you’ll have a chance to query me directly during an open-ended, two-hour chart session online.
The Hidden Pivot course could be the best opportunity you will have to learn how to forecast as accurately and confidently as paid gurus. It doesn’t take a PhD to master the technique either, since you’ll be taught how to look at stock charts as “art,” rather than in the conventional way.
Training Manual & Recordings
Here’s what you’ll get if you sign up now:
· The two-day, six-hour Hidden Pivot course and training manual
· A two-hour Q&A follow-up once you’ve had time to try the system
· Free “continuing education” classes online
· Free 24-hour access to recorded seminars, tutorials and Q&A sessions
· A free-month’s subscription, with access to the Rick’s Pick chat room during market hours
· Access to thousands of annotated charts in the paid-subscriber archive
· Access to the Educational Pages, with simple but effective strategies for risk management and market timing
· Rick’s daily Touts, including detailed trading recommendation for stocks, indexes, futures and options
· Dave McDonough’s “Excellent Hidden Pivot Calculator”
· Rick’s idiosyncratic put-and-call advice, which distills more than 30 years of trading experience down to a few simple essentials
Sign up now and receive all of these benefits and more for just $960! To go directly to the registration page, click here , then on the “Upcoming” tab. If you would like more information about the Hidden Pivot Method, or about upcoming sessions, including a possible on-site session in Florida this winter, please click here.
Hope to see you in class!
