Being Short Regeneron

We will probably jinx ourselves by writing this post, but here we go.  When trading spreads we often worry about one side gapping against us, especially the short side.  That said it seems more often than not we benefit from gaps or sharp stock moves in our spread book.  We began thinking about this Friday afternoon when a stock we were short, Regeneron Pharmaceuticals ($REGN), was halted pending news.  The news was positive, but the stock opened only about 4% higher and eventually traded below yesterday’s close.  I can think of a few examples over the past two months in which we benefitted from a plus or minus 10% move in a stock, including yesterday when Darling International ($DAR), a short of ours, was at one point down 15% on news that the Senate approved an amendment ending ethanol subsidies.

Assuming I don’t have selective memory and I have observed enough data, why is it that we seem to win more than lose from gaps?  I think it has to do with the nature of our methodology.  We are trading spreads based on statistics.  We enter a trade when the spread is a certain number of standard deviations from the mean.  So we are often buying stocks that are trading at historically low values, or selling stocks that are trading at historically high values, or some combination of the two.  So our longs don’t have a lot of room left to fall and our shorts don’t have a lot of room left to soar.  In a book of 50 plus spreads we occasionally take a hit, but so far the gaps have been in our favor.

Written by Norm Winer. Follow me on Twitter and StockTwits.

Trading Education: Techniques or Insight?

I read this passage from Howard Marks’s book titled The Most Important Thing: Uncommon Sense for the Thoughtful Investor:

In my view, that’s the definition of successful investing: doing better than the market and other investors. To accomplish that, you need either good luck or superior insight. Counting on luck isn’t much of a plan, so you’d better concentrate on insight. In basketball they say, “You can’t coach height,” meaning all the coaching in the world won’t make a player taller. It’s almost as hard to teach insight. As with any other art form, some people just understand investing better than others. They have—or manage to acquire—that necessary “trace of wisdom” that Ben Graham so eloquently calls for.

This comment got me thinking about trading education:

• Is trading education useless to a trader who lacks insight?
• How do you teach the art of being insightful?
• For an insightful trader, education is a way to add techniques to the trading toolkit. How much should he pay to acquire something that is widely available?
• If augmenting one's insightfulness is so important, where are all the schools of insight?
• Isn't it disappointing to rarely see the word “insight” in most education marketing material?
• Are we thinking about education in a Newtonian kind of way (Industrial Age-Euclidian-Time space) and missing what education could be in an insight-Internet-time-augmented human’s space?
• Is the cost of learning techniques fast approaching zero and the value of insight increasing to infinity?
• What is trading education’s adjacent possible?

Help me clarify my thoughts on the subject.

Written by Michael Bigger. Follow me on Twitter and StockTwits.

P.S. I want to thank Todd Sullivan for introducing me to Howard marks' book

Howard Marks, The Most Important Thing: Uncommon Sense for the Thoughtful Investor (New York: Columbia University Press, 2011), Kindle edition, 2.

Winning and Losing

I recently saw a tweet by @FledglingTrader that I thought was very interesting:

“I’ll forget about the Miami Heat loss, just like I forget when my stop-loss is hit.  It’s all part of the game”

The reason I found it so interesting is because it is so difficult (yet so important) to move past our losses in life and in trading so that we can focus on our wins.  It is so common to beat yourself up about a loss, revisiting it and focusing on it.  “How could I not see that I was wrong early on?  Why did I not close the position sooner?”  When we look back at the day, we tend to agonize about our losses rather than celebrate our wins.

Of course, there is something to be learned from our mistakes.  But we would learn so much more if we spent as much time learning from our successes as we do from our mistakes.

If your system is advantaged, you can expect to have some wins and some losses as part of the head and tail equation (slightly skewed). Use both to improve your system

What was your biggest win today?

Written by Jennifer Galperin. Follow me on Twitter and StockTwits.

Licking Our Wounds

We decided to unwind our short $GLD-$GDX spread this week. We first went short on the spread in April and have averaged down a couple of times since as the spread continued to climb. The spread seemed to finally turn around at the end of May before turning sharply higher again the past week. What do you do in a situation like this? Add more? Unwind all or part? Buy more $GDX?

We’re not sure there is one right answer, but we can tell you why we chose to unwind. We felt that something has obviously changed in the market sentiment regarding the mining stocks since we put on the spread. Gold has held its own the past two months as other commodities sold off, but the gold mining stocks haven’t performed well. This doesn’t feel like a short-term liquidity gap. Also, overall stock market sentiment seems bearish, something that won’t help the mining stocks. Lastly, although $GLD-$GDX is trading at the highest level since the financial crisis, there is no reason why it won’t continue to grow higher to crisis levels. And that would mean additional losses. So we unwind now, lick our wounds, and perhaps return later in a stronger position.

Written by Norm Winer. Follow me on Twitter and StockTwits.

The Season Invariant Professional Trader

Mike Bellafiore wrote a great post about the unprofessional summer trader. You can read it here.

Every post that makes me think hard is a heck of a great post in my book. Mike’s post is awesome and obviously his recipes are working wonderfully for his firm.

At Bigger Capital, we are using a different approach to trading. We define our trading space not as humans operating in a 3 dimensional space in New York, facing their terminals all day long. We are after something else.

We are looking for the best brains we can find on a global basis. Our business is to empower these potential traders to create trading systems that scale; systems that do not require the creator to be present in front of a terminal all day long. We incorporate these traders’ insights into our global algorithmic trading system. Their brains become the algorithm and vice versa. Think of it as a virtual augmented brain. We define our trading space this way.

We have no patience for the common wisdoms permeating Wall Street firms. We are agnostic to the life style of our traders. Some of them have full time jobs, one of them is a very busy mother and she works from home.

Our requisite is that they be very smart, creative, and that they contribute in awesome ways to make our vision a reality.

One of our traders is somewhere in Europe on vacation. His algorithm, the output of his neurons, is hard at work without his presence. That is how we want things to operate around here.

If I go kiteboarding this afternoon, I will most likely experience coming down a big wave on a strapless surfboard, with the kite high in the sky. At that precise moment I will be experiencing ultimate flow; the balance between water, air, speed, me, transcendence, and so forth. I become one with nature and away from the markets I often stumble on some wonderful investing and trading insights. These activities also define who we are as traders.

Thoughts?

Written by Michael Bigger. Follow me on Twitter and StockTwits.

The Art of Becoming a Better Trader

I have told the following story in a few blog posts.

When I traded single stock derivatives at D.E. Shaw, my boss traded S&P options and he made money consistently though he took very little risk. He was a trading magician. He knew his options market, especially the S&P, and he knew how to trade spreads. He constantly traded in and out, squeezing juice out of the lemon. The lemon never ran out of juice! It was a wonderful thing—a winning trading method.

He started his career trading options for O’Connor & Associates, and then worked for Swiss Bank before joining D.E. Shaw. Both of these were great trading houses at the time.

Most of the best traders I have met, trade spreads. They spread different options, stocks versus stocks, indices, stocks against indices, etc. The number of combinations is endless. They are good at identifying pockets of value amongst the securities they trade and they rotate their inventory to take advantage of these discrepancies with no net increase in market exposure.

Gaining exposure to spread trading can help you become a much better trader. At a minimum asking: What else can we trade against this? Or; Can I get this exposure at a more advantaged level? The answers to these questions will augment your thinking about extracting more value out of the system.

When you start looking at the trading world from the point of view of trading a security against another one, you will:

• Analyze the economics of both legs.
• Hone your ability to identify value within the set.
• Remove some of the market noise from the equation.
• Establish a better basis for comparison and analysis.
• Investigate new areas for exploration.
• Understand the meaning of “hedge”, of “elastic forces”, “Brownian motion”, "half life", "Intersection of self influencing stochastic processes", and so forth.
• Think in terms of capital efficiency and velocity.
• Discover powerful trading patterns not visible using traditional charting methods.

Does this make sense to you? Did you learn anything? We are putting the final touches on our spread trading educational program. The program will introduce trading concepts you have never heard before. Stay tuned.

Written by Michael Bigger. Follow me on Twitter and StockTwits.

Brain Synchronization

To the people who bought my book How Traders Achieve Creative Flow; brain syncing should be thought of as the sixth habit of highly creative traders.

I recently received an e-mail from Amazon.com ($AMZN) stating that Kipp Poe Speicherstarted following me on kindle.amazon.com. According to Twitter, Kipp is an author, independent filmmaker, and a dreamer. Kipp follows me on Twitter and vice-versa.

From now on, every time I highlight and take notes in a Kindle book, Kipp will have access to this information.

Now imagine if I could follow George Soros on Kindle. It would be a different game, wouldn’t it? If Soros highlights a passage and writes notes in a book about trading, I should pay attention because the information could lead to powerful insights about trading. I could access Soros’s brain and his insights in almost real time. You can’t beat that.

Wouldn’t it also be great to access Einstein thinking as he read physics books a few decades ago?

This process of exchanging sophisticated thinking with minimal friction is what I call brain synchronization. You can sync your brain to the insights or ideas of people capable of elevating you. This powerful idea will radically change the processes we use to acquire knowledge.

There is a lot of information on social media platforms right now, but most of it is not intelligent enough to elevate you. It buries you.

In my opinion, some intelligent information will gravitate to the written words in electronic books that will be social-media enabled to facilitate brain synchronization. Trading insights are better digested while reading peacefully in solitude.

Amazon.com$AMZN is the company that is making this a reality as we speak. It will be truly awesome the day Amazon.com pushes this information from people I follow to my Kindle on a daily basis.

I want to drink from that fountain of knowledge and insights. How about you?

From now on, I will be posting trading insights derived from reading awesome trading/investing books under the Twitter hashtag #tradinginsight.

Written by Michael Bigger. Follow me on Twitter and StockTwits.

One of Our Favorite Spreads

It was a quiet week in spread trading for us.  The market seemed to be moving back in forth in a narrow range.  The only spread we follow that made some interesting moves was $SPY-$IWM.  And some of these moves occurred after market hours.  On Monday morning, pre-market, we sold 8 $SPY and bought 13 $IWM for a total of -9.7 per spread to unwind a position.  The spread closed that day at -4.25.  When it made a sharp move after hours, we decided to unwind some more at a level of -1.73.  That’s a decent size move for this spread to cover after hours.  By Wednesday the spread moved sharply again after the close.  The closing price was -7.89 and we were able to buy some back for -10.33.  We’re really not sure what’s driving these moves other than a lack of liquidity.  You can be certain though we’ll have orders out there again this week to take advantage of such sudden moves.

With the Market selling off hard this morning, we will be trading the heck out of this spread.

Written by Norm Winer. Follow me on Twitter and StockTwits.

You Are a Truffle

Imagine a field named Greek Gyros and renowned for the truffles lying at the roots of its every tree. Hundreds of pigs are hard at work trying to dig for the bounty.

Beside this field is another one named LinkedIn($LNKD), supposedly renowned for its truffles as well.

After a few weeks of hard work, the pigs have exhausted Greek Gyros of its truffles. The pigs are getting bored with Greek Gyros, so they decide to migrate to LinkedIn.

The behavior of the pigs migration from one source of food to the next is best described by a stochastic process called a Levy Flight Brownian Motion.

The Levy Flight is a great model to use to model the behavior of media. In our example the pigs are acting not differently than journalists, bloggers (myself included), etc. The food in this case is your attention. Got ya little truffle!

At Bigger Capital, we think there are three stochastic spaces of importance (there must be more than 3) working in concert to affect stock prices:

1. The intrinsic value stochastic process. Internal dynamics.
2. The stock price stochastic process. The market.
3. The media Levy Flight. The Media.
4. And so forth.

Observing how each component is affecting the other is a beautiful market melody. Figuring out how to incorporate these dynamics into an algorithm is our challenge.

You can find out more about Levy Flights right here.

Written by Michael Bigger, author of How Traders Achieve Creative Flow.

P.S. If you are a scientist that has an interest in working on concepts such as the Levy Flight, you might be interested in joining our Creative Space.

The Knowledgeable Know Nothing

The beauty of learning Physics in University was that I quickly realized I knew nothing. And I still do.

In addition, Physics knowledge is a skill set well worth having if you think about it in relation to how you compete against your peers despite not knowing much at all. Physics knowledge opens your mind to understanding the essence of a concept and experimenting with it.

In trading, the advantage of this “knowledgeable know nothing” position is that it combines the humility of realizing you know nothing with a terrific inquisitive skill set.

Maybe the Warren Buffet “Too hard to do” concept has something to do with being knowledgeable and knowing you know nothing.

Written by Michael Bigger, author of How Traders Achieve Creative Flow.