My Friend Made $4,000,000 Trading this Pattern

On Thursday, I spent most of the day with a friend/business colleague discussing trading opportunities. I showed him the following chart which displays the SPY-IVV spread. Both ETFs track the S&P 500 index. The spread is highly co-integrated and stable. On average these ETFs don't deviate more than $0.50 from each other. (I want to thank Aris David for his research on this spread).

My friend took the chart, looked at it for a few seconds, and then told me he made $4,000,000 trading similar spreads for his personal account in 2008. I was stunned.

I asked him how he made all this money trading a few spreads. He answered: they wanted liquidity and I provided it to them 24 hours a day during that period.

When securities that more or less track the same thing deviate in price by this much, you are dealing with a liquidity gap. And there is money to be made by traders willing to provide that liquidity.

Click image to enlarge.

Michael Bigger. Follow me on Twitter and StockTwits.

How to Grow a Second Brain on Twitter

That is exactly right. Believe me, it can be done.  If you think I have gone off the deep end, you can stop reading right away.

When you think about Google and Twitter, think about the following picture:

 

The thing that sets Twitter apart from Google is that Twitter is an open API that connects text, brains, algorithms, and whatever else can be connected to it. That is pretty awesome, isn’t it?

It gets even more awesome when you use Twitter to augment yourself as a trader. How do you use Twitter to augment yourself as a trader, or, in other words, how do you use Twitter to grow a second brain? How do you lift yourself from understanding less to understanding more?

•  Follow people who are better than you are.
•  Follow the money.
•  Follow people who make you money.
•  Follow people who save you money.
•  Follow people who move you forward.
•  Follow people who make you think.
•  Follow people who increase your utility.
•  Follow people who watch your back.
•  Follow humans. Humans on Twitter don’t hide behind fake avatars.

Growing a brain on Twitter is a craft. You start with raw material, which in this case is an abundant supply of brain. Then you shape that sculpture (lists) into the mother of all metacognition machines.

Michael Bigger. Follow me on Twitter and StockTwits.

No Pressure

 Feel no pressure…

•  from the market
•  from the market going up
•  from everyone seeming to be making easy money

You are under no pressure to do anything. Sometimes it is better to sit on your rear end and do nothing.

Michael Bigger. Follow me on Twitter and StockTwits.

How I Publish a Book

In a nutshell, here are some of the steps I followed to publish How Traders Achieve Creative Flow.

1. I constantly explore trading (investing) ideas and methods that have strong profit potential. I usually write about some of them in blog posts. My latest book titled How Traders Achieve Creative Flow (to be released next week) is about Flow, Creativity and increasing your value to infinity.
2. In July 2010, I wrote the blog post titled How Traders Achieve Creative Flow. This post generated a ton of traffic. It resonated with traders. I decided to investigate the topic further and push the idea way beyond the scope of the original post.
3. Then I had to determine what would be in it for the readers. Do I have the skills required to write material that will move readers forward?
4. Then I had to determine what would be in it for me. As Jim Altucher said in this post “I’ve lost money on every book I’ve written.” I am not the type to lose money. I must be compensated in one way or another; gaining augmented knowledge, boosting my reputation, etc. Whatever it is.
5. I committed to do the work. Once I commit, I don’t look back.
6. I filled in the ShipIt booklet developed by Seth Godin.
7. I started writing the material in September 2010.
8. While writing the subject I identified two of my Twitter Relationships that could add value to the book. Sean McLaughlin wrote a chapter about minimalism. Renita Kalhorn created the bonus material titled Into the Flow Zone.
9. I spent the month of January proofreading the material.
10. Kristin Walinski, the editor, finalized the book on 2/4/2011.
11. On 2/6/2011, I sent the material to be transferred from a Word document to a Kindle file to be published globally on the Amazon.com publishing platform.
12. Next week I will send the free copy to financial bloggers for review.
13. Then, I will push the content to Amazion.com, two weeks before my Ship it deadline. ;-)

Our next published work will be about spreads. Stay tuned. 

Michael Bigger. Follow me on Twitter and StockTwits.

Moving Your Value Forward Towards Infinity

Last night, I was checking out some blogs on my Galaxy Tab, and one of the first thoughts that came to my mind was….I am drowning in a sea of information.

Do you feel the same way when trying to empty your Google Reader queue?

Having all this information at your fingertips does not necessarily increase your wealth. In December, I wrote a blog post that explained why that is. My goal was to make you realize that because market participants have not demonstrated a greater ability to gain meaning from more information, the value for traders of the ability and expertise to interpret information goes to infinity. Traders should focus on honing their ability to interpret vast amounts of information instead of trying to get more of it.

The act of writing a blog post helps traders hone their ability to interpret information better. For that reason, the value derived from this exercise is skewed toward the writer of the post much more so than readers. The readers drowned before they could reach the end of their queue. Often, great posts never reach their full potential.

It becomes imperative for traders to adopt methods to harness the abundant information flow and to use flow to move their value forward toward infinity. 

I just completed my second book titled How Traders Achieve Creative Flow with that purpose in mind. The book will be available in about two weeks.

I wrote the book to show you how to use your creative self to exploit abundant information and cheap, ubiquitous technology to innovate your trading game—a game you will crush because you have created it to work to your own advantage.

You are about to take an exciting journey into the fascinating world of creative flow. Stay tuned. 

Michael Bigger. Follow me on Twitter and StockTwits.

Greed, Fear, and Volatility

I enjoyed reading Fred Wilson’s short post about fear and greed. The post can be summarized by the piece hanging behind Fred’s office desk:

Last summer I wrote a post about why the stock market is a great optical illusion. When prices march much higher, realized volatility decreases but embedded instability (potential energy) in the system increases. The opposite is true after a big fall. Realized volatility is high but the embedded stability of the market increases. The post can be summarized by the picture below.

These statements lead us to state the following dualities:

• Perceived instability is potential stability.
• Perceived stability is potential instability.

What works for the investor/trader at the greed/buy part of the cycle are:

• Long stocks.
• Short volatility.
• Short correlation.

What works for the investor/trader at the fear/sell part of the cycle are:

• Short stocks.
• Long volatility.
• Long correlation.

If he allocates capital following what works, he will repeat until broke.

Michael Bigger. Follow me on Twitter and StockTwits.

The Desire to Speculate

Passages from my book In Praise of Speculation!

It is said that the desire to speculate is very strong in the American people. That is why our country has made greater progress than any other country in the world, because progress is the result of speculation. We are not referring merely to stock speculations, but to the word in its broadest sense. Every new undertaking is a speculation.

An inventor speculates on what he is going to invent. Often such speculations result in losses, because many inventors, or would-be-inventors, never accomplish very much. They spend their money, time, and efforts, and probably live years in poverty, and then if the invention is not profitable, they are heavy losers.

It is the same thing with every new business. It is purely a speculation. It is a common saying that 95% of commercial undertakings fail. We do not know if that statement is correct, but there is no question but that the number of failures is very great, which shows the great risk in going into a new undertaking. It is far greater than the risk involved in stock speculating when it is done in accordance with the advice given in this book.

Yet, there would be no progress without speculating of this kind. If those entering a new business would make a careful study of the venture before entering it, and would exercise greater care and judgment in conducting it, the number of failures would be very much less. The same thing is true of stock speculating. The failures in stock speculating are caused mainly by ignorance and greediness. Many people, who would be satisfied with a fair return on their money in a business enterprise, think they ought to make a 100% profit in a few weeks in stock speculation.

It does not pay to take big risks. That is true in stock speculating the same as in any other undertaking. Most speculators are keeping their minds all the time on the possibilities of profit and not thinking about the possibilities of losing.

There is an old saying, and we believe a very true one, that a man who speculates with the idea of getting rich quickly loses all his money quickly, but that the man who speculates with the idea of making a fair return on his money usually gets rich.

Do not suppress your desire to speculate. All progress would stop if people did not speculate. But do not speculate in stocks or in anything else without any knowledge of what you are doing, and try to use as much good judgment and care as possible in all of your transactions. Stock speculating with safety is possible for those who make the effort to be guided by correct principles.

Michael Bigger. Follow me on Twitter and StockTwits.

P.S. Our New book How Traders Achieve Creative Flow will be released shortly (about 2 weeks). Performance Strategist Renita Kalhorn had this to say after reading the rough draft:

I LOVE IT!!!!!!!!!! I always feel smarter after reading something you’ve written. :-)

You have such a cool way of introducing new applications of concepts.

Lots of ideas percolating. Thanks for sharing, and including me!

If you are a blogger, I would be happy to send you a free copy of the material if you promise to write a review (good or bad) about it on your blog. Ping me if you’re interested. A copy of the material will be sent when the book is complete.

Apple, the Levy Flight, and Weekly Options

A while back, Seth Godin wrote a fabulous blog post about a cool mathematical concept called the Levy flight that shows up in nature (Wikipedia: Levy Flight Description).

It also shows up in finance.

A journalist finds an interesting story to write about. Think about Merck and Vioxx. That was big business news, and it stirred up emotions. Many people took a stance onboth side of the issues related to this event. Writing about Vioxx generated good readership and sold advertising. Eventually, readers got bored with the story and moved on. Our journalist had to find other news. The journalist’s path follows a Levy flight from one random walk to a cluster, followed by the same process over and over again, as depicted in the image (Source: Wikipedia).

Or you can think about it this way: the path between each cluster is a stochastic directional vector and the cluster is a manifestation of the cockroach theory. This theory states that if you find a roach in the cupboard, others are usually crawling in the same location. Using Godin’s example, once an animal finds food along its random walk, the animal will rummage in the same area because the likelihood of finding more food is elevated.

The Steve Jobs news has already attracted many truffle diggers (journalists), sending the frequency of Internet messages about Apple to the moon.

If Apple had just entered a typical Levy Flight news cluster, this is how we think things would play out:

• The cluster will persist for months.
• The cluster will attract more truffle diggers. For that reason, more news about the health of Steve Jobs will surface.
• Expect AAPL stock to remain under pressure and volatile until the tension is released.
• The diggers will eventually get bored and move on to the next story. "This too shall pass."
• The decrease in the frequency of news messages will be a good indication of when we are about to exit the cluster.
• A trader might want to initiate a long position at that time.

However, Apple will report earnings tonight, and that will add another dimension to the situation. With everything going on with the stock today, we are going to focus on the options maturing at the end of this week. These options offer a large amount of gamma.

I wrote a similar post about Goldman Sachs in April.

Michael Bigger. Follow me on Twitter and StockTwits.

Taking the Opposite Side of Dragonfly Capital’s Trade

Greg Harmon at Dragonfly Capital wrote a great blog post titled “Playing Games with Activision Blizzard or Take Two Interactive.” I love looking at charts that include an additional dimension than the typical two-dimensional charts. In this case, another stock is added to the mix, which makes things more interesting—or at least spicier.

Based on technical analysis, Harmon reaches the following conclusion:

Trade Idea: Long TTWO against Short ATVI on the move above the top rail, looking for a move to 1.36 in the ratio. Use the 1.07 just below the top rail as a stop.

At Bigger Capital, we would take the opposite side of the trade because our spread software tells us to go Long Activision and Short Take Two. See the software’s output below.

Whose trade ideas will be correct? We both could be right, or we both could be wrong, or one of us could be right and the other one wrong.  It depends on many factors. At Bigger Capital, we do many of these spreads, and what matters to us is to be right overall in our portfolio of spreads, not on one particular trade.

What do you think?

Software Output

• 1 * ATVI - 1 * TTWO two-year spread is 95% co-integrated.
• Current Z score is -2.0.
• The mean of the spread with 1:1 leg ratio is $1.35.
• The current spread is $-0.8.
• The spread is trading below the 30-, 60-, and 90-day moving averages.

Important Notes:

• Hedge ratio is 1.12. To keep things simple, we rounded the ratio to 1; therefore, the leg ratio is just 1:1.
• A Z score below -2.0 is considered an oversold spread. A Z score above 2.0 is considered an overbought spread.
• Buy the spread means go long 1 * ATVI and short 1 * TTWO. Short the spread means go short 1 * ATVI and long 1 * TTWO.

Written by:

Aris David. Follow me on Twitter and StockTwits.

Michael Bigger. Follow me on Twitter and StockTwits.

If You Have Something to Say, Be Brief and Publish it!

Josh Brown wrote a great post titled “Financial Blogging Secrets: Aesthetics.” Regarding the length of a post, he wrote:

If your visitor clicks a link, hits your page and is greeted with a wall of text, that visitor is gone.  No one wants to read something that looks like homework, no matter well written it is. Your first paragraph should never be more than one or two sentences. Each paragraph thereafter should be 3 to 4 sentences maximum. If you're over 500 words for the whole post, you better be writing something important or brilliant, otherwise just stop. The markets are moving and people won't even give your post a chance if it looks unconquerable.

When it comes down to reading books about trading, the same is true: the markets are moving, and people won’t finish them if they look unconquerable.

The end of the era of the two- to three-hundred-page business book is upon us. Publishers have been promoting thick books so they would sell better in a physical space. A thick book gives buyers the perception that they are getting their money’s worth. Who said the meaning of a book can’t be delivered in a shorter format?

For investors and traders, the opportunity cost of reading a fat brick is enormous. How about writing one of these? Ouch.

As publishing moves to digital, I believe the tyranny of the fat brick will end, and it will benefit everyone. How-to books are going to shrink in size to about twenty-five to one hundred pages. Readers will benefit by gaining the same meaning while investing a smaller amount of time reading to gain it. Self-publishing will thrive.

Publishers will continue publishing their fat bricks to satisfy the cravings of the physical stores and their bottom lines. But publishers are not the gatekeepers anymore.

For these reasons, the market for short financial publications is wide open. If you have something important to say, be brief and publish it! Digital publishing platforms make it easy for you to exploit this market with your own awesome work.

My book about creativity, flow, and trading, which will be released in a few weeks, is about 30 pages long. It is jam-packed with information so as not to waste your time.

The time I did not spend wrapping the book in another two hundred pages of coating is better spent interacting with others on liquid networks such as StockTwits and my blog.

Publishers don’t converse with their end customers, but we can!

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