Engineering Professor (EngProf6)
Hybrid Timing Engine of Stocks and Indices
Timing and an Appropriate Investment Vehicle are the Key to Successful Investing:
On November 1, 2006 I officially started on ‘My Journey’ to quickly grow $5K into $1M. Since I started, I focused mainly on credit option spreads. I have traded in 7 different issues (SPY, QQQQ, AKAM, GOOG, ET, STX, and OIH). I have had my ups and I have had my downs. As I write this message on Dec 10 I still have 5K in my account. My trading in the last 5 weeks yielded about 1K of gross profit. Of this, 600 was used to repay a past debt to my broker and about 400 was used to pay commissions. I have been long and I have been short. I’ve made mistakes – the most notable involves OIH and it cost me several K’s. In that case I went against the model.
What Have I Done?:
I have reviewed what I’ve done, and, I’ve concluded that because of my relatively quick trading platform, option spreads are simply too difficult to handle. Let me tell you a bit about option spreads. A spread is created by trading 2 different options simultaneously. Anyone who has traded options knows that the gap between the bid and ask can be substantial. It can be 5% or it can be 20% - who knows. Couple that with the fact that to get into and out of a spread requires trading 2 different contracts. I have found the gaps in pricing too large and the liquidity too small. It has been very difficult to be consistent. It has been frustrating and it has, in several cases, led to a derailment of my strategy.
So what is the bottom line? What do I do next? I can continue to do what I’ve been doing and hope for the best or I can look for another strategy. The status quo – I don’t think it is viable in the way I have been doing it. The fast turnover (i.e. trading) of spreads is too stressful and time consuming. It is not for me at this time. My feeling is that if I continue, I will end up losing. However, before going any further in this discussion, there is one important comment I want to make and that is ‘The model has performed beyond my expectation. I am more confident than ever that it can be used to grow 5K into 1M’. But, I need to modify the strategy.
What Can I Do in the Future?:
What are the possibilities for me (EngProf6) in the future? If I put options trading aside, I am left with stocks and futures. The final choice also requires that one can readily go short as easily as going long. Obviously, one can buy or short a stock. That is a possibility but the rates of change are relatively small. Then, there is the margin to worry about. However, stock trading is, in my mind, definitely viable. If someone can start with say $100K, I think this is a good, safe way of growing one’s wealth (but at a slower rate than what I am looking for).
The other possibility is the futures market. Futures on market indices like the S&P, NASDAQ etc are definitely interesting. Why? Because, the margin is very low. In fact, it is about 6% to initiate a trade. This means that a 1% change in the underlying index can generate a 16% profit (or loss). This, I estimate is comparable to what can be done with spreads. A major advantage of futures is their liquidity and their extended trading hours. The e-minis of the major market indices trade virtually 24 hours a day. To illustrate, let’s consider the S&P500 (I track it as the SPY). The index is about 1410 at this time. The e-mini futures contract is worth 50 times this index (i.e. approx $1410 x 50 = $70,500). So when you buy the e-mini S&P, you are ‘buying’ the equivalent of $70K of the corresponding basket of stocks. You actually haven’t bought anything – it’s like options – you have bought into an agreement. If the underlying index moves 1% (i.e. the S&P moves 14 points) you have made $700 (i.e. the agreement is worth $700 more). What is also interesting is that the amount you made (or lost) is credited (or debited) from your account each day. You don’t need to trade the contract to realize the gain (or loss).
The S&P e-mini trades how many contracts a day, you ask. Let’s take a round number – 2 million contracts. Remember, you need a minimum of $4K to get a contract (going long or short is an identical procedure). So the liquidity is tremendous and the spreads between the bid and ask are very small. The tick increments are $0.25. And the commission is typically $5 per contract. Given these facts, I am going to leave the options arena and go into the futures one. I will only follow the major market indices which have e-minis (SPY, QQQQ, DIA and IWM).
I plan to transfer my options account at the end of the Dec expiry to a futures trading account I will be opening at another firm. My Journey will continue; my home page will be transformed. You are welcome to continue following my progress. Moreover, you can use the market indices to time your trades.
As you know, I am an engineering professor that carries out research. What I am doing on the investment front closely parallels what I do in my research. You start a project with objectives and a plan. And then, as the project evolves, one makes modifications because of events that were not anticipated. In the end, the project may very well look quite different from what it looked like at the start. I guess this is now what is unfolding.
When I started, my preoccupation was the model. In fact it seemed to grab many people’s attention. Now, I am not concerned with the model as much as I am with how to execute the moves that are generated by the model. So with that in mind, I am on the verge of moving to the trading of stock index futures. That is my revised plan. My objective remains unchanged – quickly grow $5K into $1 million.
Stay tuned for updates. Remember, your opinions and comments and ideas are always most definitely welcomed. And, Good Luck to All.
e-mail me at: email@example.com