In-Cog-Nito

Go Freddie

by

A friend of mine Fred Schoeneman wrote a good post at his blog. Pretty funny!

“For those of you who haven’t been enlisted swine, officers aren’t always like Clancy writes them. They aren’t wooden, super-patriotic, whipsmart, selfless, barrel-chested or even particularly brave. The guys from West Point were smart but arrogant; and the guys from ROTC were dumb and arrogant, even though they were supposed to be more laid back. Most of them were just cheese, nothing like Jack Ryan.

Jack Ryan is the kind of character that a former insurance salesman who has never been in the military would have created. And he was. Jack Ryan is total pornography. If you don’t believe me, go check out Rainbow Coalition Six. I did. It was a total blowjob of a book, about a politically correct commando team; it was so bad I couldn’t finish the first chapter. I had to put it down and pick up one of Ann Rice’s vampire novels. Yeah, Lestat is so sexy. Goth Porn gets my juices flowing.”

Until next time

by

Ok, end of experiment. I lost $350 on it and I’ll call it a day. I talked it over with my wife, and I don’t think it’s the right time for me to be going gung ho in the market. I tend to take big risks, and I’m not completely comfortable unless I do push it to the edge. And with a kid on the way, the edge is not where I should be. Sorry for the buildup and let down. Until next time buddy… Good fortune with your trading.

Just peachy

by

David at Tradingmarkets.com was nice enough to set me up with a free account to use at their trading site in exchange for mentioning them if I use their ideas. Nice trade I thought, Thanks Dave. It’ll be interesting to see what they have to offer. From the looks of it, it’s oriented towards short term traders, which sometimes I am. The thing to remember with news sites is that the most important factor is the filter in your head. Take the good, chuck the bad. Easier said then done, but nice to keep in mind nonetheless. There are plenty of investment ideas out there, the key is to know how to make use of them.

The portfolio performed fairly well today, with the long Amazon/short Overstock pair doing what they’re supposed to do. Amazon is down 2.2% while Overstock is down 5.5% for a net gain of 3.3%. Dollar wise, the OSTK short position is a little bigger than the AMZN long position, so it’s a nice bonus. Ideally you want pairs to make money in any market. You give up some of the upside on up days to hedge against ugly days like today. Overall, the portfolio is up $107.50 including all commission costs (we’re rich!).

Amazon seems to be keeping above its support I charted out yesterday. Hopefully it will hold.

According to the prospectus, Overstock will distribute shares to the bidders in its secondary auction on May 18, which is tomorrow. They didn’t mention a time frame, however, if they handle it like other secondaries it should be during the trading day.

The thing to watch is of course how the trading progresses after the secondary. This is where that Family Feud analogy comes into play. What do the bidders on the secondary do with the stock after they receive it? Do they flip it at the open? Do they keep it on and hope for the best?

It’s an academic exercise, which is to say it’s useful until the shooting starts. But it’s always fun to play out scenarios. Since I have a vested interest (I’m short OSTK), obviously I play out the ideal scenario first. As of close today, the bidders of the secondary are in the money. OSTK closed at $31.04 today. The secondary is priced at $30.50. Flip it at today’s closing price, and you have a free 54 cents courtesy of W.R. Hambrecht & Co. Ideally they will be nervous. The market is topsy turvy, and that 54 cents instant profit starts to look not too bad compared to the red on their screens. If OSTK opens up anything, I would guess there’s a temptation to sell. They know more supply will be on the market since not every bidder for the secondary will hold. Why not take a little profit? Ideally it will break the print price of the secondary. If it does, then the bidders on the secondary will feel hosed. Ideally they will then want to contain the damage, and flip it ASAP.

That is of course, the ideal scenario.

What’s the worst case scenario? Nobody sells from the secondary. The print price holds, and OSTK goes up. The market rallies, and OSTK gets squeezed. This is hopefully where that AMZN long comes into play. I call it bounce insurance, i.e. if the market bounces, you capture some of that upside.

One rule of thumb I like to follow with scenarios is that usually, you take the best case scenario, take the worst case scenario, and somewhere in the middle is what will happen. Simplistic, but again I like to keep things simple.

Can’t wait to see what happens tomorrow.

Long AMZN, short OSTK

Intrade arbitrage

by

Always on the lookout on ways to make a buck, I think I found one. I like how Jonathan put the Intrade futures quote board on the frontpage of Chicagoboyz. But the spreads between the bid/ask have always looked huge to me. For example, the “DJIA closes at/above 10750 on Dec 31” future has the bid x ask at 28 x 31. Why not arbitrage it?

Here’s what you do. Buy a contract at $28, and short a contract at $31, or as close to the bid/ask as possible. Say the DJIA closes above 10750 on Dec 31. Your long contract will settle at $100, and your short contract will settle at $100 as well, meaning you need to deliver $100 to the buyer of the contract that you shorted. Your proceeds from the short is $31, so you lose $69 on the trade. But since your long also settled at $100, your gain on the long contract is $72. Hence your overall profit is $3. Since your committed capital is $28 + $31 = $59, so your return is about 5%. Not bad since you have zero economic risk.

Say the DJIA closes below 10750. Your short will settle at $0, for a gain of $31. Your long will settle at $0 for a loss of $28. So you still make the $3 spread, at zero economic risk except tying up capital. Not bad eh?

Update: Jonathan emailed me and raised a good point that with the bid/ask at $28x$31, you can’t sell at $31 and buy at $28. I should clarify and say that you would probably have to put offers out there for a little better than the market rate, for example, offering to sell at $30.75, and bidding $28.25 to buy. That way sellers who want to sell can get a price a little better than the bookmaker is bidding, and buyers who want to buy can get a price a little better than the bookmaker is asking for. So in a sense it would be trying to scalp a few points from the market. But since you have a paired long and short that will for sure settle, the arbitrage is to capture the wide spread in the market prices.

Crash reading

by

Here’s an interesting take on the market. Grim reading but the guy has been right.

Excerpt from the article dated 5/6/04:

By allowing the official overnight federal funds rate to lag well behind the inflation rate, he says, the Federal Reserve made the worst of all possible central bank mistakes. It encouraged as much unproductive speculation in the past year as it did in 1999, when it flooded the world with dollars in anticipation of trouble from the Y2K bug. For this handiwork, he labels the Fed board “worse than the board of Enron” for its obsequious obedience to Chairman Alan Greenspan.

Excerpt from the interview dated 10/23/03:

The way Belkin sees it, we’re “at the end of a liquidity bubble.” Liquidity is analyst-speak for money, particularly dollars that the Federal Reserve prints and pushes into banks in a variety of ways for a variety of economic, political and social purposes. (“When the Fed makes new money, it’s like counterfeiting, only it’s legal,” he quips.) He learned long ago that it made sense to buy into a liquidity bubble while it’s happening, but that you needed to be able to identify its final days and get out a little early.