I recently heard from a longtime follower of  Rick’s Picks, a retiree who fears for the safety of his nest egg in this “lunatic market environment.” Like many of us, he also yearns to get short ahead of the inevitable crash. I responded as follows:

Thanks for your letter, M. I’m pleased to hear that you’ve evidently been able to find good value in my service. Concerning getting short ahead of the Big One, today’s little squeeze-a-roonie demonstrated once again how very difficult this will be. I use BestSEO, a chat room regular, as my proxy for damn-the-torpedoes trading. Like so many others in the chat room, Best is a die-hard permabear, and not without good reason. He’s also evidently willing to let a short position run against him well beyond the point where most other traders would bail out. Of course, even with his brass cahones, Best’s short positions have gotten stopped out repeatedly. He says he hedges with options, so it’s difficult to tell what he’s actually doing. But I would surmise that he has maintained a ‘core’ short position for some time, and that when the options offset has been factored in, his profits have been very substantial.

My gut feeling is that although a stock-market crash is probably inevitable, it will not be tradable — at least not by way of getting short some afternoon and waking up wealthy (or wealthier) the next morning. Imagine how difficult it would be if The Top were to be made on some Friday, at the apex of a spectacular short-squeeze. The presumptive ‘Black Swan’ that would follow — on a Sunday night, of course — would come too late to save the multitude of traders who’d gotten obliterated two days earlier.

It’s particularly maddening to ‘know’, as we like to think we do, that The Top is already in. My favorite evidence of this is that NYSE Composite breadth readings recorded in late May seem most unlikely to be surpassed. That’s when the bear market began, as far as I’m concerned, and the datum taunts all of us permabears to make good use of it. I’ll keep trying, of course, but only with such strategies as make misjudgment survivable.

Subscribers hold the September 20/August 16 118 calendar spread for an effective price of 0.25 after rolling out of short August 8 calls and into short Aug 116s late last week. We will continue to do this roll every Thursday/Friday, further reducing the cost of our bullish time spread. With luck, TLT will continue its advance to our 118 target, generating ever-higher levels of weekly income when we roll the spread. Ideally, TLT will be trading near 118 when the September calls we continue to hold expire, and our effective cost basis will be a negative number — i.e., a credit gained from shorting four or five weekly calls against them over time. As of Friday, the position was showing an $800 paper gain.  This profit is likely to keep growing even if the stock merely sits still or falls a bit. That’s because we’ll continue to take in premium shorting weekly options as long as they sell for more than zero.  On Friday, the August 16 calls we shorted traded between 0.06 and 0.09.

Since my outlook for this vehicle is long-term bullish,  we’ll continue to repeat the strategy used above in different time frames.  In the chat room, I have provided detailed instructions for 32 new spreads with a longer expiration date.  I’ve refrained from publishing the instructions here because I want them to be available only to paying subscribers. The information can be found in Friday’s chat room discusssion, beginning with comments I made starting at 12:54 p.m. _______ UPDATE (August 11, 11:19 p.m. EDT): I’ll use 0.90 as the price for Nov/Aug calendar spread that I detailed in the chat room, since several subscribers have reported filling at that price.  If you’re still trying, use the delta guideline provided, which at Monday’s 115.46 closing price would work out to 0.90 or so. (It calls for a 0.01 price adjustment in the spread for each 0.16  move up or down in the underlying stock.)  This is a day order, since we’ll be rolling into the September 5 calls this Thursday/Friday. If you’re getting a late start, you can initiate the position then, shorting the Seps against the continuously held Novs. I’ll provide a price in the chat room if asked. Click here for a free trial subscription that would give you access to the room, as well as to all touts, intraday bulletins and impromptu, virtual trading sessions. _______ UPDATE (August 14, 4:28 p.m.): Our original calendar spread, still working, entailed holding September 2oth 118 calls long against a rolling short position in weekly calls that commenced with the August 1 expiration. A subscriber who has followed my plan reported rolling the short side from August 15 to August 22, yielding an effective cost basis of 0.04 (!) for the position. The tracking position now has five weeks remaining to pay of at perhaps 40-to-1, and all that’s needed is for the underlying issue, currently trading for 116.33, to reach 118.  If TLT is trading 118 or higher when our Seps expire, the position profit would be equal to the value of those calls at that time, plus whatever net credit we have amassed via the weekly rolls. _______ UPDATE (August 18, 8:06 p.m.):  Monday’s selloff came exactly as expected, since TLT’s high on Friday matched a rally target that had been more than a month in coming. We should regard any pullback as an opportunity to load up on calendar spreads, but I’d like to get an idea first about how subscribers are playing this one.  Please let me know in the chat room on Tuesday so that I can continue to improvise strategies that will be easy to execute and as close to riskless as I can make them.

11 Tips to Beat High-Frequency Trading Algorithms

by Rick Ackerman, trader and former San Francisco PSE market maker

Think it’s impossible to beat high-frequency trading algorithms at their own game?

Think again. The prop-desk whizzes at Goldman & Sachs, Morgan Stanley, Citicorp et al. are barely making money these days. Even the Houston Astros are having a better year. The reason is simple: With so many rocket scientists in the game, the mathematical edge in trading has been chopped, sliced, diced and winnowed down to nearly nothing.

This spells opportunity for traders who think like traders rather than like mathematicians. Understanding the psychology of trading is something the machines have yet to master. This means you can beat them by out-thinking them.

How?  The thing to realize is that winning trades seldom come from the psychological comfort zone.  Indeed, you better “Look out below!” when a stock has been rallying for long enough that bulls are brimming with confidence.  Conversely, when a stock has been falling for long enough that most investors throw in the towel, that’s when the true contrarian, ignoring the grinding in his own stomach, must step in to buy ’em aggressively.

Keep the above in mind as you consider the following:

1. If it seems too easy or tempting to get long or short, do the opposite.

2. Distrust weak rallies that occur after stops have been run beneath a previous low.

3. Don’t simply bail out of a terrible trade; reverse the position quickly and go with the flow.

4. Look for the bull or bear trap in every enticing trade set-up.

5. Wild price swings driven by news or events paradoxically tend to produce precisely predictable highs and lows. Find a technical system that can identify them, and stick with it.

6. Shun breakouts unless they are so subtle that the computer whizzes will likely have missed them.

7. The trend is not your friend, as the saying goes; it is your enemy, since the more mature a trend, the more devious and evasive it tends to become.

8. Nothing enhances a trader’s horse sense and timing like taking a small partial profit early in a trade.

9. Never settle for less than $3 in gains for each $1 you’ve put at risk.

10. Don’t initiate a trade without a clear escape route and a plan for taking profits.

11. The easiest trade of the day will often be in the opening minutes, when everyone is waiting for the dust to settle.

Interested in learning even more detailed strategies to beat high-frequency trading algorithms and manage risk effectively? At Rick’s Pick’s, I will show you how options trading can not only be profitable, but fun.

Use these tips for day trading stocks with greater success [Day traders have been abandoning the game in droves because it supposedly has become too rigged to beat. In fact, the markets have always been rigged, and it’s never been an easy way to make a living. Yes, thinking machines programmed mostly by nerds who know little about the psychology of trading have added a new layer of complexity. But the nerds are hardly unbeatable. Below is the advice we gave traders in a column that originally appeared in the Sunday San Francisco Examiner.  It has been modified to suit the times, but the advice still applies. RA]

The late John Scarne, legendary card manipulator and gaming wizard, used to tell a story about how he and his pal, heavyweight boxer Jim Braddock, walked into a crooked card game and won a pile of money. Knowing that they were being cheated put Scarne on his guard, and he lost no time taking countermeasures to ensure his and Braddock’s great success that evening. Whenever it was Scarne’s turn to deal he went to work, peeling useful cards from the bottom and even the middle of the deck.  At one point, in full view of all, he surreptitiously stacked the cards while shuffling them, allowing him to deal Braddock a hand that beat a tableful of exceptionally good hands. [continue reading…]

Weak when the market was strong a short while back, NFLX has rallied sharply this week as the Dow has plummeted. Go figure. We hold a bull call spread expiring next Friday that we’d nearly given up for dead, and although it is still well out of the money, it has started to perk up.  Yesterday we did some pruning, turning our eight December 400-410 spreads into a ratio spread. We did this by selling half of the December 400s, so that we are now long four of them against eight short 410s. Do the math and you’ll see that our position will be profitable between $400 and around $415 at expiration. It would start to lose money above that; however, with the stock currently trading around $373, we should be so fortunate as to have to worry about the 410s biting us in the ass. Long before that would happen, our long 400s would spring to life and give us a good chance to exit profitably before the options expire.  The one caveat is that NFLX could explode for 50 points in a single day, turning our ‘front spread’ (i.e., negative-gamma) position lethal.  To deal with this risk, we’ll plan on buying a few Dec 415 calls when they are offered for nearly nothing. They were fetching around 0.25 at yesterday’s close, but their value will sink quickly if there’s even a hint of a stall in NFLX’s steep rally today or Monday.

Incidentally, our bull spread was part of an ostensible ‘straddle’ balanced by DIA put options.  We folded the cost of those now-worthless puts into the NFLX spread, but also took partial profits in NFLX on the way up, so that our all-in sost has been reduced to just $190.  Whenever we buy options, we treat out-of-the-money puts as having a value of zero, and calls as having only a slightly higher value. This is justified because most options purchased by retail customers expire worthless.  It is the ‘sell side’ of the game that makes money, but the most lucrative strategies are out-of-bounds for customers because of the steep margin requirements involved.

In the end, it takes all of the knowledge I have accumulated in nearly 40 years of option trading to have even a modest ‘positive expectation’ on a given trade. Fortunately, though, it is fairly easy to zero-out the  cost of an option position by taking a partial profit at the first opportunity. This we do routinely, leaving us with positions that usually cannot lose a dime but which will yield substantial leverage if our horse should finish in-the-money.

Incidentally, the stock looks primed to run up at least another $10, to the 383 target shown, before taking a breather. A pullback to the red line — a midpoint Hidden Pivot at 367.50 — should be regarded as a belated buying opportunity. ________ UPDATE: To negate upside risk above 420, buy four December 415 calls for 0.06 or better, good through Monday. I’d suggest bidding 0.04 on Monday’s opening, but raising the bid to as much as 0.06 if you’re not filled. Make the order contingent on the  stock trading 367.50 or higher. The stock looks like it’s back in staged-‘weakness’ mode, since DaBoyz evidently felt it necessary to rip off widows and orphans on Friday by opening NFLX on a bull-trap high.

In June, when Google was trading for around $880, the village idiot could have told you the stock would eventually trade for $1000. But how to play it without losing one’s shirt if wrong?  The strategy we devised entailed legging into free “butterfly” call spreads targeted on the 1010 strike. This implied buying bull spreads when the stock was weak, then selling bear spreads against them for at least the same amount when the stock turned strong. Using this tactic, even if GOOG fell to zero, subscribers would lose nothing; but if it rallied to exceed $1000, they’d reap gains of as much as $1000 per spread. On Friday, the stock easily bettered our expectations, leaping a mind-blowing $126, to $1015, on very good earnings. As a result, one subscriber who’d bought some cheap option spreads reported doubling his trading account overnight. Another said he cashed out of spreads for 4.80 that he’d bought for a small fraction of that price. [continue reading…]

[The apex of yesterday’s 174-point short squeeze left our bearish option position (see below) undisturbed, since the put options we’d have exited on a 59-cent print traded no lower than 61 cents. When the flood tide receded, the puts rose to end the day at 81 cents. If DaBoyz should attempt to leverage Independence Day seasonality yet again, we’re prepared to blow out the position for a probable loss of $100, commissions included. RA]

A bearish option trade that we recently recommended in the Diamonds illustrates how Rick’s Picks attempts to establish short positions that are essentially riskless, or very nearly so, in a rampaging bull market. Last Tuesday, with DIA trading near 148.78, we told subscribers to buy put options if this popular trading vehicle, a proxy for the Dow Industrials, rallied to a Hidden Pivot target at 150.39. Here is the trading “tout” exactly as it went out to subscribers that night: The 150.39 rally target shown [click here] is a tempting spot to try shorting, since the ABC rally pattern has many characteristics that we like. Accordingly, I’ll recommend buying four July 146 puts if DIA trades above 150.35. Stop yourself out if the puts trade for 0.20 less than you paid for them. You could also offer 400 shares short at 150.37, stop 150.47.” [continue reading…]