I got a bunch of questions about this, so I thought I’d expound here.

First, my intent wasn’t to be conspiratorial. Of course somebody is taking the other side of our trades. This is not unique to either thinkorswim or Citadel.

Recently, I attended a social event with several other Chicago Traders and had the fortune to shoot the breeze with a trader from Citadel (The world-beating Hedge Fund started by Ken Griffin). During the course of our discussion, it was revealed that Citadel sees (ie, pays for) order flow from thinkorswim and often takes the other side of trades entered on the ToS platform. Essentially providing liquidity for ToS’s customers. Of course, they don’t do this out of the kindness of their hearts. They fully expect to make money on the trade as a function of their superior execution costs and the exploitation of any edge existing in the trade.

This was interesting to me personally due to an unfulfilling trip to the floor of the CBOE several years back. At the time, I had recently begun trading spreads in $SPY. Mostly calendar spreads, but occasionally iron condors and other various multi-legged option spreads. The one question I wanted answered was: “Who in this pit takes the other side of my trade?” Or asked another way: “I’ve got a resting order to buy the XYZ May/June calendar spread at .75. Where is this order in the pit right now?” Surprisingly, nobody could give me a straight answer. This left me frustrated.

Well, now I know. I suppose this should’ve been obvious. And on some levels it become so after some time. But it was nice to know definitively that its happening and who it is that’s taking the other side.

$CBOE $AMTD

Housewife/Socialite: Oh Dear, Glad you’re home! You’ll never guess what what happened to Martha at the club today. She ordered the tuna salad, but the waiter brought chicken salad! Can you believe that? Everyone knows Martha hates chicken. The nerve! Omigod, then… Susan showed up with a gawd awful new necklace. She seemed so proud of it. None of us had the heart to tell her our shoes cost more than that silly eyesore. I could go on an on, silly me. How was your day, Honey?

Husband/JP Morgan Executive: Eh… I just found out I’m responsible for a $2 Billion loss. No big whoop. Tell me more about your day.

/end scene/

$JPM

Or more specifically, this annoyingly horrible trend of 2-person bands performing live with all manner of pre-recorded backing tracks, effects, and otherwise jarring noise and gimmicks. The effect being that it sounds like you’re hearing a full band with a singer, guitar player, bass player, drummer, and keyboardist. But you’re really just witnessing two people essentially performing Karaoke to their recorded album.

It seems every time I turn on SNL or late night tv (Jimmy Fallon, ftw) there is one of these jokes of a band playing. And when I go to a live show, one of the opening bands inevitably follows this same formula. This is usually my cue to then head for the bar and a quiet corner.

Is this the result of the music business being “iTuned & Spotified”? Are revenues down so far that the overhead to assemble a full band is just too much? Or is this a symptom of a youth culture that grew up in isolation behind their TVs, computer screens, and XBox’s that has no social skills but high-tech tools to be a do-it-yourself musician?

We can thank The White Stripes for showing the world how this could be done properly when they released their first album in 1999 and shook shit up. And these days Dan & Patrick of The Black Keys have emerged from the club circuit to now selling out arenas around the country. These two bands are some of my favorites. And they did it right. Straight up. No pre-recorded bullshit.

The rest of you trying to make it right now? Please Stop. Please. Now. You suck.

/end rant/

Long before The White Stripes became a phenomenon in the early 2000′s and The Black Keys began rocking bars in the middle 2000′s, there was another 2-person band that was blazing a trail out of Chicago called LOCAL H. In the winter of 1995, I spent some time masquerading as a DJ for my college radio station in Buffalo, NY. During this time, I had the fortune of receiving advance copies of albums months before they typically were offered for sale to the public. One such CD that landed in my lap was the soon-to-be-released debut album from Local H. I loved it immediately, made a cassette tape copy so I could play it in my car, and it stayed on heavy rotation in my car regularly for the next 5 years. Some of you may remember the hit song in 1996 that emerged from this album – “Bound For the Floor”.

For whatever reason, Local H never became huge like the Stripes or the Keys. Perhaps it might be because of front man Scott Lucas’ attitude towards the coasts exemplified in “California Songs”? ;)

Anyway, nearly 20 years later, Local H is still alive and kicking. Last night I made the last-minute decision to attend their show at Chicago’s Double Door – one of the great live music venues here. I’ve attended probably 50 shows at Double Door in the 10 years I’ve been in Chicago. But last night was like nothing I’ve ever seen there. This 400(ish)-person venue became a full-on mosh pit. The two opening bands set the tone with hard-driving sets that lathered the crowd up. And when Scott and drummer Brian St. Clair took the stage, the Local H fans were set to explode. And the band delivered 10-fold – melting faces, peeling the paint off the walls, and literally destroying the club. At the end of the show, I was covered in beer. Funny, considering I wasn’t even drinking one. It was epic.

Here is amateur video taken by yours truly via my iPhone during the 3rd song of their nearly 90 minute set:

Forgive the unsteadiness, I was filming this while trying to avoid getting smashed by flying bodies.

One of the highlights of the show was when they twisted “Bound to the Floor” into a full-on screaming metal version of Beastie Boy’s “You gotta fight for your right” in tribute to the late Adam Yauch.

And in true punk-rock fashion, the show ended after Scott leapt from the stage to crowd-surf and somebody stole his shoe. After attempting to beat the shit out of who he thought was the perpetrator of the crime, he went back to the stage, took the mic and told the crowd to fuck off. Metal.

-

Adam Yauch, one-third of the legendary Beastie Boys has passed today at the age of 48.  You will be missed.

Rest in Peace.

-

Here’s a piece I put up on the StockTwits blog to commemorate the occasion:

… in 1987, S&P Futures – and Chicago – cemented their roles in the world of risk management during the famous “Black Monday” crash where the S&P lost 20.4% in a single trading day. While investors couldn’t get their brokers on the phones to exit their positions and shell-shocked market makers on the floor of the NYSE put their hands in their pockets and stopped trading, the trading pit at the Chicago Mercantile Exchange never stopped moving, never stopped trading, and never stopped taking the other side of trades.

Please click thru for the rest: 30 Years Ago this Week, CME Group Changed the Trading Landscape Forever

One area though that has suffered has been my trading. Yes, I actively trade, but my responsibilities during market hours with StockTwits make it tough for me to put in the kind of zen-like focus and effort that I’d prefer to.

So to address this deficiency, I’ve recently made some changes and have brainstormed some ideas that I’d like to share with you and get some feedback on.

Reading this post by Brian Lund (@bclund on StockTwits) opened my eyes to the fact that perhaps my ego is getting in the way. I’ve always prided myself on being a do-it-yourself trader, preferring to learn things the hard way (I must enjoy pain). In his post, Brian makes the case for putting your macho aside and subscribing to a trading service – something I’ve always scoffed. But this got me thinking… the biggest problem for me is I can’t seem to find the time or energy necessary to dig through hundreds of charts each day to find trading opportunities that make sense for me. The good news is, there are several Traders out there who do, and they provide these ideas for a nominal fee. And even better, some of the Traders who are doing this are people I have the highest respect for – earned by watching them share ideas consistently every day on StockTwits.

So last month I shut up my inner ego, took the leap of faith and joined a couple subscription services to help me with idea generation, and so far I’m pleased with the results.

Another idea I’ve been bouncing around is finding a better, more capital-efficient, and less scary way to ride big trends in the biggest market winners.

Last week I had the privilege of spending face time in San Diego with two investors/traders who I have enormous respect for – Howard Lindzon (my boss & CEO at StockTwits) and Ivan Hoff (the evil genius behind the StockTwits 50). I’ve always admired Howard’s ability to jump aboard a trend and ride it out for huge gains. And I’ve been in awe of Ivan’s ability to surface great trading ideas that could turn into the next big trend via StockTwits 50 for quite some time now.

Fundamentally, riding big trends makes sense to me. I understand the math behind it and the fact that the win/loss ratio is very unfavorable but it only takes one huge winner to make up for many, many small losses. The problem I have is that I tend to get shaken out of the big trends before the big move materializes – either from lack of patience or due to a scary but short-lived pullback. This is where Howard’s iron stomach and force of conviction vastly outstrips my mere mortal abilities.

So to minimize my weaknesses as a Trader and to exploit my preference for options, I’ve been exploring the idea of playing potential long-term winners via long-term options (LEAPS, in some cases). When I identify a stock that has potential for large gains (a good place to start is with stocks making new all-time highs), I look to open a position in at-the-money call options in the furthest out month that is available for trading. I choose the furthest month available because the big trends need time to play out.

But it doesn’t stop there, position management is the key to making this work. It isn’t just buy and then close my eyes. For starters, I will attempt to size the position so that the purchase price is no more than 1% of my available cash. Right off the bat, this puts me in the favorable position of knowing that this stock could collapse all the way to zero, yet the risk to my portfolio is no more that 1%.

The next step is to continuously roll the options up as the stock achieves each successive strike price. For instance, if I purchased the $XYZ January 2014 30-strike call option for $4.00 when $XYZ stock was trading at $29.75, I’d then roll up to the January 2014 35-strike when the stock trades to/through $35. And I’d likely be able to do so for a $2.50 credit on the roll. In doing so, I’ve now reduced my total risk in this position down to $1.50 (or about .3% risk to my entire portfolio).

As you can see, with each successive roll I will be taking risk out of the position – eventually locking in profits. And then this puts me in a much stronger position to ride out the inevitable pullbacks. Yet, the position will still be on if/when the stock resumes it’s course of making continuously new all-time highs.

I realize that owning 100 shares of stock outright versus owning 1 call option and rolling it will make much more money in a big trend, but the balance of value-at-risk to my portfolio makes it much more attractive to me. Also, it can become a numbers game as the capital requirements in owning call options allows me to build many more positions than outright stock ownership, thus giving me better odds at capturing the one or two big trends that more than make up for the 10′s or hundred’s of breakouts that ultimately don’t result in “the next big one.”

This week I started two positions to test this out:

I bought November 25 call options in $DDD for $4.20 when the stock was nearing an all-time high on Monday April 16. November is currently the furthest month out that is available for trading. If/when it trades to $30 (the next higher strike price), I will look to sell my $25 call and purchase the $30 call with the procedes, leaving cash left over thus reducing my risk.

I bought November 24 calls in recent IPO $YELP for $3.70 on Friday April 20, and will follow the same plan listed above. Several Traders I respect on StockTwits are bullish on Yelp, and I liked the idea of getting in on a pullback.

I’m interested in hearing any thoughts you may have on this idea. Help me punch holes in it.

I have to acknowledge to Sabres fans everywhere that I take full responsibility for the Sabres recent playoffs failures. On July 1, 2007 (a day that shall forever live in infamy) I issued a Pox on the House of the Buffalo Sabres. A curse, if you will. I made a very public announcement to all my friends and family back home that the Sabres would never win another playoff series again, unless and until management figures out a way to pay back the fans for completely giving up on their team and their city on that fateful day. And as they were eliminated from playoff contention last night, the curse has now continued into it’s fifth season.

A little background: Coming out of the NHL lockout that forced the cancelation of an entire season, The Buffalo Sabres had assembled a rag-tag team of mostly nobodies that became the model of the “new NHL.” A team built on speed and four rotating lines that came at you from every direction. There were no superstars. Just hard-working, blue-collar grinders that played with heart and captured the imagination of the Western New York community. Buffalonians have always loved their Sabres, but during the 2005-’06 and ’06-’07 seasons, the love affair reached heights never before seen in Buffalo. The town was completely Sabres-crazed, and the Sabres returned the favor with excellent seasons making it to within 1 win away from the Stanley Cup finals in ’06 and nearly as close again in ’07 before finally running out of gas against an Ottawa team that was hellbent on making up for past playoffs losses to the Sabres. It sucked to lose, but man that was a great run. And the team was still young and was set up for what appeared to be a continuous stream of great hockey for years to come, like the Detroit Redwings have enjoyed for nearly two decades now.

Then July 1, 2007 happened.

The Sabres played the “small-market victim” card when contract negotiations began with three of their emerging stars: Chris Drury, Daniel Briere, and Brian Campbell. And instead of doing everything the Sabres could to ensure the team captain (Drury) and the rest of the nucleus of the team stayed together, management crossed their fingers and hoped these players would agree to stay in Buffalo for less money – because they were part of something special. In today’s sports world, you know how this story ended. When the window for free agent signing opened on July 1, both Drury and Briere were gone in a heart-beat, with Campbell following their cues and leaving soon after. Management just shrugged their shoulders and said “we did everything we could” to keep them. Bullshit.

So, five years later and the Sabres have yet to win a playoff series – just as I’ve prophesied. This by no means makes me happy. I don’t say this to gloat. It just is what it is. So here is my idea for what management can do right now to turn the worm and win back the hardened skeptics…

Offer the Chicago Blackhawks whatever they want for Buffalo’s hometown hockey hero and Stanley Cup winning goal scorer Patrick Kane. No player or amount of players is off limits. Trade the whole damn team if you have to. And once this trade has been pulled off, build the team around him with local players from Western New York and Southern Ontario. Make it truly – our hometown team. There is a ton of great young hockey talent being bred in and around Buffalo.

For much of the history of the Montreal Canadiens (The NHL’s all-time winningest team), they did just this. They stocked their locker room with local French Canadian hockey players from all around Montreal and Quebec. The fans knew the players were one of them. Don’t underestimate how powerful this emotional connection can be between a team and its fans.

Imagine how great it would be for families in Western New York and Southern Ontario to have their sons grow up to play hockey for their hometown team? Whenever you’d attend a game at the arena, you’d bump into friends and family of the players all over the place. And if (dare I say when?) the Sabres win the Stanley Cup with this model, the fan reaction and outpouring of emotion would be nothing short of magical.

For a city that seemingly has had nothing going for it since the 1950′s, Buffalo needs this. More than any other sports town around. Anybody not from Buffalo who knows or is friends with somebody from Buffalo knows that we bleeeeeeed our teams. We take losses very personally. They hurt. Bad. We shrug it off, put on a brave face, and crack jokes… but we’re all hurting. Baaaaad.

This is just one jilted fans’ two cents, but could there be anything better than pulling this off for the long suffering fans of the Buffalo Sabres and their surrounding communities?

P.S. As a Blackhawks fan, I would hate to see Kane leave. But my Sabres come first…

-

He had mentioned he was a big fan of Ed Seykota. Naturally, I too am a fan. I asked him if he’d seen the banjo song and he claimed to never had heard of it.

Well, for many of you, this is old news. But in case you’ve never seen this… All Traders can relate to this and enjoy it….

Managing my open options spreads with one hand while petting goats with the other. Doesn’t get more minimalist then that, eh?

So Mrs. Chicagosean and I are headed to Los Angeles for a little R&R later in the month. The place we’ll be staying at is smack dab in the middle of West Hollywood, but the accommodations aren’t what you’d expect. Yes, there will be wifi, but we’ll also likely be awoken each morning by a Rooster. And a large turtle may wander into our room to ask if we’d like some coffee.

What?

Yep, thanks to a gem of a find on airbnb, we’re staying at an “Urban Farm.” Check out this link which has a ton of photos of the place. Totally pumped!

The place will give me plenty of space to expand my mind and contemplate how to put on a Long Airbnb/Short Expedia pairs trade.

Yet, this doesn’t necessarily mean I should fold up my tent and head back home. It just means I’ve got to recognize this about myself, never forget it, and then position myself accordingly.

This is why in 2012 I’m making a concerted effort to trade credit spreads on both sides of the market while maintaining minimal delta risk to my portfolio. While position adjustments will be mandatory as the markets move, it doesn’t require constant monitoring and my success doesn’t hinge on me picking proper directions. This is very important for me as I don’t typically have the time available during the trading day to be closely watching every tick of my positions. Nor would I want to even if I could.

I’m cautiously optimistic that 2012 will be a nicely profitable year for me, thanks in large part to the trading plan I’ve put in place. Of course, I’ve been wrong before…  ;)