1. Sign up for an Interactive Brokers account; state that you want to trade options.
2. Transfer >25K (day-trading capability) or whatever is reasonable amount money for you. Enough for you to care about but not over the amount where if you lost it all, you'd lose sleep over.
3. Now use the highest/lowest volatility scanner and buy/sell some options randomly in that list; max out your real cash to accumulate positions (do not go on margin).
4. Now figure out what the fuck you just did and how much money you are going to lose. This is the most important step, nothing motivates you to learn security analysis, risk management, Black-Scholes/Bionomial Tree option pricing, post-transaction cost analysis than the threat of losing your money.
5. If you get over step 4, then you probably have a strategy that turn over 7% monthly, or turn over 100% annually. Now automate it as much as you can with IB API.
2. Transfer >25K in chips (high-roller capability), or whatever is reasonable amount of money for you
3. Play the tables
4. Figure out what the fuck you're doing while you're doing it
5. If you get over step 4, you probably think you have a solid strategy for winning against a casino. Now, automate the task by getting people to pay you for your new book/DVD and public talks.
"When I was young, people called me a gambler. As the scale of my operations grew, I became known as a speculator. Now, they call me a banker. I have been doing the same thing all along." -Sir Ernest Cassel
There are plenty of people who should not be in the stock market, and are basically just gambling.
But in the casino table games, in general, the odds are always against you. There IS no winning strategy.
In a market, any market, there IS a winning strategy at any given time, though the strategy will change with time along with the market.
The point of the PP was more "Pay $25k to go to school and learn about trading stocks" or "How to play with $25k on the stock market to force yourself to learn what's up in real life."
Either way you are out $25k, though in the second scenario there is the chance you may actually end up ahead.
That's why you should plan to lose all of that money. The goal is to extend your capital loss for as long as possible while executing trades, so you can learn how to trade options; which will teach you better than a FE program can because that's what FE is all about, numerical methods/pricing model/back-testing for derivatives and hedging.
Bah! The market is perfectly easy to exploit these days, you just need to make your bets with other people's money.
Of course, to make that work, you've got to convince people with lots of money that you'll beat the market, else they'll never hand over the cash. These people don't care for your high-falootin math, so you should probably leave out the real gory details when you talk to them, but you can't make it too obvious that you're babying them, you need them to feel like they could totally understand all of it if only they weren't too busy to listen; further, if you know anything about your math, you know that the market's not very easy to beat, and that if they knew how tough it was, they'd never give you their money.
In other words, it's bullshit time: you're gonna have to lie through your teeth if you want that money.
Having lost lots of money for other people in the past is the best way to look credible, though in some cases it's okay if you've come out ahead, too. Be careful though, if you've done too well they might start to wonder how much of your own wad you're putting into this thing, and you never want to play with your own money, so it's always better if you don't have to answer the question at all. Never mind that you took your 1% per year off the top of all the money you lost before you lost it (and really don't mention the 10% of each up year!), at least as far as your future investors know, you don't have any Real Money to speak of. :)
People with lots of money and an interest in mathy funds are often familiar with the two base trading strategy types (well, the two base types other than that boring old "buy good companies and hold them like a puss" strategy), momentum and mean reversion - "mean reversion" in particular makes these guys feel really smart when you say it and they understand what you mean, as does "volatility", so say those words a lot, it will help.
As you construct your pitch, you have to make sure to take into account the recent MFE grad, physics major, or computer geek that your mark...err, "future investor"...will hire as a consultant to look into it and see if he can automate the strategy on the cheap based on the details you've given him. The reaction you want from that consultant is less "this is a really good strategy, I should try to do it!" or "this is idiotic, I'm going to expose this" and more "this looks like a joke, but it's strung together plausibly enough that this rich moron's probably going to give these guys a lot of money, I wonder, can I get a job there in exchange for my silence?".
Taking all that into account, here's the type of elevator pitch you want to shoot for:
"Alpha will be created by constructing synthetic Asian lookback options on emerging market debt with valuations derived from our proprietary distributed high frequency mean reversion algorithm that predicts, with 98% accuracy, volatility skews at the millisecond time scale and below."[1]
Blammo.
[1] Your actual trading strategy, of course, will be "Put as much money on the line as possible without getting sent to jail. Cross fingers, pray for profit after a year. Collect huge pile of money if so, change name of fund and create new, better fund with bigger investors next year if not. Repeat."
Cool if true - the one thing you want to make sure of when using the IB interface is that you don't accidentally end up on margin - which is easy fairly easy to do by accident.
(It's not that they try to get you there - it's just a trading platform for pros. A friend once told me how part if portfolio was sold automatically because of an automatic margin call when he didn't even realize hew as on margin)
Very true. Forgot to mention that if you sell options, you have unlimited loss potential; so by definition, this fear should motivate you to learn about delta-hedging and risk management very soon.
Depends what kind of options you are selling - but I'd actually say explicitly leave out writing calls from the plan - that's not somewhere you want to go given the unlimited risk you face.
Comments
DIY Financial Engineering:
1. Sign up for an Interactive Brokers account; state that you want to trade options.
2. Transfer >25K (day-trading capability) or whatever is reasonable amount money for you. Enough for you to care about but not over the amount where if you lost it all, you'd lose sleep over.
3. Now use the highest/lowest volatility scanner and buy/sell some options randomly in that list; max out your real cash to accumulate positions (do not go on margin).
4. Now figure out what the fuck you just did and how much money you are going to lose. This is the most important step, nothing motivates you to learn security analysis, risk management, Black-Scholes/Bionomial Tree option pricing, post-transaction cost analysis than the threat of losing your money.
5. If you get over step 4, then you probably have a strategy that turn over 7% monthly, or turn over 100% annually. Now automate it as much as you can with IB API.
DIY Financian Engineering Lite Edition (TM)
1. Go to Las Vegas
2. Transfer >25K in chips (high-roller capability), or whatever is reasonable amount of money for you
3. Play the tables
4. Figure out what the fuck you're doing while you're doing it
5. If you get over step 4, you probably think you have a solid strategy for winning against a casino. Now, automate the task by getting people to pay you for your new book/DVD and public talks.
"When I was young, people called me a gambler. As the scale of my operations grew, I became known as a speculator. Now, they call me a banker. I have been doing the same thing all along." -Sir Ernest Cassel
I call shenanigans on that....
There are plenty of people who should not be in the stock market, and are basically just gambling.
But in the casino table games, in general, the odds are always against you. There IS no winning strategy.
In a market, any market, there IS a winning strategy at any given time, though the strategy will change with time along with the market.
The point of the PP was more "Pay $25k to go to school and learn about trading stocks" or "How to play with $25k on the stock market to force yourself to learn what's up in real life."
Either way you are out $25k, though in the second scenario there is the chance you may actually end up ahead.
What if you don't have enough money to go to Vegas at all?
Who on Earth was voting this up? Does nobody comprehend the concept of a not-easily-exploitable market anymore?
That's why you should plan to lose all of that money. The goal is to extend your capital loss for as long as possible while executing trades, so you can learn how to trade options; which will teach you better than a FE program can because that's what FE is all about, numerical methods/pricing model/back-testing for derivatives and hedging.
Bah! The market is perfectly easy to exploit these days, you just need to make your bets with other people's money.
Of course, to make that work, you've got to convince people with lots of money that you'll beat the market, else they'll never hand over the cash. These people don't care for your high-falootin math, so you should probably leave out the real gory details when you talk to them, but you can't make it too obvious that you're babying them, you need them to feel like they could totally understand all of it if only they weren't too busy to listen; further, if you know anything about your math, you know that the market's not very easy to beat, and that if they knew how tough it was, they'd never give you their money.
In other words, it's bullshit time: you're gonna have to lie through your teeth if you want that money.
Having lost lots of money for other people in the past is the best way to look credible, though in some cases it's okay if you've come out ahead, too. Be careful though, if you've done too well they might start to wonder how much of your own wad you're putting into this thing, and you never want to play with your own money, so it's always better if you don't have to answer the question at all. Never mind that you took your 1% per year off the top of all the money you lost before you lost it (and really don't mention the 10% of each up year!), at least as far as your future investors know, you don't have any Real Money to speak of. :)
People with lots of money and an interest in mathy funds are often familiar with the two base trading strategy types (well, the two base types other than that boring old "buy good companies and hold them like a puss" strategy), momentum and mean reversion - "mean reversion" in particular makes these guys feel really smart when you say it and they understand what you mean, as does "volatility", so say those words a lot, it will help.
As you construct your pitch, you have to make sure to take into account the recent MFE grad, physics major, or computer geek that your mark...err, "future investor"...will hire as a consultant to look into it and see if he can automate the strategy on the cheap based on the details you've given him. The reaction you want from that consultant is less "this is a really good strategy, I should try to do it!" or "this is idiotic, I'm going to expose this" and more "this looks like a joke, but it's strung together plausibly enough that this rich moron's probably going to give these guys a lot of money, I wonder, can I get a job there in exchange for my silence?".
Taking all that into account, here's the type of elevator pitch you want to shoot for:
"Alpha will be created by constructing synthetic Asian lookback options on emerging market debt with valuations derived from our proprietary distributed high frequency mean reversion algorithm that predicts, with 98% accuracy, volatility skews at the millisecond time scale and below."[1]
Blammo.
[1] Your actual trading strategy, of course, will be "Put as much money on the line as possible without getting sent to jail. Cross fingers, pray for profit after a year. Collect huge pile of money if so, change name of fund and create new, better fund with bigger investors next year if not. Repeat."
That's making a new market.
Pretty different than trading against an existing market.
> max out your real cash to accumulate positions (do not go on margin)
Options can't be bought on margin. They lose value over time and thus can't be used as any form of collateral.
Cool if true - the one thing you want to make sure of when using the IB interface is that you don't accidentally end up on margin - which is easy fairly easy to do by accident.
(It's not that they try to get you there - it's just a trading platform for pros. A friend once told me how part if portfolio was sold automatically because of an automatic margin call when he didn't even realize hew as on margin)
By following Step 3, you will lose much more than whatever the amount was in Step 2.
Very true. Forgot to mention that if you sell options, you have unlimited loss potential; so by definition, this fear should motivate you to learn about delta-hedging and risk management very soon.
Depends what kind of options you are selling - but I'd actually say explicitly leave out writing calls from the plan - that's not somewhere you want to go given the unlimited risk you face.
Noname, what if you don't have any money?
Books are free, if you have the internet or live near a university library.
I do like your empirical attitude though.
I would subscribe to your newsletter.
You forgot "Just buy the fucking dip"...