… and I talked to Jon about that and this is what he said -

(Referring to a specific inquiry)… “but I really encouraged him to do whatever he could to purchase your course since that is what gave me the context to get so much more out of the books that I read, which was literally hundreds.  I read everything you mentioned (articles included) and others books that were connected by topics, but you provided me with an exceptional framework from which to discern what I was reading and how to apply it to myself.  Well, I do hope more people went out to purchase your course  rather than try to read all the books that I read.  It’s part of my own learning style and I have a certain way of processing information.  Also, my wife played a huge role in helping me understand myself.  We don’t own a t.v., so you can imagine how much time we get to talk (that is if our three little boys aren’t wrestling or playing Nerf swords with me).  I guess you better get your book done soon…”

But … having said that, Deborah Bershatsky, one of our most talented and experienced mental coaches, suggested to me yesterday that a terrific place to start is with The Road Less Traveled... a book I read in the early 1980′s! And I agree. After that, Emotional Intelligence by Daniel Goleman is a great start. Descartes’ Error and The Feeling of What Happens by Damasio.

1. Was it purposeful?

2. Were specific orders entered that would “sweep the book” in PG, MMM and Accenture? Why those stocks?

3. Why 2:40 pm? Isn’t that a suspicious time in terms of margin calls from clearing houses and expiration of limit down rules @ NYSE?

4. What kind of requirements should there be to be an exchange of any kind – major or dark pool? 50 – do we really need 50 different marketplaces? Isn’t that asking for trouble (see #1).

The SEC isn’t known for its immunity to the perceptual biases known from behavioral finance. In fact, they are known for the opposite.

Congress isn’t known for its prescient thinking …

Who is going to ask this stuff?

….oops add one more #5) Some high frequency firms supposedly pulled their orders… maybe the cause was a LACK of high frequency or at least a sudden shock to the balance. Given that there were apparently no bids in the three aforementioned stocks… that makes MORE sense!

… well I feel rather obligated to go through with my bullish ITM put spread but honestly, since I didn’t manage to get it on, I also feel a personality change in the market. For me, I sense these things through speed and rhythm and the s/r of yesterday and this morning, is striking my “UPR” (unconscious pattern recognition) as a change.

I can’t yet go so far as to want a bearish call spread… and I think I will still take the opportunity to put on the bullish put spread today …. but as much for the learning experience as for the conviction in the trade.

Well between the margarita’s and the great NYC weather (and the garden and the dogs and …), I have yet to learn tos analytics… so my trade isn’t on. But… it is about to be (or at least I am dedicating the rest of the afternoon to the analytics part)!

Yes I should be writing … but geez, a girl has to trade sometime doesn’t she?

While I am at it… might take a look at some $GS options too!

(ahhh… it didn’t happen… man even THIS is hard with all the phone ringing!)

Even though this options (learning) gig allows me write while I have a trade working – and not be staring at the screen all day  … TODAY is a good example of how the intraday movement gave me an opportunity to get in BUT I missed it. Now I haven’t yet looked at the options chains to see what I might have had or how much might have moved (maybe not much) but with the wide range day it is easy to have the feeling – that very common feeling in trading – that I MISSED IT!

The easiest thing to do would be to jump into the trade.

But, luckily, I learned a LONG time ago NOT to do that. June is still a LONG way away (I think).

Hmmmm… maybe this options gig isn’t so psychologically different than pure directional trading after all. That is what Mike W. told me!

ZAP is the guy who got me into my first trade, my first prop desk, my first job in NY managing traders and now I am thrilled to have him as my new business partner in The ReThink Group/TraderPsyches & SportPsyches. More importantly for our purposes here though, he knows options …well like I know … (hmmm… maybe I don’t know anything as well as he knows options).

In any event, new dilemma – he wants me to buy a call spread vs. sell a put spread. Reasons being 1) I won’t get the prices I need on such an in the money put spread because who is going to take the other side? (Back to the human question – even in options!)

Good thing this is a June trade. It is taking longer to figure out (or maybe just for me to understand it) than I thought! I think I need my margarita drinking partner Bill, my business partner Don and our thinkorswim analytics all in the same room. Geez – I NEVER liked group trades!

UPDATE TO POST “Joining the Options Counter Culture“

1. Nice to have a tutor in thinkorswim software … better to have it be the same guy you drink margaritas at home with.

2. A put spread risks less than just buying calls.

3. I am actually bearish for May and bullish for June.. so now I am looking at two simple spreads.

4. Strikes are kind of tough – but not really. SPY 127/128 for the raging bull. In other words, I feel comfortable with 1250  and think even 1300 on the index so… how about splitting the diff?

5. Timing – well I expect to take it off the week or two (or even three) BEFORE June expiration. And this is where some more analysis is needed…

…. now look at that, except for the margaritas, every other decision here is discretionary and ambiguous. I mean I could take the probabilities produced by the model (and its assumption on what the vol will be) …. but then I would have to BELIEVE that vol… and I don’t actually. Trade lesson #1 from 1994 – “Non-volatility begets volatility”.

The key however is that I have an opinion and I am convicted about it… someone explain to me that those two pillars of successful hedge fund managers are NOT feelings. (Now yes those feelings are based on intellectual analysis which is also based on experience -which has a feeling component to it – and yes I could definitely be wrong… particularly with SEC v. GS in the air!)

Ok… so I have my idea … and I have my time-frame …. i.e. after maybe a “pro-longed” (relative to recent history – after all, ALL market moves only occur in context) swoon/retracement over $GS, we will resume the march known as “markets climb a wall of worry”.

Now think about it – those two “decisions” in and of themselves require taking a stab within the relentless roller-coaster of market uncertainty. Take the first – market direction – this SEC takes on GS theme could pound away at the banks for months … and if it does, we have just seen the high of this 13.5 month bull market that started in March ’09. I am going to consciously take the bet that “the trend is your friend (until it is not)” …but of course I could be wrong.

2nd…. time-frame…. well…. over the course of my trading lifetime, I have seen too many summers plagued by sell-offs…. so for now, I just want to get started with implementing a relatively short-term spread for an expiration between May and June. But… which one? Man… I just don’t know.

B back to you after I spend some time with this “new-fangled” thinkorswim analytics I now have.

Despite the fact that the guy who got me into the trading business in 1994 had been almost an original CBOE floor member, despite the fact that one of my best trades ever was a covered write on LU in July of 1999 (think sell Lucent @75), despite the fact that the man in my life now is fully conversant in delta, gamma, theta, vega and even thinkorswim software…. I have personally resisted (sometimes actively, sometimes passively), the whole idea of options.

When I think back to when I was first introduced to speculative trading (versus the buy and hold AT&T for a lifetime that my father did) I remember thinking “it’s weird, they are so cheap!” -sort of like I was looking at a pair of Armani shoes priced at $99 and thinking “something isn’t right here“. But that really isn’t why I didn’t do it. I mean after all – all of my best friends were current or ex-CBOE floor traders (ZAP, WAR, SUG, DEO, ) …I ate lunch in the building, worked out in the building, drank coffee amidst the flowers just west on Jackson… but went back to my momentum trading shop a few blocks away to actually trade.

And I guess if anything that is it… I was inculcated with the idea of short-term directional momentum from one of the legendary traders of the time – Steve Schonfeld -  and options just seem so damn hedged. Somewhere in my mind, I wasn’t really taking a risk (like that was a bad thing! What real chicks don’t hedge?) …anyway…

Well… I have changed my mind. For a multitude of reasons -

1. I owe Jared Levy – “The Statistician” on CNBC’s FAST MONEY – a chapter for his book.

2. I lost a lot of my capital a few years ago betting on one CEO and one industry that I knew very well (industry and CEO) but I still intend to be living in Aspen in 10 years so I have some ground to make up! Yes I made all the “behavioral economics and finance” mistakes there are to make – confirmation bias, anchoring, framing… you name it. (You don’t think I know all this trading psych stuff because I read it in a book do you?) Without the gory details… let’s just say those cheap Armani shoes make a bit more sense now!

3. Most of all, I am committed to finally finishing my own book – and that takes lots of time … time that doesn’t allow for sitting watching the charts all day to catch intra-day momentum moves on the index futures (something I am, even if I say so myself, rather good at) but does allow for tactical planning at any hour of the day and even better, doesn’t require stops because real option trading – spreads, straddles, iron flying things … have “stops” built in by definition.

… so building my own options book… well that I think I can and now even WANT to do. I have been struggling with my time constraints vis a vis trading, speaking, writing… and options now seem like the overwhelmingly obvious answer. In fact, I think it will be good – I will learn something, I will extend what I know about the brain and risk to a trickier environment and eventually, I will most likely even make money.

See options trading sounds easier from a psychological perspective – after all you have these well-worn models to guide you right? But in reality, I don’t think it is. You actually have more inputs, more possible outcomes and therefore more decisions to make. By virtue of the fact that I am not going to scalp options I will also have more time decay (and TIME) to tolerate… which while it is supposed to be good – a day like yesterday (SEC announces fraud charges against GS) proves that anything can happen – and while theta (that general reality that all options get cheaper with every passing day) may work in your favor, on a day when the market moves seriously directionally (my previously most beloved of all days), theta doesn’t stand a chance.

Stay tuned… options perception, judgment, decision making and anxiety … through the eyes of psychological capital. First trade up … a bullish put spread for either May or June expiration – probably May …”sell in May and go away” after all …

It took a major meltdown to jar them from their biases but the intellectual powers that be, from the Hudson and Charles rivers to the shores of Lake Michigan, finally are giving serious credence to the reality that most people, even professionals, don’t and even can’t act rationally in the face of making risk decisions. The list of the ways we don’t act rationally is limitless and defies categorization (believe me I have tried) but there are a few things I can definitively say about taking the next step in a real understanding of “the brain on risk”.

The first – instead of just saying “emotions are required for a decision” – explore what that means. Maybe we will find that the emotional states or emotional data will be easier to categorize than the behavioral! Think “emotions as information”.

Second, start to take the social context – and what is known as Theory of Mind – into account when understanding your own and someone else’s seemingly irrational decision.

It is hard for me at this point to decide for myself which comes first – the feeling or the social setting. And in fact they are most likely reciprocal but I can say for sure that the forefront of understand behavioral economics lies not in thinking harder but in fact in thinking about thinking and rethinking the role of feelings and social expectations in perception, judgment and decision making.