When I first found short-term trading, before the internet and before the term day-trader was invented, I was hooked. I was on my way to a PhD and said “skip that”. So… I have no room to talk when I ask the question with maybe a hint of perjorativeness…. but then again maybe I do.

Back then, in 1993 – 1994, it wasn’t easy to be a short-term trader. I mean very few people had access to quotes or commission rates that would make it remotely possible. Hardly anyone outside of the neighborhood of LaSalle and VanBuren in Chicago even remotely knew what I was talking about. Almost everyone I was trading with had been on the floor of the exchange. In fact, that was really the only way into any kind of short term trading for a living. It was a small and relatively privileged group.

Enter the internet and brokers and traders who want to make some money off of teaching other people supposedly how to trade and now way too many people say “All I want to be is a day-trader”.

It isn’t for the money. The vast majority lose. So what is it?

I believe I know the answer – and it isn’t the lip-service ideas about gambling or thrill. It might be not having a boss or employees but I think it goes deeper than that… What do you think?

… 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.

This bullish spread for June would be on right now if I really knew how to use the analytics that I have … but alas I don’t. And patience to learn them… well I have to consciously invoke that. Working on it now.

I am not a linear learner (my own term). I need to futz around with something, take it apart, put it back together… get the “why” of it  -before I can do anything. (It never ceases to amaze me when traders want me just to tell them what to do – I mean I don’t think I would ever do something just because someone told me to. It, whatever it is, has to make sense… and the only way it can make sense is if I explore it).

So… while some theta is a wastin’…. the markets aren’t going anywhere (well maybe they aren’t going anywhere but up) but… you know what I mean.

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 …