One of the more obscure topics I cover in my options courses is the difference between probability of expiring (POE) and the probability of touching (POT). This can be exploited by a savvy trader as the cost basis of every option is squarely based on the probability of expiring in the money (ITM). However most retail traders remain oblivious of the fact that very few ITM options will ever be held all the way into expiration.
Clearly I am not talking about basic algebra here, but in the context of participating (and surviving) as a trader in the financial markets this time tested maxim has rarely let me down. One may counter by pointing at social manias or the various financial bubbles we’ve seen implode over the past two decades. And I would agree for there is a not so subtle difference, but it is a very important one to which I decided to dedicate this entire post, as it will make you a better trader over the long term.
Since launching this trading blog in August of 2008 I’ve literally lost count of the numerous times when I watched the financial markets edge toward the abyss only to be stick-saved by some last minute incantation issued by our revered high priests of finance. Similarly I have long lost count of all the people who attempted to ‘fight the Fed’ and in the end paid the ultimate price of seeing their entire trading capital wiped out, either gradually or in a theta fueled pyre that even would put Burning Man to shame.
Bond futures are in free fall and we are quickly approaching a situation where the floor may give way underneath whatever has been holding up the stock market over the past month. Of course you wouldn’t be a regular on Evil Speculator if you did not recall the many times we have peeked over the proverbial abyss only for the Fed to step in and stomp all over the bears. Lucy has had some fun over the past 12 years and clearly it’ll take a bit of finesse to gauge direction and play the swings.
Whether you admit it or not the market has us all trained like Pavlov’s dogs. Grab yourself a copy of Meditations (Marcus Aurelius) or The Prince (Niccolò Machiavelli) and one thing becomes painfully. Despite all our technological advances human nature in essence has not changed one bit. And believe me when I tell you that Ms. Market has a bonafide PhD in how to press our buttons, a.k.a. the scientific study of fuckwithretailology.
It’s been almost 30 years since I’ve lived in Northern Europe and among several personal reasons a major incentive to leave for warmer climates was that I don’t care much for six months of non-stop crappy weather. The are two things I absolutely miss every single year however. One is a white Christmas (yes, I’m hypocrite) and the other is a real spring, especially early spring when the snow begins to melt and the first snowdrops push their tiny heads through the remaining vestiges of snow. And based on the numbers it also happens to be a good time for equities. So let’s review the freshly updated monthly stats for March.
When it comes to the financial markets nothing ever moves in a straight line. For one that would be way too easy and if you’re looking for easy then I recommend you find yourself a hobby instead. That is probably one of the most difficult lessons to learn for fledgling traders as our minds are linear and short term oriented by nature while participation in the financial markets requires the exact opposite: non-linear long term oriented thinking.
I promised you impending drama on Monday and Ms. Market decided to ship out a whopper via next-day delivery. Unlike many of the muppets who pride themselves to be market analysts I am among the few who admit to have zero prophetic abilities. But frankly you didn’t have to be Cassandra to recognize the divergences that had been accumulating right in front of our eyes.
Another flat week in stocks with crypto crosses shooting toward the moon. The main event on everyone’s radar of course were the congressional hedge fund hearings during which we learned that the entire financial industry was squarely built upon the premise of uplifting retail investors plus each future stock purchase would now qualify for a free copy of the King James bible.
It’s a short trading week and on average they do tend to be a bit sleepy due to a lack in participation. This was evidenced by the reduced weekly trading range stats I posted on Monday. However the gyrations we’ve seen thus far are tantamount to running in circles, which potentially opens up some interesting low probability profit opportunities for us.