Lenny Dykstra              Flea

I know I've never seen them in the same place at the same time.

I wrote a bit about a covered call ETF this week.  This is probably the most popular conservative strategy in options (that is in italics for a reason).  One thing I've noticed a lot recently in the ETF world is bubble speculation.  There are too many ETFs for the market to bear.  The poster child of the ETFs gone too far claims are the HealthShares ETF offerings.  Jack Bogle recently attacked these funds because they're too concentrated.  I'm not sure who sets the rules on how concentrated or diversified a fund or ETF should be, but I'm all for having very broad based as well as concentrated offerings.  I wouldn't recommend a sector or concentrated ETF to a passive investor, but for speculators, they're the bees knees.

I've also read recently that we may see state specific ETFs soon.  That seems a little silly because a company's physical location seems of little to no value to me.  I suppose if you just so happen to like Home Depot, Coke, UPS and Delta then the Georgia state ETF may just be for you.  I still don't think that limiting ETFs is the answer, but rather education.  Just like anything else, let the market determine when there are too many ETFs.

What that, now I want to take it a step further.  The covered call ETF illustrates but one of the many option strategies out there.  I would be very interested in seeing some other types of option strategy ETFs.  Perhaps a calendar ETF that buys a long calendar 2% away from the current price of the index.  Since stock indexes tend to go up, what a great way to leverage yourself with protection.  Perhaps there's a put calendar fund that buys out of the money put calendar spreads for downside protection.  Maybe an "income strategy" ETF that sells calls and puts or bull or bear spreads or even iron condors.

Shall I get the prospectus ready?

Something I will get into in more detail later is the fact that I think that good returns are comprised of two factors.  These two factors are good stocks and good probabilities.  I define good probabilities as a series of conditions that are favorable for an asset to move in the desired direction over a set period of time.  For a long time, good probabilities was all I believed in, but the cruelty of life experience (read, drawdowns) seems to tell me that I'm wrong.

Since I rode the good probabilities train pretty far, I wanted to come back and start to sharpen my stock picking skills a bit.  No, I'm not interested in hitting home runs, I'll settle for stocks that will more than likely beat the indexes.  Once I feel confident that I'm a decent stock picker, I'll apply my good probabilities theories to good stocks and see where we end up.

I'm not real sharp when it comes to analyzing companies and quite honestly, I think there are free sources out there that have already identified "good stocks".  Being the skeptic though, I wanted to put some of these ideas to the test.  Back on May 1st I started my own "fund" using the Marketocracy web site.  There are two things that I've noticed over the last 5 years that seem to beat the indexes pretty handily and that is the IBD criteria and MSN's StockScouter rankings.  I've paper traded and kept some spreadsheets and things just generally became disorganized, so I decided on a different approach.  The approach I've chosen is to limit the number of stocks to around 10 at a time and to reshuffle my holdings at the beginning of each month based on my criteria.  Also, I'm combining the two.  I'm using IBD criteria and a top StockScouter ranking.

The criteria is as follows:

• Market cap >= 250 million
• Total shares outstanding >= 25 million
• Quarterly Revenue Growth Above 5-Yr Average in the last quarter
• EPS Growth Yr over Yr. >= 20
• Institutional Ownership has increased in the last quarter
• 12-Month Relative Strength >= 70
• Stock Scouter rating = 10
• Last Price >= 7

This usually produces the desired 10 or so stocks.  Sometimes the same stocks show up from month to month but most of them don't.  I've been selling all that don't show up on the last day of the month and buying the newcomers on the first day of the following month.

You can chart my progress as well as my holdings at my fund holding at Marketocracy.  Here's a visual of my progress so far.

So far she looks good, but I'm still skeptical.  Even though volatility has picked up, I've outperformed by a good margin.  The true test is when we hit a sustained downtrend.  Just like backtesting, I want to test my idea in all of the major market conditions (up, down and sideways).  I plan on keeping this as virtual thing for at least another few months.  If I'm still satisfied, I'll begin with a small amount of real money.  I'll most likely use a Zecco account to keep transaction costs to nothing (sorry IB).

Something I will get into in more detail later is the fact that I think that good returns are comprised of two factors.  These two factors are good stocks and good probabilities.  I define good probabilities as a series of conditions that are favorable for an asset to move in the desired direction over a set period of time.  For a long time, good probabilities was all I believed in, but the cruelty of life experience (read, drawdowns) seems to tell me that I'm wrong.

Since I rode the good probabilities train pretty far, I wanted to come back and start to sharpen my stock picking skills a bit.  No, I'm not interested in hitting home runs, I'll settle for stocks that will more than likely beat the indexes.  Once I feel confident that I'm a decent stock picker, I'll apply my good probabilities theories to good stocks and see where we end up.

I'm not real sharp when it comes to analyzing companies and quite honestly, I think there are free sources out there that have already identified "good stocks".  Being the skeptic though, I wanted to put some of these ideas to the test.  Back on May 1st I started my own "fund" using the Marketocracy web site.  There are two things that I've noticed over the last 5 years that seem to beat the indexes pretty handily and that is the IBD criteria and MSN's StockScouter rankings.  I've paper traded and kept some spreadsheets and things just generally became disorganized, so I decided on a different approach.  The approach I've chosen is to limit the number of stocks to around 10 at a time and to reshuffle my holdings at the beginning of each month based on my criteria.  Also, I'm combining the two.  I'm using IBD criteria and a top StockScouter ranking.

The criteria is as follows:

• Market cap >= 250 million
• Total shares outstanding >= 25 million
• Quarterly Revenue Growth Above 5-Yr Average in the last quarter
• EPS Growth Yr over Yr. >= 20
• Institutional Ownership has increased in the last quarter
• 12-Month Relative Strength >= 70
• Stock Scouter rating = 10
• Last Price >= 7

This usually produces the desired 10 or so stocks.  Sometimes the same stocks show up from month to month but most of them don't.  I've been selling all that don't show up on the last day of the month and buying the newcomers on the first day of the following month.

You can chart my progress as well as my holdings at my fund holding at Marketocracy.  Here's a visual of my progress so far.

So far she looks good, but I'm still skeptical.  Even though volatility has picked up, I've outperformed by a good margin.  The true test is when we hit a sustained downtrend.  Just like backtesting, I want to test my idea in all of the major market conditions (up, down and sideways).  I plan on keeping this as virtual thing for at least another few months.  If I'm still satisfied, I'll begin with a small amount of real money.  I'll most likely use a Zecco account to keep transaction costs to nothing (sorry IB).

One of the reasons for the name "The Market Skeptic" is my constant skepticism and sometimes outright distrust for all things market related.  Perhaps I'm a bit jaded because for a number of years I believed what I heard on CNBC and believed in the existence of gurus that could navigate us little people to repeatable market success.  I think there's a lot of that going on in people now, which is why Cramer and Fast Money are very popular shows.  Most people are unaware that Cramer's recommendations do no better than a monkey saying "buy" or "sell" randomly on the same stocks.  You can also see the outright lies in the day to day market commentary.  For awhile, the stock market drooped when oil rose, except for the days when it didn't.  Back in the late 1990's, it was always the bond market rallying that brought stocks down, the old "flight to quality" except for days when it didn't.  More recently it's been gold or the housing sector and this month it's the bond yields.  The point is, no one knows what causes these daily gyrations and it's really pointless to speculate or even care because you're too late anyhow.

I suppose I'm a slow learner, as it took me years to really figure this out.  There are no gurus, there are no concrete reasons why the market does what it does.  There is no holy grail.  There is no Santa Claus.  If you believe in any of these things, stop, and your pursuit will become much clearer.  This does not mean that probabilities are not at play and that you cannot outperform the indexes or even make a decent living trading whatever you like to trade.  Just know that there is no easy way.  Any trader worth anything will tell you about hard work and discipline.

Now I could dedicate an entire blog very easily to calling these people (gurus, CNBC, late night television) out for what they are, but the point here is to remain productive and positive.  Calling out Cramer does not equal alpha in my portfolio.  You can call Cramer a joke, but there are a coupl of important lessons that can be taken away from that show that are repeated over and over.  Do your own homework and leave tips for waiters, not for making stock picks, for starters.  The ideas that go into stock picks and lessons learned are far more valuable than if he's buy, buy, buy or sell, sell, sell on Riverbed Technologies.

So yesterday the market moved up reasonably well at the open only to fall back into the red.  This happened two days in a row, which doesn't bode well for the bulls.  Gold was down, bond yields down, gasoline and crude were down sharply, so why did the market fall?  Easy, because yesterday we were all scared in the afternoon that some of the future leveraged buyouts may be too risky.  And the beat goes on ....

Over the years, this has become the fuel for my fire.  I don't believe much in what I read without finding my own evidence to back things up.  This evidence comes from the chart, which doesn't lie, and experience either personally or drawn from others.  I will provide charts and numbers based on what I've read, digested and experienced.  I hope others can return their experience.  This should help us all cut through the malarkey.

One of the reasons for the name "The Market Skeptic" is my constant skepticism and sometimes outright distrust for all things market related.  Perhaps I'm a bit jaded because for a number of years I believed what I heard on CNBC and believed in the existence of gurus that could navigate us little people to repeatable market success.  I think there's a lot of that going on in people now, which is why Cramer and Fast Money are very popular shows.  Most people are unaware that Cramer's recommendations do no better than a monkey saying "buy" or "sell" randomly on the same stocks.  You can also see the outright lies in the day to day market commentary.  For awhile, the stock market drooped when oil rose, except for the days when it didn't.  Back in the late 1990's, it was always the bond market rallying that brought stocks down, the old "flight to quality" except for days when it didn't.  More recently it's been gold or the housing sector and this month it's the bond yields.  The point is, no one knows what causes these daily gyrations and it's really pointless to speculate or even care because you're too late anyhow.

I suppose I'm a slow learner, as it took me years to really figure this out.  There are no gurus, there are no concrete reasons why the market does what it does.  There is no holy grail.  There is no Santa Claus.  If you believe in any of these things, stop, and your pursuit will become much clearer.  This does not mean that probabilities are not at play and that you cannot outperform the indexes or even make a decent living trading whatever you like to trade.  Just know that there is no easy way.  Any trader worth anything will tell you about hard work and discipline.

Now I could dedicate an entire blog very easily to calling these people (gurus, CNBC, late night television) out for what they are, but the point here is to remain productive and positive.  Calling out Cramer does not equal alpha in my portfolio.  You can call Cramer a joke, but there are a coupl of important lessons that can be taken away from that show that are repeated over and over.  Do your own homework and leave tips for waiters, not for making stock picks, for starters.  The ideas that go into stock picks and lessons learned are far more valuable than if he's buy, buy, buy or sell, sell, sell on Riverbed Technologies.

So yesterday the market moved up reasonably well at the open only to fall back into the red.  This happened two days in a row, which doesn't bode well for the bulls.  Gold was down, bond yields down, gasoline and crude were down sharply, so why did the market fall?  Easy, because yesterday we were all scared in the afternoon that some of the future leveraged buyouts may be too risky.  And the beat goes on ....

Over the years, this has become the fuel for my fire.  I don't believe much in what I read without finding my own evidence to back things up.  This evidence comes from the chart, which doesn't lie, and experience either personally or drawn from others.  I will provide charts and numbers based on what I've read, digested and experienced.  I hope others can return their experience.  This should help us all cut through the malarkey.

How many times have you heard that covered calls, also known as, buy-write are a "low risk" way to use options?  Honestly, these are not particularly conservative because theoretically your downside is unlimited and you've capped your upside by selling the call.  This doesn't stop the late night T.V. infomercials or the trading/investment radio shows from pushing a covered call strategy.  Truth be told, just like any option strategy, covered calls have their place in this world.  A covered call is equivalent to a short put, but covered calls are allowed in most accounts, naked puts are not.

Typically the late night TV shows will explain how your account is earning "rent" on stocks that you already own.  This is 100% true when the market is moving sideways.  As we all know the market doesn't always move sideways, but this doesn't mean that you can't get a bit of "rent" while this is the case.  A low risk to gain this exposure has been recently introduced as an ETF, which makes it available to everyone.  Barclays has recently introduced an ETN that tracks CBOE's BuyWrite index (BXM) on the S&P 500.  The symbol name is BWV and it began trading on May 23 of this year.

With the impending downturn that everyone is fearing, perhaps adding a bit of downside protection would make you sleep better at night.  Despite what they tell you on the late infomercials, the covered call strategy behaves just as chart shows you.  When the market meanders, you're outperforming the index.  But as you can see, this year, the index would be outperforming you.  What is compelling, especially to those who have ulcers, the equity curve is a lot smoother than just plain buy and hold.

We still have two issues to consider before phoning our broker.  First, will this ETN offering from Barclays track the index properly?  If not, how far will it deviate?  The second item to consider is that the volume absolutely pathetic.  The volume last Friday was a measly 700 shares.  Wow!  I've been watching this ETN and noticed the spread at one point on Friday was 1.5% wide.  That's absolutely insane.  My guess is that everyone is waiting to see if my first concern shakes out.  With a spread like that, it's hard to tell how close the tracking is.

The bottom line is that I'm intrigued by this ETN for my longer term holdings.  It could help just a bit when things are in a range or trending down.  I'm keeping my eye out for more volume and two to four quarters of trading to get an idea for tracking deviation.

How many times have you heard that covered calls, also known as, buy-write are a "low risk" way to use options?  Honestly, these are not particularly conservative because theoretically your downside is unlimited and you've capped your upside by selling the call.  This doesn't stop the late night T.V. infomercials or the trading/investment radio shows from pushing a covered call strategy.  Truth be told, just like any option strategy, covered calls have their place in this world.  A covered call is equivalent to a short put, but covered calls are allowed in most accounts, naked puts are not.

Typically the late night TV shows will explain how your account is earning "rent" on stocks that you already own.  This is 100% true when the market is moving sideways.  As we all know the market doesn't always move sideways, but this doesn't mean that you can't get a bit of "rent" while this is the case.  A low risk to gain this exposure has been recently introduced as an ETF, which makes it available to everyone.  Barclays has recently introduced an ETN that tracks CBOE's BuyWrite index (BXM) on the S&P 500.  The symbol name is BWV and it began trading on May 23 of this year.

With the impending downturn that everyone is fearing, perhaps adding a bit of downside protection would make you sleep better at night.  Despite what they tell you on the late infomercials, the covered call strategy behaves just as chart shows you.  When the market meanders, you're outperforming the index.  But as you can see, this year, the index would be outperforming you.  What is compelling, especially to those who have ulcers, the equity curve is a lot smoother than just plain buy and hold.

We still have two issues to consider before phoning our broker.  First, will this ETN offering from Barclays track the index properly?  If not, how far will it deviate?  The second item to consider is that the volume absolutely pathetic.  The volume last Friday was a measly 700 shares.  Wow!  I've been watching this ETN and noticed the spread at one point on Friday was 1.5% wide.  That's absolutely insane.  My guess is that everyone is waiting to see if my first concern shakes out.  With a spread like that, it's hard to tell how close the tracking is.

The bottom line is that I'm intrigued by this ETN for my longer term holdings.  It could help just a bit when things are in a range or trending down.  I'm keeping my eye out for more volume and two to four quarters of trading to get an idea for tracking deviation.

As any option trader knows, the bid/ask spread for buy and selling options has been a lot on the ridiculous side for a number of years.  The minimum spread was a "nickel" (0.05) which amounts to $5 per contract and this was the best that you could do.  You start running into contracts that aren't the most liquid in existence, then factor in a spread strategy that's two, three or four legs and your risk/reward takes a hit very quickly.  I began trading options in 2001 and was immediately turned off by the bid/ask spreads.  I used options sparingly until I started trading spreads and then based on the bid/ask spread considered options a racket.  I could not even get filled on the mid in most cases.  I finally got pretty good at legging in, and would sweat it out most times to get a perceived "good fill".

Enter 2007 and the penny pilot program.  The only broker or exchange that I found that embraced this was Interactive Brokers.  The exchanges in particular whined about how this would overload their quote systems and bring the exchange to it's knees (repeat the same whining by the stock exchanges when the quotes moved to pennies).  Apparently the SEC saw through this nonsense and had them proceed.  Assumably, the compromise here was that only a select few items would be eligible to trade in penny increments.  The original stocks were accepted into the penny pilot program.  After all of the whining and fuss, the final results are in.

The penny pilot program is a success!

This is probably not a surprise to anyone, but it's nice to see this in print.  In every single case, the spreads narrowed considerably.  However, the letter to the SEC from the CBOE paints one of the most uncelebrated successes I've ever seen.  In fact, they warn on a number of occasions in their report to the SEC that they need to proceed cautiously implementing this across the board.  Prolonging the inevitable perhaps?

Bottom line folks, this is big news for the little guy.  When the pilot program started, I was truly elated to see an out of the money calendar spread on MSFT with a spread of 0.02.

As any option trader knows, the bid/ask spread for buy and selling options has been a lot on the ridiculous side for a number of years.  The minimum spread was a "nickel" (0.05) which amounts to $5 per contract and this was the best that you could do.  You start running into contracts that aren't the most liquid in existence, then factor in a spread strategy that's two, three or four legs and your risk/reward takes a hit very quickly.  I began trading options in 2001 and was immediately turned off by the bid/ask spreads.  I used options sparingly until I started trading spreads and then based on the bid/ask spread considered options a racket.  I could not even get filled on the mid in most cases.  I finally got pretty good at legging in, and would sweat it out most times to get a perceived "good fill".

Enter 2007 and the penny pilot program.  The only broker or exchange that I found that embraced this was Interactive Brokers.  The exchanges in particular whined about how this would overload their quote systems and bring the exchange to it's knees (repeat the same whining by the stock exchanges when the quotes moved to pennies).  Apparently the SEC saw through this nonsense and had them proceed.  Assumably, the compromise here was that only a select few items would be eligible to trade in penny increments.  The original stocks were accepted into the penny pilot program.  After all of the whining and fuss, the final results are in.

The penny pilot program is a success!

This is probably not a surprise to anyone, but it's nice to see this in print.  In every single case, the spreads narrowed considerably.  However, the letter to the SEC from the CBOE paints one of the most uncelebrated successes I've ever seen.  In fact, they warn on a number of occasions in their report to the SEC that they need to proceed cautiously implementing this across the board.  Prolonging the inevitable perhaps?

Bottom line folks, this is big news for the little guy.  When the pilot program started, I was truly elated to see an out of the money calendar spread on MSFT with a spread of 0.02.

With volatility seemingly back in fashion, smart traders have been watching (or trading) the VIX.  Premium sellers were throwing in the towel when the VIX was churning along between 10-12 for over a year, with the exception of a brief spike in July 2006.  Looking at a chart, it looks like volatility is back, from a relative standpoint.  In fact, if this were a company's stock chart, this looks like a classic "break out" pattern.  Maybe I make old Bill O'Neil proud and call this the beginning of a cup and handle.

I drew a solid line at 10.00.  This is clearly very tough support, maybe even unbreakable support.  The Bollinger Bands have widened notably since the 400 point drop in February and really haven't squeezed back together as tight as they were.  So is this a change in the trend?

There have been many comparing the last few months to 1999, but I think many have forgotten just how ridiculous 1999 was.  Stocks were doubling and tripling in days.  The Nasdaq was making triple digit gains in one day on a somewhat regular interval.  This is not 1999 folks, however, the other side has also forgotten what volatility is.  I could hardly believe my ears when I heard a certain channel that covers the market everyday refer to Wednesday's 190 point drop as a "crash".  Folks, 2002 saw VIX readings in the 50's, yesterday's spike put us at 15.  190 points is about 1.3%, or to most, nothing but general noise.  To put it in perspective, the Dow lost 20% of it's value in 1987.  If that were to happen today, the Dow would have to make a drop of around 2700 points in a single day.  We really need to start calling things what they are.  I suppose it wouldn't make very good television if the analysts all said "Well, I think the indexes will probably meander for a while and bump around like me looking for my car keys in the dark".

At the very least, if volatility is back then the markets can quit putting the traders to sleep.

With volatility seemingly back in fashion, smart traders have been watching (or trading) the VIX.  Premium sellers were throwing in the towel when the VIX was churning along between 10-12 for over a year, with the exception of a brief spike in July 2006.  Looking at a chart, it looks like volatility is back, from a relative standpoint.  In fact, if this were a company's stock chart, this looks like a classic "break out" pattern.  Maybe I make old Bill O'Neil proud and call this the beginning of a cup and handle.

I drew a solid line at 10.00.  This is clearly very tough support, maybe even unbreakable support.  The Bollinger Bands have widened notably since the 400 point drop in February and really haven't squeezed back together as tight as they were.  So is this a change in the trend?

There have been many comparing the last few months to 1999, but I think many have forgotten just how ridiculous 1999 was.  Stocks were doubling and tripling in days.  The Nasdaq was making triple digit gains in one day on a somewhat regular interval.  This is not 1999 folks, however, the other side has also forgotten what volatility is.  I could hardly believe my ears when I heard a certain channel that covers the market everyday refer to Wednesday's 190 point drop as a "crash".  Folks, 2002 saw VIX readings in the 50's, yesterday's spike put us at 15.  190 points is about 1.3%, or to most, nothing but general noise.  To put it in perspective, the Dow lost 20% of it's value in 1987.  If that were to happen today, the Dow would have to make a drop of around 2700 points in a single day.  We really need to start calling things what they are.  I suppose it wouldn't make very good television if the analysts all said "Well, I think the indexes will probably meander for a while and bump around like me looking for my car keys in the dark".

At the very least, if volatility is back then the markets can quit putting the traders to sleep.

This is a place to write and hopefully discuss some random ideas related to trading systems, trading, markets, ETFs, options and maybe discuss a stock or two.

Briefly about me, I'm a software developer and I'm currently working on the RightEdge software package.  I'm a software developer and a swing trader.  I use the systems that I create and also do some discretionary trading as time permits.

This is a place to write and hopefully discuss some random ideas related to trading systems, trading, markets, ETFs, options and maybe discuss a stock or two.

Briefly about me, I'm a software developer and I'm currently working on the RightEdge software package.  I'm a software developer and a swing trader.  I use the systems that I create and also do some discretionary trading as time permits.