Jeffrey McLarty

You can now follow my money printer, on twitter.  http://www.twitter.com/MoneyPrinter.  It is a feed of my algorithmic actively managed market-making buy-write.  It’s everything including sent orders (SO), canceled (CO), and executed (XO), as well as my observations…and anything else.  ‘w’ means ‘write’ and ‘c’ means ‘cover’.  Right now, it’s produced manually, as are the trades. I funded $11K Canadian and the manual part of my algorithm has me writing puts to get assigned.  I decided it would be better not to do this part for the initial round, and instead start the algorithm already long…that way I can get the automatic portion up and running quicker.  I’m still working on the automatic version, but to do that, I need a better feel for the liquidity, because the automatic version will take constants to tweak things.

So, I bought 100 SSO $76 and 100 HXU at $35.53 on friday afternoon, soley because it’s the May option expiry…that way I start with one entire month.  I would have bought more HXU, I’m planning on doing so, before June, but I just need to transfer another ~15K into Interactive Brokers.

Eventually, I’m going to get my algorithm to tweet the orders it sends, automatically…but this likely won’t be done until July.  It’ll be super cool to just get tweets on my phone telling me the trades the algorithm is making.

I’ll publish summaries after a bit of time.

Myron Sholes was just on bloomberg, he’s originally from Timmins, Ontario…cool!  He moved to Chicago because of the economics research coming out of the school ’spoke to him’.

He spoke in a fluid prophetic manor with respect to those who are “Flexible”. They inherently possess more ‘options’ than those who are inflexible.  Since options have value, flexibility is valuable, which can be invested just like any other form of value. It makes so much sense at any level of an organization’s hierarchy.  From a single person’s perspective to a multi billion dollar empire.  It also parallels the law of large numbers.

He also spoke on ‘Intuition’ and said it can lead us to believe stuff that we don’t correctly understand.  So, true. Guilty. Creating a model, then testing it against data, eliminates this problem and returns progress.

Glad I tuned in.

I sent some good money after bad, and picked up a little more Sandvine. I also bought RIM at $139, and MFC at $38. I’ve been patiently trying to sell some puts on HXU.TO, in order to get assigned, but nobody has hit me, and I got to believe it’s hitting a short term peak. I just want a couple days of red, in a row, and i’ll be long.

I also got IB finally funded. I only funded the minimum, $10K, because I’m just learning the software. Trying out my account, I wrote a single put on SSO, $75, expiring tomorrow. Yah, I know, it’s only ~$50. But I was playing with the cool VOL (volatility) order type.

Check this math out. I put up $1900, and hypothetically make $50 minus the $1 in fees. *If it expires worthless* that’s a smooth 2.5%, or 36% per year pre-tax. The cool part is, if you could pull that off once a month - your money is only on the line 12 days per year…all you need is the balls/stupidity to risk getting assigned. But, I kind of want a little SSO so I can trade the calls on it.

A Mexican entrepreneur took a picture of our group as we unloaded the tour bus after we arrived at Chichen, Itza.  On our way home, she tried to sell us a mickey of tequila with our picture scotched tapped over the label.  $16 USD.  We didn’t buy one…maybe web 2.0 it up, somehow.   But get this, they didn’t have a bottle of water to sell us, on a day when it was 100*F out.

Tips are going to keep Mexicans uneducated.  I’m suffering from an anchoring heuristic, I’m sure, but if tourists keep subsidizing the wages of mexicans working in the tourism industry, then they have little to no incentive to go out and get educated.

I bought an $80 Chess set, reduced for me to $60, then negotiated down to $30.  You know what’s the difference between a pond and a bishop in my Mexican chess set?  Nothing.

It sucks to have been one of the ~16M Mayans during the 50 years that the Spanish invaded…15.8M died, the rest probably wished they did.  But before that, they did really amazing things manipulating gravity, acoustics, and most impressive - the solar angles.

Don’t dive from sketchy dive shacks.  If they don’t clean the tanks properly - bacteria will get in your lungs and kill you vacation.

If I ever have a pet jellyfish, I’m going to name it ‘9V’, because that’s what kind of battery a jellyfish feel like when they sting you.

Last week, I caved to my friend and girlfriend wanting me to come to Cancun…so I fly out tomorrow with them, and my bud’s girlfriend.

Planning on drinking too much, eating too much, not getting my insatiable appetite for diving completely full…and reading like the dork I am.

I was at the bookstore trying to decide between Friedman’s ‘The World is Flat 3.0′ and ‘Globalization and its Disconents’ by Stiglitz, when on the shelf I saw Stiglitz’s new book ‘Making Globalization Work’.  I picked it up and saw on the first page of Sliglitz’s new work, one of the reviews…

“A worthy counterpoint to to Thomas Friedman’s popular The World is Flat” - Brendan Driscoll, Booklist

…so I grabbed all three books.

I’m busy.  I’m young.  There is infite media to consume - books, music, movies etc.  I’ve decided I’m no longer going to consume anything that isn’t referred, by at least one person who I consider more informed than I, and who I share similar interests/goals with.  See, when something is referred, that means it has a higher chance of not wasting my time.  If I have the choice of consuming something random (pretty much just me judging a book by it’s cover, or by some paid for review) vs a referred service/product, well - I have better odds of optimizing my life.

3 years ago, I joked and unofficially appointed a good friend, Adam Franklin, to be my personal movie advisor.  It was after he recommended a great flick.  I joked about paying him a salary, giving a bonus, firing him after a bad call, getting him an assistant and granting him extra vacation - it was, an inside joke for a long time.  But, since then, he has recommended better movies than Sikel and Ebert (I know I butchered their names, sorry, it’s my blog).  I appreciate it, and thank him sincerely for his recommendations.

Why should you accept this promotion? I mean, what’s in it for you?  Nothing that you can put a price tag on, it’s all intrinsic.  If you recommend me something, and I like it, you’ll get a thanks, you’ll have my loyalty, my appreciation, and I will go out of my way to make recommendations back to you.  I will also get to know you better.  I will also make a conscious effort to say to others “I really enjoyed this book, I think you’ll like it, this guy I know - Mr. Smith, also recommends it”.  Who knows how powerful that statement, or chain could become if everyone named dropped while they gave recommendations.  In my eyes, this is one of the most imperative times when anybody can name drop.  I say, if I give you a recommendation, and you agree after consuming the recommendation, please forward my name on with you’re recommendation when you talk to somebody else.  It’s the least I/you can do, right? Do you get what I’m trying to say?  I hope so.

See, this is all part of me expanding, and I’m taking this seriously.  I’ve been expanding my network of smart people, not in a selfish/capitalistic way, my intentions are entirely symbiotic.  If you read this, I consider you part of that network, and I thank you.

To kick things off:

My Dad, and and I, both highly recommend “Boom, Bust & Echo, by Dr. K. Foot” for anybody who likes to extrapolate on population trends, or is into demographics

Roy Verstreate, CEO of Anchor Lamina, personally recommended, a book I’m sure you’ve heard of, but ”Good To Great” is a great read….but it’s a cliche, and if you haven’t read it yet, well, you probably have a reason for not doing so.

Howard Lindzon, recommended a great book, I loved it, any investor will appreciate learning from author Ralph Wagner “A Zebra in Lion Country”.

Larry W. Smith, an economics prof, I’ll call him the best, maybe the most informed thinker I know, he takes the word leadership and squares it, has a list of recommendations. I intend to cherry pick through these, and pass on the ones I like.  First one up is “Globalizations and its Discontents” I buying it today.  He also wrote a book, which is on my ‘to read radar’ -> “Beyond the Internet”.  I’ll let you know.

…don’t get me wrong, I’ve read many other books - but…they are all just…”meh”…and you can find “meh” books on your own.

So any recommendations? Please, leave a comment!

So, the link Paul shared, regarding the mortgage map, was sent to me about 2 weeks sooner by my good bud Thiago Avila.  Thanks, Thiago.  BUT, in my defense, I never got it - because - he sent it to me via Google Chat. I searched and searched my inbox, only to discover he sent it asynchronously, and I must have closed a multi-tabbed browser or something or ie crashed or etc. etc. .  Moral of the story, don’t rely on people receiving google chat messages.

Algorithmic & Actively Managed Market-Making Buy-Write is what I call the strategy and it’s my latest way I’m going to harvest money from the capital markets without having to worry too much. It’s more like an experiment in liquidity. My intentions are to test out my hypothesis, prove it works, then open up a fund to friends and family to invest privately.

For starters, to understand what I’m doing, you have to know what a “buy-write” is. If you do, skip this paragraph.  A Buy-Write is a strategy where you go long an asset, and write derivatives against your ownership.  The most common form, is going long the stock and writing calls.  The beauty behind it is you go long an asset you don’t mind holding anyway. Ie, you wouldn’t sell it if it became cheaper but for the right price you’d be happy to sell it (higher).  Well, you choose what price you’d “be happy to sell for” and write that call.  You rake in anywhere between 1/2 % to 2 % a month, hopefully while your stock goes up in value (but not too quickly).  This strategy is arguably less risky than un-hedged ownership because once you write the calls, the asset can fall in value a little, and you’re free to take profit on the calls fall in value.  So, while the upside is capped (while you’re covered), and the downside is a hypothetical -100%, you offset you’re P/L line with the premium of the derivative.

Market making is the act of always trying to sell or buy something, it adds liquidity to the market, and the goal is to capture the bid/ask spread.

My strategy is merging these two ideas to get a Market Making Buy-Write.  I’m going to manage if actively adding compensation for bullishness and bearishness, and I’m working on an algorithm to do it for me.

So, I’ll go long (at least 1000 shares) of a double-long options trading ETF.  The higher the implied volatility, the better, and the more bullish you are on it, the better. I’m going to use HXU.TO, double long the TSX - because I believe Canada is in good shape, compared to other countries. I’m also going to apply the same strategy to SSO.  I’m less bullish on the US, but IV is higher…so it’s a wash.  And I’m also going to do it with one other diversified emerging market ETF.

This is how it mechanically…

1. Go long the ETF (BTW, this will work with regular stock too, but stocks swing more violently and IV is less consistent); Eg. HXU.TO at ~$30, at least 1000 shares = $30K.

2. Send 3 to 5 orders to sell various call options on either the front-one,-two, or -three month option (out of the money). Wait patiently, if the markets move up, raise the ask, if it falls, lower the ask. The options are so illiquid, it might take a week for an order to take.

3. Any that are sold, immediately try to buy them back cheaper, trying to capture the bid/ask spread, patiently waiting at the bid. If the markets move up, good, if they don’t, time is on your side and you’re covered. More patient waiting.

4. Repeat 2 and 3 as much as possible.

There is an active/human based management component, where watching the markets full time, one can incorporate short-term bearish/bullishness into the strategy by picking different strikes and being more or less willing to sell calls (aka raise or lower the ask/bid accordingly). But it’s important to always be ready to sell/buy calls - for the right price.

Downfalls to this strategy are that volatility can blow it apart. Luckily as volatility climbs, so should option premiums. The TSX could shoot up, but in which case, any stock covered will just get called away and return more that capturing the spread would have. Of course, there’s a downside, but it should be offset by the fact that any short calls will fall in price, and in the long-run the market trends up.

Starting out, over the next three months, I’m going to program an algorithm using Interactive Broker’s API to do exactly what I’ll be doing manually to test this out. After I have the algorithm working, I’ll add in some bullish/bearish constants that I can change whenever I feel like and leave it on auto-pilot.

Here we have a strategy, that even if with 1000 shares, if you can sell 5 calls, and buy them back $1 or more cheaper, once a month - you’ll have a machine that’s generating at least $500 / $30K = 1.6% per month = 22% per year (before taxes) while the asset should easily appreciate by at least 15% year.

I’m curious about the scaling of this idea, but as time goes by, liquidity will improve. So, as liquidity improves…I’ll shoot for 15 contracts a month taking $0.3 each time, rather than the 5 contracts taking $1 each time.

This strategy is nothing new, people have been doing it since options started trading, I’m just going to get my slice of the pie.

Thanks, Paul, http://www.newyorkfed.org/mortgagemaps/

…well…it might take a couple days to clear, but the point is - A much higher fraction of my net worth is liquid and approximately only 20% invested.

Do I have plans for the loot? You bet.

I’m going to load up the boat on *HXU.TO. depending on the charts, market timing may vary. Enough to add a tiny bit of liquidity on the Montreal Option Exchange. I’ll be trading calls optimistically, essentially running an actively managed buy-write…which I will be switching over to an algorithmic managed buy-write (as soon as I finish the code and get a dedicated processor for it). I’m expecting +23% returns from this.

I’ll also be buying a much smaller position in SSO, planning on selling nearly at the money calls, or maybe i’ll scale in by writing puts-to-own. I’d like to steal +19% per year from this - should be doable if I stick to my policy of at the money front months and don’t get optimistic on the US.

The other list of stocks I’ll be buying include:

VCP (multiplier expanding returns, around the corner), MFC (15% + whatever calls I can scalp), XRAY (18%), and maybe a little TNH (no ceiling on expectations). Also want to take a second look at NTDOY, now that the fit is out.

I’ll be continuing to hold JCI (expecting 18% + multiplier expansion from 15 to 18 + whatever calls I can scalp), CCJ (no ceiling on expectations), CPA (no ceiling on expectations), AAPL (26%), GOOG (22%), and SVC.TO (I’d like to get out of the red before 2009).

I want to save a little cash for adding the right “green” play that comes along or “rice equilibrium” play, or maybe something else - on the cheap.

I may skip on TNH and instead just buy that agriculture ETF, I forget the symbol right now…it just launched…I realize I’m late to this party.

I’d also like to add some exposure to South Africa or Latin America…likely it’ll be through an ETF.

I’m curious what you would do if you suddenly had a bunch of spare cash you had to put to work.

I’ll also be investing in things to improve my productivity: 40″ 1080p LCD HDTV + 2 x19″ Monitors all driven by an Intel Quad Core, 2 TB raid array hard drive with 8 GB of RAM + blue ray and 8 channel sound.

*Note, in original post I wrote HXD.TO - that was a mistake, it’s fixed now.

According to an informed mortgage department rep, at PC Financial, all 5 major banks were sued almost two years ago for accepting “pre-payment” payments not on the discrete mortgage re-balancing dates, as per the standardized contract.  Because of that lawsuit, two years ago, I lost $400, today.  Read on to not let it happen to you. If I had known sooner, I could have saved the minor fee.

Picture this scene.  A home owner wants to use some of the penalty free pre-payment, to increase equity in their home, and reduce the mortgage payments before their 5 year term is up.  Before the lawsuit, the bank would say “Sure, we can take that cash, today, and on the 1st of next month, your new payment will be lowered to $XXX”.  That’s how I figured it would work, but the lawsuit slapped the banks hands for being flexible, and now they choose to only accept payments on the dates when mortgage payments are also collected.

See, the banks used to take pre-payment money any given day of the month and applied the same flat calculations.  The legal document (the one with all the fine print, borrowers sign when they get the mortgage) gave them the right to not bother to account for the (negligible) difference in present value of paying down your mortgage on say the 10th vs the 20th of the month.  Ie, if you paid down $25K worth of mortgage on the 10th, by the banks flat calculations (which they were legally allowed to do) it had the same effect as paying down your mortgage on the 20th.  Somebody got mad about this, and sued, and won.  So, Banks said “Fine, we’ll stop (being flexibly) and accepting payments except for recalculation days (days when we regularly just collect a mortgage payment)”.

Now, since I’ve sold my house on the 15th of April, with a close of the 30th of April, I don’t have a mortgage payment date in between.  So there is no recalculation day where PC Financial will collect my ~$25K of pre-payment. Since there is a penalty, which is a function of the outstanding debt, due when the mortgage is broken I’m forced to pay the penalty on my entire outstanding mortgage, rather than paying down my pre-payment and paying just a penalty on the remaining 4/5ths of the debt.  The penalty for breaking the mortgage early, on 1/5th of debt is approximately $400.  The conclusion is, if I would have closed the sale of the property on the 1st of May, I could have used my pre-payment privileged and sent them a check for the ~$25K on the first of May, but since the deal closes on the 30th of April, I’m screwed out of $400.

Thanks big banks…keep up the good work *rolls eyes*

Tycooonville - That’s where I’m headed.  It’s a place where high degrees of wit, extreme capitalistic tendencies, uber conservatism, and intelligent policy both fiscal and monetary are expected, no - demanded.  In Tycoonville, absolute gains are expected, present value is assumed, and markets are effecient as they all obey causality. To get there, you’ll need hard work, a brain, and likely some form of leverage - plus an invite, from the mayor. 

I’m up at 4 in the morning planning my next 3 months.  This is a green sign with white text, on the way to Tycoonville.

Seriously,  I feel like I have to let everybody know, but likely no one cares, so hence this asynchronous message to the internet. I’ll call it the gameplan from here on out.  Oh, and i’m not being narcassistic anybody who reads me - likely has a vested interesting in some of these points.

ToDo:

0. Finish Taxes (Due in 5 days, will be done in 1 or 2) Clean house for the last time, before tenants move in on May 1st. April is done.

1. BlogTalkRadio - Andy, Ross, & Howard - as I warned I had zero time for this in April, now it’s May - let’s get on it.  If any of you read this, I’m dedicating 18 hours starting May 1st at 1 pm and to be use up on or before May 4th + whenever a scheduled show.  We’ll see how the first show goes.

2. Cuba - You only live once, but Cuba, one can do twice. My girlfriend + plus best bud want me to go…so I’m in. May 5th ish - May 15th ish

3. Chicago - Have to still arrange with Andrea, at Ariel, what week I can volunteer.  1 week, likely late May.

4. Los Angeles & San Francisco - Got some weekend trips to make here.  Assigning two weekends in June.

5. Florida/Hawaii - Both these markets require some attention, may not be able to squeeze them in, crossing my fingers I can.  2 weeks, one per state, likely July.

6. Philly - I regret not calling Scott sooner, I hope I can still get involved with Ashoka, time permitting.

7. Point Pelee - I have to squeeze in a few days with my folks.

In between all those shananigans I have to find a place in Toronto (and move there), finish stoxbox, launch a separate get rich quick scheme I’ve been brewing, manage my growing portfolio, and i’d like to assign a little time and capital to an algorithmic buy-write strategy using Interactive Brokers.  PLUS I should redo jeffreymclarty.com and bluemoat.com.  Oh, and it’d be a shame if i didn’t read a book or two - right?

9. Dallas - The gameplan all wraps up with a week here, starting July 28th.

PS - there is no 8 in Tycoonville, we work on a scale from 0 - 10.  People expect, no - demand, 9’s and 10’s so there is no use for 8’s.  We kept the numbers 0 - 7 to measure hours of sleep per night.

I want a tool where I can quickly look at, show, and share cash flows, graphically.  I want to be able to manipulate them, create annuities, both growing, shrinking, positive and negative, show better than expected, worse than expected, add risk and possibility of outliers events, etc. etc. I think if North Americans better understood cash flows and more specifically, the present value of money - they could be all more well off.  That’s the only trick to getting rich.  Folks, a dollar today IS NOT the same as a dollar tomorrow.

I want to be able to quickly draw up and down arrows for projects, ideas, opportunities, investments, budgeting, etc.

I’m going to add this to the long list of things I want to program for myself.  Maybe I’ll make a website out of it.  Maybe I’ll create a website to help entrepreneurs pitch ideas.  Maybe families could use it, or investors could network and share experiences as well as invest in each others projects.  Maybe discount brokerage firms pick this up to help clients manage more than just their security holdings.

Maybe nothing will come of this idea, and it will end here and now - then again, maybe it won’t.

There’s a lesson in here somewhere, in marketing, or honesty or something…whatever.  This was about two years ago.

My house phone number was previously used in an erroneous advertisement for a bike shop.  I got so annoyed, I started screwing with the callers that didn’t say either “Hello, my name is” or give some other form of polite introduction. Here is one of my favorite phone calls, I remember:

Ring…Ring…

Me: “Hello?”

Caller: “Do you do Bike Tune-Ups?”

Me: “That depends, I could probably do it”

Caller: (Slightly confused by my lack of confidence) “Well, how’s that work? What are your prices?”

Me: “I’ll need a spoke count to get you an accurate quote, and it depends on why the bike needs tuning”

Caller: “Okay, I can count ‘em, the bike’s right here - is the front usually the same as the back?”

Me: “Rarely, you normally have to count both tires”

Caller: “Oh, Okay - no problem - 1 - 2 - 3 - 4…6 - 8 - 10 - 12…”

Me - covering the phone, and laughing OUTLOUD.

Caller: “…Front has 32, back has 32″ (I forget the real numbers, but they were the same)

Me: “Oh, really, that’s strange that they are the same - where did you get THIS bike - that’s going to cost extra”

Caller: “Why does it cost extra?”

Me: “Oh, well, if they are the same we have to label them, so we don’t mix them up.”

Caller: “Oh okay, well, can you give me a quote now?”

Me: “I told you it depends, on why the bike needs tuning?”

Caller: “What?”

Me: “Yah, I saw this one time, a bike that came in, with a bent frame after the owner got fat and then stopped using the bike.  It was kind of a chicken and an egg thing”

Caller: “Oh…well…”

Me: “What’s the matter sir, did-cha-get-fat?”

Caller: “Ahhhh, wellll….” (I’m thinking he was leaning towards yes)

Me: “Don’t worry, I think I can fix any bike that you have”

Caller: “Well, I didn’t get *that* fat” Me - (OOoh  you’re making this too easy)

Me: “How much weight did you gain, sir?”

Caller: “maybe 30 lbs, it was a side-effect of medication”

Me: “Oooooouuuuuu, that’s actually quite a bit of weight, especially if you didn’t re-enforce the frame”

Caller: “Oh, I didn’t do thaaaat”

Me: “Oh you should have, that’s going to cost extra”

Caller: “So how much am I looking at?”

Me: “Let’s see…(pretending to add up numbers)…$942″

Caller: “Are you kidding me?”

Me: “Yes. I’m honestly kidding you.”

Caller: “What? Huh? Can I speak to a manager?”

Me: “No, err, I mean, I am the manager, sir”

Caller: “Are you serious?”

Me: “I told you already, I was honestly kidding you”

Caller: “What?”

Me: “I told you, you asked if I was kidding, I *SAID* ‘yes’ ”

Caller: Silent…”Ummm…” Click.

I owe some thanks, and shout-outs, to the people closest to me that helped me over the last 5 years.   My sister, was probably the most priceless asset to have - she was essentially risk free income, who helped me out in many intangible and unquantifiable ways through-out the entire last 4 years.  She also brought her friends as customers, that worked out really well.  Big thanks to her.  Followed by an “almost-tie-for-first-place” ranking of my amazing girlfriend who helped me out, especially over the last 3 years, with PRICELESS cleaning hours as well also becoming a source of revenue over the last 8 months.  Many many thanks are due.  I’ve also had good friends, I want to thank, as customers for on & off 4 months stretches. Customers who in hind-sight, I should have trusted more and not worried so much over getting deposits as early as I made them.  With the exception of minute little ”best-timez-of-our-livez” dart board holes, holes I almost wish I could take with me when I move out, they never really caused any damage and have been top-notch tenants to deal with.  I don’t know how to put a value on a repeat, good, customer…But want to say thanks for everything guys, and for being so cool.  I owe an even huger (yes I said huger)…maybe even the hugest (yes I said hugest)…thanks to my folks, they helped me in SO many quantifiable AND unquantifiable ways.

My Reflections (Read ‘em if you want, and at your own risk, just my thoughts out-loud):

Hindsight, I think it worked out well for me as well as everybody involved.  I mean, because I put up capital and hours of work I was able to provided a service - a service they all needed, and were happy (I think) to pay for.   I *think* they received a fair price and a good product, in their dealings with me.  Of course, there were minor hick-ups, but compared to the limitless, no-upper bound, of things that could have gone wrong (for either me or them)…everything generally worked out.  Hindsight - I’m glad.

I don’t know the entire impact, I likely never will, of having to balance friends, my girlfriend, and sister (and sister’s friends) as customers.  I’ll never know how many times they likely kept thoughts quiet just to be polite.  I had a few myself, but it’s water under the bridge now.  There are other impacts, I don’t want anybody to think, that I’m not thinking about it.