Martin Kronicle

I get a lot of nice emails from readers and I should probably post more of them. Here is one I got in the past week.

“I want to say I really enjoy your site and that it continues to be an intricate part of my education. My favorite are the podcasts and videos. I must have listened to the podcasts with Mr. Sperandeo, Mr. Ritholtz and Ms. Raschke and watched the videos with Mr. Dunn about a thousand times each.

This material, along with other sites and books ranging from trading to history to philosophy, led me to test trading theory for myself. After extensive work here, I decided to launch my own fund which is launching Jan 2011. Thank you again for your help. Go Yanks.”

Michael M. — MartinKronicle reader

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The grain market has been literally and figuratively on fire these past 2 trading sessions. As I’m writing this, December Corn is up 45 cents – and this is after being up 30 cents on Friday. That’s 75 cents or almost $4,000 per contract.

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November Soybeans are up 47 now after being up 70 cents on Friday. That’s over $5,000 per contract.

How much of these gains are you willing to take?

Over the last few weeks I’ve written about managing portfolio heat and I created a tutorial video on trading gold.

When you are out marketing your track record, allocators will ask how you handled this period in time. Telling them “I just followed my rules” is too general and you won’t build any trust with this statement. You need to break it down for them.

Another answer is “I saw unanticipated gains that came to me as a gift in a matter of a few days. I felt this was an outlier event that didn’t show it’s head in my hypothetical backtesting. I took some gains and MOST IMPORTANTLY I cut the risk and the volatility to my portfolio.”

When the market is on one side of the trade, everyone will be heading for the door at the same time. But if you are just starting out (5 years or less of a track record) managing risk is as much about managing your track record than for someone such as Bill Dunn for example. He already has everyone’s trust. You don’t. You need to earn it. And to put that into perspective, it will take 10 to 15 years before anyone is going to know whether your trading results are random or based upon skill.

Look at it from another point of view: You had gigantic gains overnight. You waited for an X-day low to get out and watched the gains recede faster than your hairline? Explain that to a client. They are not going to care about your rules when you’ve let gains slip through your fingers.

In circumstance like these, you have to pick a spot where you’ll be emotionally and financially stable by offsetting some of the risk. Sell some contracts and move a stop up to protect the majority of the unrealized gains. You can get back in. Most of the guys who made kajillions during gold’s big move in 1979 were catching large chunks of the move. That means they were in and out of gold WHILE IT WAS TRENDING.

Ed Seykota used to say, “your stop is the point at which you are willing to transfer the risk to someone else.” What is that spot for you?

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In order to get a feel for using options in turbulent times, listen to my interview with Larry Shover, author of Trading Options in Turbulent Markets.

I began playing guitar in October 1973 and have played ever since. Simply put, it is impossible to express the impact that John Lennon has had on my life. The competitive, yet symbiotic partnership between John and Paul is not likely to be matched by any songwriting duo anytime soon.

Bill Dunn of DUNN Capital Management sent me a presentation he made before the Hedge Fund World Middle East 2010 in Dubai UAE to share with my readers.

The presentation is called Planning for the Uncertainty of the Future and is used with his permission. Bill asked that I include this message below.

“Dear Reader — For your information I have attached an annotated version of my keynote address to the recent Hedge Fund World Middle East 2010 conference in Dubai in which I demonstrated and promoted the benefits of including Managed Futures in investment portfolios.

At the conference I only made reference to the CTA Index, the S&P Index and the various other Alternative Investment Classes because I wanted to keep the focus on the Asset Classes vs. specific members of the Classes.

In this private correspondence, however, I thought it would be more interesting and appropriate to also show DUNN programs in comparison to the CTA Index because it is an investable product while the CTA Index is not. Thanks for your interest. Bill Dunn”

You can watch the Bill Dunn video interview I conducted with him at Chateau Marmont in Hollywood.

Podcast: Play in new window | Download

Larry’s new book Trading Options in Turbulent Markets is one of the most clearly written books on options that I’ve ever read.

Based on his 25 year career as an options trader, Larry starts with some simple concepts and takes the reader through multiple option positions such as back spreads and ratio spreads. I learned a lot from this book and I’ve been dealing with options throughout my career. This book is very well written and will make a great textbook for an aspiring options trader – a great reference book – a keeper.

Some items that are especially juicy:

- probabilities don’t matter with options
- where and how novices get killed (things to avoid)
- how pros make an asset class out of theta (things to do)
- misconceptions about cheap options

Total length is about 25:34.