Sitting Here in Limbo…..(Perfect Storm cont.)

Posted on 09/14/2011

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…..Waiting for the tide turn.
Yeah, now, sitting here in Limbo,
So many things I’ve got to learn.
Meanwhile, they’re putting up a resistance,
But I know that my faith will lead me on.

Sitting here in Limbo
Waiting for the dice to roll.
Yeah, now, sitting here in Limbo,
Still got some time to search my soul.
Meanwhile, they’re putting up a resistance,
But I know that my faith will lead me on.

I don’t know where life will take me,
But I know where I have been.
I don’t know what life will show me,
But I know what I have seen.

May 5th (aka – The Perfect Storm) started with a bearish growl when the weekly jobless claims surged to 474,000 – the highest level in 8 months (they have been over 400k every week since with the exception of one. An already jittery energy market started to breakdown.  

In the office, there is “squawk box” of sorts that has a countdown before economic data is released and then an announcement when it “hits the tapes”. Perhaps you’ve watched ’25th Hour’ (Spike Lee’s post 9/11 masterpiece) and can picture the scene where Barry Pepper’s character is anxiously waiting on unemployment numbers having disobeyed a ‘direct order’ to reduce his position in the S&Ps.

Anyhow, I clearly recall thinking “OH SHIT!” after hearing that number. 474,000 – seriously? At which point my stomach started turning like Mary Lou Retton during her 1984 Olympic performance. Flip after flip, only I didn’t stick the landing.

Allow me to put this in greater context for those who are wholly unfamiliar with the trading world. It’s male dominated. It’s often, but not always, fast paced. Sometimes it’s frenetic. The goal is to make money every single day, but the key is to have more up days than down and to have bigger up days than down days. Years ago, at least in my experience, the ‘leash’ was much longer. Now, with the focus on high frequency and algorithmic trading, the emphasis is on your Shape or Sortino Ratio…..understandable, but highly impersonal.

In short, you’re only as good as your P&L and often you’re only as good as your recent P&L. (Profit and Loss).

At that point, I’m like Capt. Billy Tyne (George Clooney’s character in Perfect Storm) when he realizes that he made a critical error in not heading back to port a day or two earlier (I should have done a couple things differently….specifically, I should have defended my belief that the risk in the Energies was skewed dramatically to the downside, that my positions were sized appropriately (only $3,000 in daily decay), and I should NEVER have sold out of the 102 puts and I REALLY should have covered the 100 puts for .05 – those fateful nickels). Obviously hindsight makes this crystal clear.

Also, I underestimated the risk in my “synthetic” gasoline v. heating oil spread and I did NOT size that trade properly. Serious miscalculation on my part.

As an important aside – in my years on and off the trading floor as well as in brokerage, there are a few, very critical keys that separate those that can trade successfully over the long haul and those that get blown out.

1. Stubbornness will kill you. Put another way, wanting to be “right” more than you want to make money is a recipe for disaster. Retail types and poor/desperate traders do it all the time. You convince yourself that “things are different this time”, “this MUST change”, “I’ll just add to this loser and average up or down”. Sound familiar? – ADDICTS and enablers do this all the time too!

2. Leverage cuts both ways. Disciplined guys know how to take losers; they do it quickly and regularly. However, when things play out as they expected, they hit “home runs”.

(I’ll elucidate further on these and other keys later…..)

Back to the Perfect Storm…….

Our main character is in this uncomfortable “limbo” where it seems likely that what he wanted to happen 2-3 days ago is about to happen, but in the interim his positions changed (instead of heading to port – he headed into the eye of the storm) and it’s getting VERY DARK.

Most people that work 9 – 5 (and I don’t say that disparagingly) or have never been in/around the financial tilt-a-whirl of derivatives trading cannot understand this feeling.

Cliff Notes: I NEED Heating Oil to outperform Gasoline. I NEED Gasoline vol to move more than Crude vol.

Between 7:30 (Chicago time) when the weekly jobless claims were announced and 8:00 when the energy markets open, Crude and the products were typically volatile, but relatively range bound.

8:30 the equity markets open and volatility in Crude picks up. Not good, but not terrible.

9:15 (ish) Crude starts to collapse. I mean it’s going down like the guys Mike Tyson fought early in his career – FAST and UGLY. The white line below is WTI (Crude) and the orange line is Brent. It illustrates my point.

9:45 – talk with my buddy and direct supervisor about positions. Crude vol jumped from about 28 to 35 at this point and we have yet to see a corresponding move in Gasoline vols (it a significantly less liquid market – so it’s not very surprising, but still disconcerting). This isn’t shaping up to be a pretty day.

10:30 – step into the conference room. “Is this something you can come back from?” “Absolutely”. “Ok, I believe in you and you’ve had a number of good ideas already, but we need to stop the bleeding”. “Gotcha, thanks”. Return to desk.

11:00 – shit goes from bad, to really bad in a hurry. It was important that Crude hold the $100 handle, but it broke that level, triggered a bunch of stop loss orders and sealed my fate.

Not only is Crude going down much more quickly than the products, but heating oil is plummeting and somehow gasoline will not follow suit. (I could bore you with refinery run utilization numbers or my take on the flooding as well as the political backdrop regarding gasoline prices, but it’s not relevant).

11:15 – Mayday, mayday, this is the Andrea Gail and we are going down!

 

………..this drama is TO BE CONTINUED……..

 

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