At times the environment is simply conducive to the aggressive, long style trading that I've grown accustomed to. Most of my grinding comes in the form of 'Micro Interest Rates' (usually Fed Funds and Euro Dollars) and a surprise move in the discount window Thursday created a porthole of opportunity to press the positions I felt as if I'd been milking for so long.
Hindsight trading is 20/20 and as usual, I wish I'd emptied my entire holster on Friday afternoon instead of holding back the last few rounds. In talking with some of the other traders around the desk, they too all expressed a feeling of lament for being reserved in their efforts. Yet, there's something to be said about that bit a reservation. It's that piece of me that has probably produced some of the longevity I've enjoyed through my trading career.
I discussed some of my early trading venues in an earlier post, but I didn't truly earn my trading stripes until I stepped into the Bond Options pit at the CBOT as an autonomous local. This pit, more than any other, taught me to press a winner but to never be without bullets.
It was the spring of 2005 and the volatility was getting cheap. Though none of us were clairvoyant, we could all feel a trend starting to develop. This trend would continue for almost 3 painful years and would encapsulate nearly 20% of the all-time low month/month volatility readings including a mind boggling 4.2 print in August of '06. {Historical Vols} But this is the place where I learned to watch the few titans amongst the our pit locals.
These "3 Kings", as I'll call them, were traders that would never sell premium on the first pop, rather they would sit back and watch what real paper was doing. They all possessed that unique ablitiy to fearlessly buy it higher and sell it lower. As if they were all taught by the famed Jesse Livermore (Reminiscences of a Stock Operator), they never saw it as chance to empty their pockets when the first bid appeared. Rather, they were the ones buying it (usually through the pit brokers) from all of the smaller locals, myself included. Not that I wasn't happy to sell my book for a perceived profit, but it confused me as I watched the 3 Kings books swell under the immense weight of millions of dollars of gamma.
Then it happened. The real paper showed up. Not that small retail customers deck, no, these were the big houses that had to move a position. I suddenly learned an enriching lesson: real paper is 'price-insensitive.' They needed the options and they were willing to pay up in order to get them. Guess what, I was fresh out of bullets. I had let go of the options I had stomached as losers for the last 2 months, and for what? 4 extra ticks? It hardly seemed worth it. Yet there, across the pit in their own corner, the 3 Kings continued to bid premium in the face of paper. The unthinkable occurred next. It was like a game of chicken and PIMCO blinked. Their bid jumped 10 ticks and the 3 Kings unloaded the wagons. They dumped every bit of the longs they'd gobbled from the locals and in the process they even offered all the little guys around them a chance to get some real edge. They had created a marketplace and they had dictated what the price would be.
My first game-changing lesson was complete. I saw that if you sell on the first pop, you haven't guarded your longs and now you may miss the real trade. I would have plenty more opportunities in the next few months and years to practice this skill and ultimately refine it to the point I felt comfortable pressing it. The real mark of a learned skill is the ability to teach it to others...but that's another story.
One down. A multitude left. And as I finish this, I realize that my holster is re-loading quickly.
LH
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