Selling Naked Calls?

That's why I said "generally." Even car wrecks take a little while to unfold after the point of no return.


As a result of that, so far as nightOwl's question, my contention is that the markets would be trendy even if trend traders didn't chop it up so much. Meaning, people adapt to trend traders by trading counter-trend, so the trend traders don't even need to fine-tune their own texture, so long as counter-trend traders know when to fade them and when not to, and compete to do so.


"If it is a positive-sum game, wouldn't people figure it out and just create wealth?"


Yes, billions of them every day, would create wealth. That is why the amount of currency - scraps of paper - can keep rising, and still everything you can use currency to claim keeps getting cheaper. For statistics to back this up, go to:


http://www.juliansimon.com/writings/Ultimate_Resource/


So far as LTC, Meriwether, "admits" he was wrong, even though such an admission may simply be an unpleasant step to raising more money.


So far as "setting" the trend, if you mean executing only a portion of your order, which other people see hitting the tape and then clean out the offer before you can get anymore, only to sell to you higher, that is bad. You should be picking off the offer yourself, based on the only asymmteric information you have, knowledge of your own size behind.


But if you mean buying an apple instead of an orange today, so that fruit growers see this and start tearing up orange trees in Florida to sell the land to build condos and use the proceeds to plant apple trees and hire labor in Washington - if you mean someone extrapolating your current surprise demand into a business decision which will reallocate capacity to make your purchase cheaper in the future than it would have been had you not shown them a serially-correlated blip of your emerging need, to meet - then it is good to be a trend setter. Meaning, if you set the trend on your own side, by having your buy followed by other buyers who are not you, you lose by makign yoru good more scarce, but if your buy triggers a trend anopng selelrs, you win, or something.


Course, it becomes tricky in stocks where consumers are really just longer-term middlemen.


So far as stock-market knowledge being useless, the basic restriction on the evolution of knowledge is the fineness of texture, analogous to the wave frequency and number of wave coefficients in a given strategy. Most often, the different coefficients are the product of independently-evolving entities, whereby the harmonic sum and feedback between different pulsars creates a more complex signal than any of the individual pulsars could produce.


So the challenge is to be more complex than your surroundings, and yet be in one place. You want the learning to place inside of you and limited to you, not involcing teh combined evolution of you and a far-flung collection of adjusting particpnast around teh globe. In other words, you might call most stock-market evolution exosomatic. A structure which does not have sufficient initial complexity to sort junctions out of - like a baby's brain - can only evolve to interact with a complex-topology-source signal as part of a group.


The basic idea of OFT or "Orderly Feedback Theory" is that it is only possible for the rodeo rider to not get thrown off the bull if he has more joints than the bull, and can model the bull's patterns, together with the bull's environment, and still have neural connections left over. The entropy of an object must be equal to the entropy of all objects to which it is adjacent, to its environment, on all super-spheres and sub-speheres. Otherwise, adjacencies will be thrown off in a process called "junction burning" or "busting" and, in the commodities markets, "bankruptcy."


This self-preservation of sub-atomic particles by synching up with the waves as dissipated in their environment, and their working as teams in orderly lattices/networks so as to dissipate shocks propagating across space in an orderly fashion, is what prevents macro wormholes, or non-3-dimensional space from surviving or perpetuating - I think. Irregular topologies get fried, by magnifying and refracting complex shocks.


My favorite supply-chain metaphor involves picturing a tank of water with random inflows and outflows, where it is your job to keep the water level at the height of your own eyes, by opening and shutting an in-faucet and an out-drain in reaction. Now suppose there are two or three other remote, anonymous people also attached to the same water tank, with the same job, will you be able to evolve coordinated responses, a division of labor, without talking to one another directly?


Assume that your only "communication" is the water level, meaning it costs you to communicate, and random external shocks could be mistaken for communications? Will you guys settle into a predictable, self-resolving game? Or will your lowering the water at the same time as somebody else opens his drain cause it to go too low, so that everbody opens their in-faucets at once, and now it is four times as high, 16 times as low, and so on, until the amplitude gets so great that one or more of the un-cooperate-able parties gets tossed off?


Now, picture the same situation, except where what is your individual eye level is going up and down relative to the target eye-level of others regulating your same tank, because you're floating in another, different tank, regulated by other stangers, and so are each of them. The brains have to be more complex than the super-arrnagement of people, faucets, and tanks they compose. If the brains can't get more complex, the system will break down and, by destruction, get less complex.


OFT, and evolution, it's all about how fine a texture you can adapt and reflect internally - by pruning down your own internal synapse-feedback junctions so as to model data sets at your own sensory boundary along the time axis - your own internal entropy, on all neurological sub-spheres.


Lazy/sloppy answer, I admit, but you asked.


leroy

BTW does anyone know the actual Long-Term Capital story or are you just assuming they were wrong?

---

When Genius Failed: The Rise and Fall of Long Term Capital Management by Roger Lowenstein

Also, _Inventing Money_ by Nicholas Dunbar.

One of the interesting things about people who engage in closed-system thinking is that they believe in the free-floating animistic fallacy at the same time. Meaning, they are wrong at both ends. They think it's all in your head - things manifest as a result of our thinking them - but at the same time there is only one universal frame of reference, it can be complete and accurate for all heads, and it must be internally consistent based on simple logic proceeding from popular initial assumptions (and which assumptions we should all "reasonably" agree upon).


We saw examples of this back in the limit-order thread - where a group of academics believed that by making the free-floating decision to refer to the NYSE specialist as "she," they could change the resultant texture of sexual occurence on the exchange floor - as well as in my discussion of the animistic fallacy with Craig H - where I pointed out the flawed thinking of propagandists who imagine that simply by getting the large masses of people to believe something you can make it so. Then again, without the idea that influential individuals can engineer the world, you can't write very interesting fiction.


With Marco, we have an example of a person who equates wealth with currency - with dollar $igns in effect. And he inquires whether it is better to be a trend setter or a trend follower - as if you can decide to be either, as if you can roll dice to pick which country to invest in and when, rather than having your opinions formed for you, by a process of Darwinstics selection among opinion leaders and popular ideas.


Review the Marco model. The properties of wealth and of money are equal and overlapping - and can be respresenetd by a dollar sign and all the words which that sign is associated with. And in a world of cause and effect, of intentions emerging from nowhere (or emanating from the human spirit) and free-floating results, we have trend setters and trend followers.


Years ago, I had my eye on a smart-looking uzi for sale, for a couple hundred bucks at a local store. Finally, the week before the new assault-weapons ban went into effect, I made up my mind to go buy it - only to find out another guy had beat me by four hours, and had paid four times what the tag had been for however many months prior. So naturally, I wondered, had the subset of weapons chosen to be banned statistically coincided with the weapon I had considered to be smart-looking?


Was it all an image thing? And were these images a free-floating feedback loop, an internally-consistent popular cartoon world, with no basis in reality? What physical properties did the weapon actually possess in my mind, could it shoot straight, or was it just scary?


So I went around asking people what they thought of the new Federal Assualt-Weapons Ban, recently signed into law by Congress. Universally, people wrung their hands and nodded their heads, and said it was a Good Thing, Very Good. I then defied every single one of these people to define for me what subset of guns qualified as "assault weapons" - or, alternatively, to draw me a picture of what their idea of an "assault weapon" was.


But not one of them could! They could barely even say, well, "it's a black, mean-looking thing," much less a cheap, lightweight rifle, mass-manufactured at low cost for foot soldiers by communist planned economies. Or something. The images they had seen in the movies had not even imprinted a cartoon on their minds which they could draw upon.


So what had even taken place, what was the physical manifestion of this ban, other than that they wouldn't be scared? Or was any such physical connotation, such as a reduction in feelings of violence - okay, a reduction in actual murder - even contemplated?


So, I got to thinking, if people could talk all day wihtout having any idea what they were taliking about, could not a computer be programmed to do the same thing? To talk about it all day, did a computer need to have any idea of what an assault weapon was beyond a few word associatons, such as black and pointy and "mean, greedy, black-haired men?" Could you simply construct a two-axis/nine-square physical-categorization table for words in a symbol-association network, by which all phenomena could be explained, and all sequences of words could be translated into other words?


The two physical-property axes were "good" vs. "evil" and "subject" vs. "object" - plus some colors and so forth. In other words, Bill Clinton is good, as well as a leader - by being an animator or a "mover" in the words of Craig H. He has good intentions, and can choose to be a trend setter. A tree is also good, but it is an object of good and bad intentions, and does not have its own intentions. The only internal debate comes up over the friendly dolphin, which is universally defined as being good, but whether it is good as a mover, doing good deeds, or as a mov-ee - in need of being on the receiving end of the good deeds of others - is in question.


Note, the core physical-descriptor table only has nine squares - good-neutral-evil by manager-inanimate-managee - and there is no spot even for simple tools, which convey transitive properties, for instance. There are just leaders and followers, good and bad, and inbetween.


In other words, the dolphin has feelings - same as trees - but also may be more animate, more self-directed than the helpless ghetto/welfare mother in "need" of health-care coverage (which coverage can be produced out of thin air, merely by the good intentions of others who are also good, but are on the cause side of cause and effect). It's an interesting model of the universe, but it exists only in people's heads. And of course, it is only in the free-floating logic of Marco's symbol-association network that my model becomes self contradictory.


But I'm not talking about symbol manipulation pursuant to evolved rules, I'm not talking about mathematics. Nor am I talking about indentities, where rather than building a castle out of thin air, we discover two existing castles which happen to fit on opposite sides of an equals sign. I'm talking about reality, which is beyond the human ken. If you begin with an initial set of assumptions and proceed to build on them - only the initial assumptions are adjusted backwards to produce a feelgood result, or one consistent with what you were originally inclined to hallucinate, or the least common denominator perception of the mob - anything is true, so long as we wish it, and if only we could overcome the stubborn objections of reality-addicted meanies, like


eLROY


P.S. I actually had a far more complete social/language model for a computer simulation of an articulate mob idiot than I have even touched on here, but I scrapped it - for obvious reasons.

it is obvious to me now, trading is a "positive-sum" game. We should all drop everything and go be day traders......

eLROY..I am sure you will not be offended but I think if you devoted more time to looking for

opportunities in the options markets,particularly options on futures your energies would be better directed.I have known a number of traders like

you and typically they didn't last long.Every angle and piece of information had to be scrutinized from 50 different viewpoints.Don't you ever just "feel" something is a good trade.

My guess is that you have had this feeling many times and failed to act on it.For example I was watching Soybeans for a while and wanted to

go long if the market got below 420 basis March.

I found a way to talk myself out of doing it.

I hate it when I do that...don't you?Sometimes you just have to let go...forget the all the research and math nonense.For instance Bonds have been up sharply a few days in a row now and the Feb options expire in two weeks.Are there some opportunities here? I think so.Don't be afraid to be wrong..it is going to happen.

This is a very convulated way of saying it is difficult to generate excess return (which is basically what hedging is trying to accomplish by minimizing losses).


Selling naked calls, selling covered calls, taking on huge risk, etc. All the time honored ways of making an "easy" buck in the market. Doesn't happen folks. Being a top portfolio manager is like being a top poker player...it takes both talent and experience.