President of Market Compass and co-author of Fundamentals of the Options Market
Focus: Option, Arbitrage and Position Trading
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Michael Williams on Position Trading with eSignal
As an options market maker and institutional floor broker for more than a decade, my focus is on limiting my capital exposure and maximizing my profit potential. You're only as good as your last trade, and, if your last trade can blow you out, you are just a shooter and should be playing the lotto or slots.
When you trade large positions (arbitrage [Arbs], LAVA strategy, back spreading and front spreading or split-strike conversions), keeping the data simple to read and having the ability to execute quickly are important. Too much data can lead to "analysis paralysis."
1. Arbs -- Watching the spread between the two issues is important (Parris/Chinese Arbs). Watching the implieds between the issues (if you are trading a volatility Arb) is easily accomplished on eSignal's options pages.
2. LAVA (Limited Assets Volatility Arbitrage) -- This proprietary trading model is used by one of our hedge funds. eSignal allows us to import live data into our proprietary software for monitoring in real time. eSignal's Sigtools (a DDE tool you pull from the Start menu, in Programs, eSignal, and it's called Excel Sample) allow for porting live data into an Excel spreadsheet, for those interested in designing their own strategies.
3. Back Spreading and Front Spreading -- Most position traders fall into one or both of these camps. eSignal makes it easy to monitor the options market and equities market simultaneously to hedge either Delta or Vega positions.
4. Split-Strike Conversions (Ratio-Collaring) -- This strategy has become more popular in the hedge fund community. eSignal makes it easy to monitor the index, basket and options, so you'll know when to execute or roll the position.
With my eSignal application, I usually watch only two screens: The Market Screen and The Trading Screen. I have included two examples to show how I laid them out and why.
The Market Screen
This screen is broken into two basic sections: Quotes and Charts. I also call this the "1,000 foot view" because it's the view of what is going on in the market as a whole, how my stocks are reacting, what is going on in a particular merger/acquisition (M&A), etc.
|In the Quotes portion of the screen, I keep
track of the...
||I am looking for...
|1. Overall market
||a. Dow and NASDAQ for overall market sentiment
b. VIX and VXN for volatility sentiment
c. Futures, Cash and Trust, keeping track of the variance. This maybe set up for the cash/futures/trust arbs.
|2. Top issues
||a. Baskets (SOX vs. the issues I watch in the basket)
c. Other stocks in the same space or in my portfolio
I have been using one chart to watch M&A Arbs. I usually just have a candlestick chart on a 6-month and a 3-day. I can pretty much eyeball lows and highs.
The Trading Screen
The second of the screens I watch is broken into four basic sections: Stock Data, Chart, Level II and Options. Each one of these screens is a piece of a puzzle. It is not until you can put them all together that you can see the complete picture. The picture shows you what the options order flow is, how the firm may be hedging the position, where support or supply may be, and what the fundamental strengths or weaknesses are. It is only when you see the complete picture, that you are an informed trader who can execute his/her plan.
This screen gives EPS, PE, High/Low and other helpful, live information.
The chart screen is very similar to the Market Screen I use, but I sometimes watch intraday on this one.
This screen is the one I use to watch who is currently bidding and offering on the issue. It is interesting to see when a big player is bidding on a stock and then subsequently watch that same player on the options side selling calls or buying puts. It gives me a good idea where I can unload stock or load up when the position calls for it.
Because I have been a market maker and worked in the hedge fund community, I use options for creating positions and hedging equity positions. eSignal allows you to format your options screen the way you need to see it. I usually look at volatilities, so mine is designed to meet that need.
|Michael's Educator Credentials
President of Market Compass, Michael Williams founded the company in 1999 after a decade of experience as a member of the Pacific Exchange (PCX). Williams has been on the front lines of the trading pits serving as an institutional broker representing Morgan Stanley, Goldman Sachs, Smith Barney and Swiss Bank. He later became an Options Market Maker and traded in active issues focusing on the technology and semiconductor sectors. Williams has served on the Options Listing and Marketing Committees for the PCX. He is a certified instructor for the PCX Institute. He frequently lectures throughout the country, including stops at Pepperdine University’s MBA Program and the Securities and Exchange Commission (SEC).
Michael Williams' Writings
Michael recently co-authored Fundamentals of the Options Market, now in its second printing..
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