What Size Market Moves Should You Target?

This may be joyriding in the obvious-mobile, but commissions and other fees/expenses are a big deal in trading.  I pointed out a few months back that it could cost you about 1/6th of your profits in the speculative alternatives portfolio to use a broker with the wrong type of commissions structure.  I want to explore that idea in a lot more depth now.  It turns out that commissions put very fundamental boundaries on what sorts of trading you can make money at.  They’re a fundamental part of the market’s structure in the same way that auction market dynamics and FIFO ordering are.  Failing to understand this point cost me a lot of money along the way – certainly many thousands of dollars.  Let me see if I can explain what I learned for that expensive tuition.

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A Bucket Full O’ Arbitrages

An arbitrage is a trade that produces near risk-free and near guaranteed profits.  In general, independent and retail traders are not successful as arbitrageurs.  We’ll get into the reasons why in a bit.  But it’s still important to understand how arbitrages work, because they’re a fundamental part of the structure of the market.  Each arbitrage defines an equation, for lack of a better word, of how the prices of various instruments should be related to each other and to interest rates.  Some of these relationships are trivial to understand, but others are far from obvious. Continue reading

Trade the S&P Tickle Me Elmo Style Part 2


This is a continuation of Part 1 – start there if you haven’t read it.

Last time we worked out how one might go about speculating in Tickle Me Elmos in 1996, and I made the claim that the same logic can be used to trade the S&P in shortage situations today.  If you’ll recall, the basic plan was as follows:

  1. Identify a good to speculate in based on sufficient TAM and a shortage of the good, which manifests as increasing price and gross margin.
  2. Determine a “will-buy” price for that good which takes into account the shortage, leaves you sufficient margin, and leaves a reasonable chance someone will sell to you.  Make it be known you will buy the good at that price.
  3. Wait for someone to take you up on your offer.  If someone does…
  4. Sell the good at full post-shortage prices on the open market. Continue reading

Trade the S&P Tickle Me Elmo Style Part 1

It’s Black Friday in the US which is the start of the traditional Christmas shopping season.  To get us in the shopping spirit I figured we could all use a Dikensian visit from the Ghost of Black Fridays Past.  The ghost that happens to be pulling the late shift this year is from 1996 which turns out to be a pretty interesting year, Black Friday wise,  for two reasons: eBay and Tickle Me Elmo. Continue reading