Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Prop Trading Overview

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Sent in by a thoughtful Sloper who wanted to share….

In the process of hunting for a job I've delved deeply into the prop 
trading industry.  There's very little info on many firms since most have no 
customers, clients, or investors.  Some don't even have a website.  I've 
spoken with traders at probably three dozen firms at this point and now have 
a decent sense of the industry. 

   Here's a summary of the industry as I see it: 

Capital Providers (don't require you to put up your own capital and take 
minimal fees out of your trading revenues):

Options market making firms – usually headquartered in Chicago, these firms 
are technology intensive and generally built around small teams.  Traders 
are sometimes paid a generous salary with discretionary bonus, or sometimes on commission.  An 
example is Peak6. 

Quant firms – filled with engineers and PhDs, the firms are usually composed 
of large teams.  There is usually no sharp divide between quantitative 
analysts and traders, rather the "traders" are really statisticians and 
programmers.  Pay is generally a generous salary with a bonus tied to 
performance.  An example is Tower Research Capital. 

Discretionary firms – composed of former prop traders from broker/dealers, 
these firms generally support lone wolfs and tiny teams.  Pay is entirely 
performance based, usually 30%-60% of profits.  An example is Ronin 

Put up your own capital:  (easy to spot because they roll out the red 

Training firms:  These shops train new traders (frequently for a fee), 
require you to put up your own capital and provide leverage, and generally 
charge higher commissions.  Most emphasize technical analysis.  Example: SMB 

Trading space: There are a plethora of firms that basically provide you with 
leverage, desk space, camaraderie, and everything that comes with back 
office support (see below).  You generally keep 70-90% of your profits. 
 Some support remote trading.  Example G-2 Trading. 

Backoffice Support:  These firms are basically providing access to a 
broker/dealer including leverage, a negotiated commission structure, 
clearing etc.  You keep 90%-100% of your profits.  Most support remote 
trading.  Example: Victor Securities 

The training firms are basically a sucker's game.  For the experienced 
trader with their own capital, the trading space and backoffice support 
categories can potentially be the best option, although, most of the best 
traders flock to the "capital providers" categories. 

Slopefest III – All Firmed Up! (Market Sniper)

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As most of you know, Slopefest III is scheduled for Saturday and Sunday, May 14th and 15th in Las Vegas, Nevada. I had a lack of input from Slopers as to events, activities, etc. but no problem! With the massive help of a Slope lurker (Mr. K) who is a long time resident of Las Vegas, we have put together the formal meeting. I kept in the front of my mind the fact that the size of everyone's' dollar is different (As Dear Old Dad Used To Say!). I think we have found the right spot to accommodate everyone price wise and it is also a spectacular venue!

Saturday, May 14th between 6 and 9 pm at a private club at the top of The Mandalay Bay in the Foundation Room!

Go to the main elevator bank at the Mandalay Bay. You will see a desk at one of the elevators. You will need to tell the person there that you are with the Slope Of Hope. As this is a private club, there is a minor dress code. No open toed shoes/sandals for men. No sneakers, no shorts (no gang apparel either for you wannabees). No tank tops either I think. Just use common sense.

There is a minimum cover of $50 per person. Use your credit/debit card. Your drinks and eats will be charged against your minimum. IF you cannot afford $50 for the evening, you should not be in Vegas! This way, you are in control of what you spend. We most likely will be in the Media Room which is the best one according to Mr. K. We will have an absolutely spectacular view of Las Vegas while we get to know each other. Here is a link to the site. There are some pictures if you scroll down to the  links.

Dinner is a bit pricey for many so we can all decide where to go for dinner from there, should we wish to eat more.

As for further meetings/get togethers, that is open. Personally, will be going to the Sterling Buffet on Sunday at Bally's. Never miss the chance myself.

For those who do not yet have rooms. City Center has the best deals and the rates are not only good, they always have rooms and the rooms are VERY nice. Check the Vdara and the Aria for best deals.

Have another special announcement. Mr. John Person, his wife Mary as well as Mr. Butch Headding and his wife Phyllis may also be in attendence! So if you have an unautographed book by either Tim and/or John Person, bring it with you!

I look forward as does our host, Mr. Tim Knight to meeting you all at Slopefest III!

Time to take a time out and have some fun, good people. We have MORE than earned it! I will also be giving mini-seminars on how to get an edge on the casinos at blackjack and craps!

Yours in the ever elusive search for edges in and away from markets, the Market Sniper.

Optimal Puts vs. Index ETFs for Hedging

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Hey Fellow Slopers,

This another post that might be a little basic for some of you, but a question came up recently about the differences between hedging with inverse ETFs and optimal puts, and since I know there are some self-described beginners among Slope lurkers, I thought it would be worth an elaboration here.

Inverse ETFs can be useful tools in hedging against market, sector, or industry risk, but there are a few reasons why investors may want to consider using optimal puts to provide downside protection for their portfolios (a quick reminder: optimal puts are the ones which will give you the exact level of protection you want at the lowest possible cost):

  • Ability to hedge against idiosyncratic (or, stock-specific) risk. Say you own a particular stock and you are unwilling or unable to sell some of your stake in it to reduce your downside risk. If the stock has options traded on it, you may be able to use optimal puts to hedge against a decline due to an event specific to that stock. Inverse ETFs can be used to offset market risk or industry risk, but not stock-specific risk. For example, if you owned Toreador Resources Corp. (TRGL — a stock we mentioned in a post here last month,"Market Neutral: Short TRGL, Long IMO") at the beginning of the year, owning optimal puts on it could have limited your downside as TRGL declined since then, but owning shares of the ProShares Short Oil & Gas ETF (DDG) wouldn't have, as that inverse ETF has declined year-to-date as well, as the chart below shows.  TRGL
  • Precision. Say you own 824 shares of Exxon Mobil, and you'd like to know how to hedge that position against a greater-than-17% loss. Using Portfolio Armor (available as a web app and as an Apple iOS app), you could simply enter "XOM" in the symbol field, "824" in the number of shares field, and "17%" in the threshold field, and then Portfolio Armor would use its algorithm to scan for the optimal puts to give you that level of protection at the lowest cost.1
  • Ability to cap cost at the outset. It's not always clear how investors who use inverse ETFs decide how much of their portfolios to allocate to them — I've asked Inverse ETF investors about this in the past, and in response have been told they "feel comfortable with" some small percentage. To use a round number here, let's say an investor decided to allocate 10% of his portfolio to an unleveraged, inverse index ETF, such as ProShares Short S&P 500 (SH), to provide him some downside protection against a market correction. What if the S&P 500 went on to stage a rally instead — what if it went up another 25% over the next several months? In that case, the investor's portfolio might be 2.5% lower than it would have been had he not purchased that downside protection. What if, instead, the investor bought the optimal puts to hedge against a greater-than-20% decline in the ETF that tracks the S&P 500, the SPDR S&P 500 (SPY)? As of Wednesday's close, the cost of those optimal puts was 0.86%; if the investor bought enough of those optimal puts to hedge his whole portfolio, their drag on his performance in the event of a 25% market rally would be capped at 0.86%.2

It's worth noting that, in that last case, part of the reason the optimal puts on SPY are so cheap is that volatility is still relatively low. The VIX volatility index closed Wednesday at 15.07, close to its 52-week low of 14.30 (its 52-week high was 48.2). Volatility can spike quite quickly though, so if you are considering hedging, you may want to consider doing so while volatility remains relatively low.

Disclosure: I am short TRGL.

1In that case, Portfolio Armor would round down the number of shares you entered to the nearest hundred (since one put option contract represents the right to sell one hundred shares of the underlying security), and then present you with eight of the put option contracts that would slightly over-hedge the 800 shares they cover, so that the total value of your 824 shares would be protected against a greater-than-17% loss.

2For the sake of simplicity there, I ignored the transaction fees of purchasing the ETF and the options, and I ignored the management fee of the ETF.