Active-Trader - Tax Act 2013

Welcome back Active Traders and Wealth Builders.

For the past 2 weeks I have been on hiatus from this blog and instead working on my income Tax filing for 2013. All told, I spent between 25 and 30 hours on this effort.  Cutting to the chase, I got my highest tax refund ever due to some educational expenses - and of course due to the fact that my employers withheld more in taxes throughout the year than I owned in the end.  I learned some great stuff in the process as follows:

1) Yes - you can do it yourself

Tax law is a mess of regulations, special cases and if-then scenarios.  Tax Act makes it easy by following an interview style of question and answer.  Doing so is an education in itself.  Did you know you can deduct moving expenses or the costs incurred in looking for a new job?   After the question and answer is done, Tax Act produces the Tax Return documents which you can sanity check against prior years.

2) It costs less

In prior years, I paid an accountant $575 to file my taxes. This year, I paid a total of $254,  almost $76 to Tax Act itself, and $179 for Gainskeeper as discussed in a separate post.  Granted I don't get to deduct the $575 but cost avoidance is better than a deduction any day.

4) You are in control

Through the process of using Tax Act, the program calculates your Federal and State refund (or liability) and displays it in the upper right hand corner.  For every entry, you can determine the impact on the bottom line. Using these features, I was able to deduct some medical expenses from my state returns which I had not considered in prior years.

5) E-filing - No more trip to the post office

Most like you already pay your bills with on-line and get paid via direct deposit to your bank account.  So why pay your taxes though the mail?  Instead e-file and save the postage.  Not only that, within 12 hours of submitting the e-file, I got e-mail confirmation that my returned had been accepted by the Tax authorities.  I never got that peace of mind when filing via snail mail.

6) Faster Refunds

When you e-file, you have the option of receiving your refund via check or direct deposit.  I highly recommend direct deposit so you can get your refund faster.

To summarize, doing taxes yourself with Tax Act is better, faster and cheaper.  It is the tax equivalent of on-line bill pay.  Not only is it better, its better in many ways.  Give it a try yourself and come back later for a summary of what I learned regarding the Tax consequences of all my trading activity.

Get some rest and enjoy your weekend, you earned it.

Active-Trader - Taxes for Traders

Welcome back Active Traders.

As you know, I am a big fan if the US Federal Reserve.  However I'm not such a fan of another branch of the US Department of the Treasury and that is the Internal Revenue Service.  And that's because every year at this time I struggle to reconcile all my trading and prepare for filing income taxes.

This year is going to be somewhat different because my accountant has retired for health reasons and I have decided to file the taxes myself using an web site service called TaxAct.  I did some research and Tax Act comes pretty highly rated and very reasonably priced and just behind industry leader TurboTax.

So what makes Tax reporting such a hassle for traders?  Its because for most small investors, they have to report each transaction on either the 1099-B or the 8649 form.  In the past, I put all this on a spreadsheet and reported it to my accountant who dealt with it.  Now that I am doing the taxes myself, I learned a few things in the process.

First is that you can import the trade data directly into Tax Act via a CSV file which are commonly used for data import and export from Microsoft Excel.  Tax Act Specifies the columns required in a specific order along with a code indicating how the transaction should be handled:

A - Short Term with basis reported to the IRS
B - Short Term with basis not reported to IRS
C - Short Term not reported to the IRS at all
D - Long Term with basis reported to the IRS
E - Long Term with basis not reported to the IRS
F - Long Term not reported to the IRS

Back in the bad old days, brokers were not required to report the basis (cost) of positions and it was up to the customer to track and report that information.  The IRS is phasing in new rules where the brokers are required to report the cost basis for trades for which they have the information.  For the 2013 tax year, that includes most equities (stocks) but does not include options.  So for most of my stock trades are category A and most of my options trades are category B.  Constructing a CSV file varies by broker as follows.

E-Trade

For E-Trade, this process is pretty simple, go to Accounts, Gains and Losses, select the Tax Year from the pull-down and click Submit.  From the screen which appears, you can download the data directly to CSV and with a minimum of manipulation get it into the required format.  I would give E-Trade a grade of A on this functionality.

TD Ameritrade / Thinkorswim

For TD, this process is pretty easy and the data can easily be accessed from the www.tdameritrade web site.  For a bonus, TD integrates GainsKeeper accounting software into the web site and you download a fully complete and electronic copy of the 8649 form for input into the software.   Unfortunately, Tax Act only allows one 8649 import per reporting code above.  So instead  you have to import the individual transactions.  This is very easy and the data downloaded into TD Ameritrade can be imported directly into Tax Act with no manipulation required.   Overall, I would give TD a grade of A+ in this area.

TradeStation

TradeStation is another story altogether and here's where it gets ugly. Remember this post Welcome to TradeStation when I was excited about opening a TradeStation account?  I was excited to find that a trade which cost me $10 on E-Trade can be done for $1 on TradeStation.   Of course I knew there would be a downside to using TradeStation.   At the time I didn't know what the downside was but assumed I would find out eventually, and find out I did.

For all the things TradeStation does well, they do a lousy job of financial reporting.  For example, E-Trade can tell me the exact percentage I am up or down for the year.  They can tell me  realized gains and losses for the year to the penny and at any time and export it to CSV.  No such luck with TradeStation.

Instead, TradeStation takes almost an arms-length relationship between your trades and their reporting on them.   Here are the specifics of what TradeStation does and does not do:

- They report opening and end-of day balances on a current and historical basis

- They allow detailed downloading of raw trade data in 6-month intervals

- No reporting of Year to Date Profit or Loss

- No download of the 8649 or any attempt to pair opening trades and closing trades

As of this writing, TradeStation missed the statutory deadline to deliver the 1099B data.  They indicate on their web site that per the law they have asked for a 30-day extension and that they are working with their vendor to deliver the data by 3/18/2014.

Now this past part concerns me just a little bit.  TradeStation depends on a vendor to provide this information?  They clearly are a technology-based organization and I am a little concerned that they can't produce this data from their own servers and systems.

Anyway, that data that they provide can be imported into trader's accounting software such as TradeLog (from Green Trader Tax) or GainsKeeper.  GainsKeeper provides this service on a per-year basis based on the number of trades as follows:

- Investor - Maximum of 150 trades - $69
- Trader 1000 - Maximum of 1000 trades - $179
- Trader 3000 - Maximim of 3000 trades - $379
- Trader 5000 - Maximum of 5000 trades - $499
- Trader Elite - Maximum of 20,000 trades - $659

So in my case, the worst case scenario is I have to pay $179 to resolve the trades from TradeStation and convert them into a format which can be imported into TaxAct.

It would probably be a better exercise for me to create the spreadsheet myself each weekend as I progress through the tax year.  This would also provide a good opportunity to review the prior week's trades for lessons learned.

Is there any relief from these onerous requirements to report each transaction to the IRS?

There is an election under section 475f called Trader Mark to Market status.   If your trades meet certain criteria and you make this election early enough in the Tax year, you are allowed to report a single net gain/loss figure for your trading and pay taxes based on that.   Also, once you make this election you are exempt from disallowing losses on Wash Sales.  This election and subsequent judgements by the IRS in terms of whether traders qualify for this election or not are the subject of entire blogs and best followed on Green Trader Tax.

Get those taxes ready and have a great week ahead.

Active-Trader - Market Maker Move - Part 2

Welcome back, Active Traders and Wealth Builders.

In my prior post Market Maker Move I talked about trading earnings reports using Options.  Since then, I've picked up a few of the finer points of this trade, and used them to good effect this past week.  So let's go through what happened and what was learned from the experience.

First recall that we start this trade by getting the "Market Maker Move" from the Thinkorswim platform.  This appears in the upper right on the Trade tab in yellow next to the text MMM. The MMM is essentially the sum of the premium of the at the money puts and calls and is the amount of the move expected up or down from the closing price.

The gist of this trade it to sell a call spread above the market and a put spread below the market.  In both cases, the short strikes are outside the Market Maker Move.  In the above example of BIDU, I sold short the 182.5 calls and bought the 185 calls as protection and sold short the 162.5 puts and bough the 160 puts as protection.  In the graphic above, the short strikes levels are in red, and the long strike levels are in green.

With this trade, you want the stock to close the week inside the short strikes, so you can keep the entire premium collected on the short strikes and take a complete loss on the long strikes.  In this case, I took in a credit of 1.17 for a max loss of 1.33.  I try to keep the credit greater than about 30% of the spread.  30% of 2.5 is 0.83 so this premium was considered healthy and worth taking the trade.

So what happened in this trade?  BIDU reported good numbers and in the after hours session the stock shot up and traded above my short strike at 185.  So this trade looked like it was going to turn into a max loss.   Surprisingly, when the regular session started on Tuesday, the stock traded at about 175 right in the middle of the range - a gift from the trading gods! The stock closed the week inside the MMM so this position went to max profit.

I had a similar situation with First Solar FLSR where the put side of the trade appeared to go to max loss. Unfortunately, this happened during the regular market hours.  So I pulled the trigger and closed this trade out at just about the fair value of the difference between the strikes, essentially locking in a loss on this trade.  Surprisingly, the stock rallied off the lows and ended the week right smack in the middle of the strikes.  Had I done nothing, the trade would have gone to max profit instead of max loss!

Finally, I tried the same trade with DECK and this one did not go as well. The stock opened down below my short strike and traded most of the day down in that range.  I closed the spread for a debit of 1.60 versus the 0.83 cent credit taken to start the trade.  I could have done better had I waited until later in the day.  And that is one of my lessons learned is to give the trade every change to work out before taking a loss.

Lessons Learned

1)  Do this trade only on big, liquid stocks with lots of volume and good projected Market Maker Moves.

2) Trades later in week are better than those early in the week since you benefit more from Theta Decay.

3) Don't do this trade unless you have options expiring that Friday.  Again Theta Decay is our friend and we won't profit from the collapse in Implied Volatility unless those options are expiring and soon.

4) If the trade goes against you, don't be in a hurry to take a loss.  Things can look very ugly for a time, for example DECK traded as low as 68 on Friday before closing at 74!  But there is tremendous underlying pressure for the stock to close within the MMM because the Market Makers themselves are selling naked straddles on these positions and they only profit if the stock expires inside the MMM.

That's all for now, have a great weekend.

Active-Trader - TC2000 v12.4.5

Welcome back, Active Traders and Wealth Builders.

Keeping on top of the stock market can be a challenging task.  There's so much information out there, and its constantly changing.  It can be a challenge to just to get your head around it let alone make sensible trading decisions.

One of the tools I use to tackle this mountain of data is TeleChart 2000 abbreviated TC2000.   I've been a customer of the Worden Brothers for more than 20 years and their products continue to improve and deliver more bang for the buck.

Recently, the Worden's delivered TC2000 v12.4.5.  This version contains a raft of improvements, and I want to touch on one item here which is the ability to plot fundamentals on price charts.  This capability was present previously only with an additional data package, but its now provided in the core TC2000 Gold Service which costs about $299 per year which includes unlimited access to the price database including unlimited real-time streaming charts and market scanning.

The thing about fundamentals is that they don't change nearly as often as price.  Most financial data is delivered only once per quarter or only 4 times per year.  Once piece of fundamental data which does change daily is the short interest ratio - that is the number of days of typical trading volume it would take to cover all short positions.  In the chart above, we can see that Short Interest in TSLA is trending higher, but it is a relatively low level compared to historical values.  Note that tops in Short Interest would seem to precede tops in price. To come to a different conclusion, the level of short interest in TSLA is at relatively low levels compared to historical levels.

Another one that I find interesting a plot of net earnings.  This figure is reported quarter and its very easy to get a long term view by plotting this on a monthly chart.  Take a look at this chart of Synaptics (SYNA) with the net earnings plotted in red at the bottom of the chart.  Are earnings keeping pace with the rising stock price?  You bet they are.  I took a new position in this company this week in both my TradeStation and E*Trade accounts and I expect higher prices ahead.

Using these charts, its very easy to get a long-term look at the earnings growth trends for all of the companies in your portfolio. I was able to get a look at this information for all 82 stocks in my portfolio in less than 10 minutes.  And from that brief exercise, I call tell you that stock prices are absolutely correlated with net earnings.  

Take a look at these graphs for your favorite stocks and use this information to your advantage.  Have a great and profitable week ahead.

Active-Trader - Into the Black

Welcome back Active Traders and Wealth Builders.
This past Friday my E*Trade accounts finally came into the black for 2014.

Recall we had a solid 2013 but then stocks sold off hard on the first day of the year, and for most of the month of January.   Most of this past week gains can be attributed to Facebook which is my largest individual stock position and a monster trend in the making.

Unfortunately, my TradeStation account is still down for the year but staging a recovery.  The above gains are paltry considering the performance of my mentor John F Carter.  Having just completed my first full year as a member of Simpler Option,  I have learned much from my association with Mr Carter, and it well worth the $147 per month.

Here is a quick summary of the key points:

1) Don't expect anything from the market.

Coming into trading with a mindset like "I need to make $1000 a day trading" is totally wrong.  Instead, wait for the market to show its hand before taking any action.   A great JC quote which sums it up is "Don't anticipate, participate."   If you take your time picking trades properly from Tuesday-Thursday, you will most likely get paid on Friday.  See #3 below for more on that.

2) Don't trade all the time.

JC has no problem sitting and watching the markets all day and if he doesn't see any setups, he doesn't take any trades.  It sounds simple enough, but he trades only when he sees a setup in the making.

I read a great quote in my first every edition of thinkMoney (magazine from Thinkorswim):

Day-trading is like owning a Bed & Breakfast.  Most people do it until they run out of money.

3) Most trading takes place between Tuesday and Friday.

Most positions are opened late in the day on Tuesday, Wednesday and Thursday when JC is live in the room.  Friday is mostly for closing out positions opened the prior 3 days or preferably letting them expire worthless. Every Friday is payday in the world of weekly options and you want to be on the receiving end of the transaction.

This one took me a while to finally sink in.  Most of the time, stocks that have great looking charts on Fridays give you a much better entry point between Tuesday and Thursday of the following week.

4) Sell Premium

If you are bullish sell put spreads,  If you are bearish sell call spreads.  If you are really bullish or bearish, use the proceeds from selling the spreads to finance directional positions.

5) Sell Premium at +1 and +2 Standard deviations.  JC does this by treating the Market Maker Move at 1 SD and just multiplies by 2 for the 2 SD.  He will be happy to take in 50 cents on a 5-dollar spread.  That's right, he's making $50 with a max loss of $450!  Terrible Risk to Reward ratio, but highly likely to pay out.

I haven't brought myself to do this yet, but this past week I sold puts in NFLX for 0.80 credit for a 5 dollar spread and it worked out okay.

6) Size properly.

JC has no problem risking 5% of his account on a position that he has some conviction in.  I'm still sizing too small for my account size, but i'm slowly starting to make my way out of 1-lot syndrome.

Also, it was my first full week of trading with 100% awareness if the Voodoo levels. Remember in last week's post I said next resistance in PCLN was the treeline at $1261 a full 65 points away?  Well PCLN did that move and then some! Next targets in PCLN are the snow lines at 1300 and then 1322.  And above that you can see the 423% of the original wave 1 move which would be the top of wave 5 at 1361.

Facebook (FB) also responded well to the Voodoo levels as shown in the graphic above left.  We have a few snow lines to get through at 68 and change and 69.37 with the next tree-line up at $71.60.

Voodoo has changed by whole perspective on price action and i'm never going to look at a chart the same way again.  Using Voodoo I had profitable trades in PCLN and FB.

As for next week, GOOG looks very interesting.  We close above the psychologically strong $1200 price level and for this week, we have resistance at 1210 and support at 1192.  The next major upside target is 1240.

You can position for a move to the 1240 level by buying an in the money call debit spread such as the 1200/1230 call debit spread for as close as you can to a 1x1 risk reward ratio.  For example, you would pay no more than $1500 for the spread (which is your max loss) for a maximum profit of $1500 if it goes fully in the money in your favor.

And thus are my predictions for the future, use them to your benefit and have a great week ahead.

Active Trader - Voodoo Clues - Part 3

Welcome back Active Traders and Wealth Builders.

It was truly an amazing week, not because I made a pile of cash in the markets although I did okay.  The real reason is that after 25+ years of looking at the markets, I see prices in a completely new light now that I know how to calculate the Voodoo lines.

Recall from last week's post Voodoo Clues - Part Two, that I found a video which explains the logic of the Voodoo lines. We got as far as calculating the red lines and ran out of time. In this post, we're going to wrap it up and show some examples about how truly amazing a discovery this really is.

Note that when you draw the red lines, it divides the prices up into 4 unevenly sized regions.  These red lines are called the "fire" lines and are the most significant areas of support and resistance on the chart.

As for an example, check out the way prices first paused at the 281.1% line at 1102 and pulled back.  Later, note how this area, once breached became an area of support which has since contained prices on the downside.  And note how prices are now camped out just below the treeline at 1200 and once they break $1200, the next target is ....  $1261.  How that's for predicting the future?

At first I had a hard time drawing the lines.  But after a little bit of practice, it comes very easy.  Whenever I see a chart on Simpler Options video, I pause the video and make note of where the red lines are.  With as little information as a single red line (and a rudimentary knowledge of Elliot Wave) I can find Wave 1 and everything else is mechanical from there.

Using Thinkorswim charting to draw the lines is a snap. Simply select the top to bottom of Wave 1, then hide all but the 0%, 100%, 161.8%, 2.618% and 423.6% lines.  The graphic on the right shows the configuration for the fire lines.

The next step is to further subdivide the 4 regions between the red lines at the 0.382 and the 0.618 lines.  Those are the green lines which JC calls the "tree" lines. Now sub-divide those regions once again at the 0.382 and 0.618 levels and color them white to get what Carter calls the "snow" lines.

Within a day or 2, I calculated the Voodoo lines on most of the popular charts I look at.  This was very exciting stuff.  Not only did I save the $995 to buy the Voodoo lines indicator, I saved $50 a month in on going maintenance charges for the rest of my trading life!  Now you can understand why I don't like to spend money on indicators!

Using my new found knowledge, I did swing trades in AZO and NFLX on their breakouts to new all-time highs.  Unlike the past, I knew in advance when to take profits!

Here's another one of my favorites, Facebook.  I'm loaded up long.  Use this information to you own benefit and have a great weekend.

Active-Trader - Voodoo Clues - Part Two

Welcome back Active Traders and Wealth Builders.

In this post, I want to delve further into how the Voodoo lines are calculated.  We know from last week's post that Voodoo lines are a very valuable tool for identifying hidden areas of support and resistance.  While I did not purchase the indicator, I have seen it work first hand many times with almost eerie accuracy.

Further research indicates the Voodoo lines indicator was originally called FibGrid and marketed by First Wave Trader.

The name FibGrid in itself gives some pretty good clues as to how the indicator works.  I struggled with some Fib Tools in ThinkorSwim and then did what every good information worker does - they just ask Google!  Using that I came across a marvelous video found here which basically lifts the lid on the way the indicator works.  Its based on Elliot Wave principles, so if you are not familiar with Elliot wave, do some research here.

1) First step is to zoom out to a weekly or larger time frame and look for a major low that corresponds with the bottom of wave 1 in an 5-wave bull market advance

2) Second, identify the point at which wave 1 ends and gives way to wave 2.  In the example above, that corresponds to point 1 on the chart shown in white.

3) Next, use the Fibonacci extensions tool to measure the distance from the low up to the top of wave 1.  That corresponds with 100% of the high to low move of wave 1.  The low itself represent the first red line and the top of wave 1 represents the second red line.

4) Next step (and here's where it gets really cool), configure your Fibonacci extensions tool with these ratios 0%, 100%, 161.8%, 261.7% and finally 423.5%.  Those 5 red lines represent the 5 most powerful lines in the sequence and will act as areas of both support and resistance.

Knowing that, I figured it would be a snap to fire up ThinkorSwim or Tradestation and replicate the results I grabbed from some screen shares from Simpler Options and videos shown by John F Carter.  This is where it got sticky - where exactly does wave 1 begin and end?  Are the intra-day high and low values included, or just the closing values?

With some trial and error, I was able to replicate the red lines for SCTY with about 10 cents or so.

This is a marvelous discovery and probably the biggest revelation about and indicator since I cracked Range Bands earlier in this blog.

Check back later for part 3 where I delve into the green and white lines.