Just in Time For The April 15th Tax Filing Deadline -
A Summary on How to Qualify for Trader Status - Ted Tesser
In this article, we will explore some of the criteria which have been deemed essential for one to qualify for this classification.
First of all, there is no IRS Code section which clearly identifies this election. The Code defines an Investor as "a person who buys and sells securities for his own account." (IRC 263A.) On the other hand, the IRS Code also defines a professional Dealer or Market Maker as one who holds "securities for sale to customers in the ordinary course of business..." (Reg. section 1.471.) The Code does not specifically define what a Trader is.
The definition of Trader has evolved through various court decisions over the years which create and define this hybrid category. Basically, a Trader is an investor who trades with such a high level of activity, that the investing becomes a business to him. And, although he does it for his own account, he is still afforded some of the benefits of the professional.
Over the past few years, many cases have been decided in favor of the trader status, and several of these in particular stand out as landmark decisions. As early as 1935, the Supreme Court decided on the Trader designation in Snyder vs. the Commissioner. The Court stated that "a taxpayer can be involved in the business of trading securities."
In 1967, in the case of Reinarch vs. the Commissioner, an option writer did not even have to prove that he was running a trading business, because the nature of option writing lent itself to the basic definition of Trader. In 1978, in the case of Marlowe King vs. the Commissioner the same was decided for a future's trader - even though some of his transactions were long term!
More recently, in 1991 two cases were decided in favor of trader status, and each was significant. In Nubar vs. the Commissioner, it was held that the extensive trading of stocks and commodities constituted engaging in a trade and business.
In the most significant of decisions, Ropfogel vs. the U.S. District Court-Kansas, the criteria were specifically identified which qualify a person for this coveted status.
These factors were determined to be the following:
- The average holding period of the security (or other trading instrument.)
- Whether long or short-term profits were expected.
- The extent of financial leverage was employed.
- Taxpayer's intent to collect dividends and interest.
- The expectation to derive profit from frequent trading.
- The presence of the Schedule C on the tax return.
- The existence of an office.
To summarize, to be classified as a trader, an investor should file a Schedule C, engage in very frequent trading, and profit from short-term transactions. If the trader is engaged in futures or options activities, they will, however, allow longer term transactions.
Interest and dividends should not be a significant part of income, and the trader should not be buying investments for reasons of fundamental under-valuation in the market. He should be doing so to capture short-term swings in market movement. For this reason, technical rather than fundamental analysis gives more support to the Trader status.
Frequency of trading is an issue, and daily trading is best, although not required. Also, trading should involve substantial amounts of time tracking and analyzing investments, but a full-time profession is not necessary for trader status.
In short, not everyone will qualify for Trader status, but many people do. It is better to cover as many bases as possible in qualifying, and well worth the effort to do so.
A More Detailed Explanation To My Article of Last Month
On How I Used Spread Profits To Buy My New House - Don Smeathers
The goal of this letter is to describe the way I use the Dow Jones Trading System program to trade OEX options.
This is not to be interpreted as to be the only way to use the program, but I have found it to be reliable and profitable.
I use credit spreads using OEX put options of the current months expiration as the trading vehicle. I determine how many contracts by using the Dow Jones Systems Trend Index, aggressive variable mode total contracts, the most recent trend. Thus, the most contracts that I would have ever use is 65, based on 13 positions of five contracts maximum exposure during the recent bull trend.
Then I would buy the nearest in-the-money put and sell the nearest out-of-the-money puts and take in the credit. I hold the contracts to expiration and pocket the profit.
If a trend is just starting on the Dow Jones (aggressive variable, actual Index), I add to my positions as your program indicates (five contracts at a time) using the same parameters for entry.
As the market continues to move thru strike prices I buy higher strike puts or continue to add to the current long strike puts and sell higher strike puts depending on the market.
The cost to add positions with a five point strike difference is $1000 per contract, therefore adding five contracts at a time requires $5000 (less the credit money that's generated). This program requires $15000 minimum equity and level two trading at Charles Schwab & Co.
At the end of each month's expiration I start with the total number of contracts that the Dow Jones program indicates to hold in open equity. That way I can continue to profit if the trend continues and even add additional contracts if they are generated by the system.
This program has permitted me to achieve a high degree of success in trading the OEX with reasonable confidence.
I check every day to see if the Dow Jones System confirms my trading action, but the OEX actual index and the OEX Harmonics seem to be too conservative.
I think that investors can use this system of trading using deeper in-the-money OEX contracts and achieve a more conservative return if they feel uncomfortable using the at-the-money and nearest strike of puts. The following is supporting documentation concerning spreads:
Monetary Requirements: $15,000 (Broad Based) minimum equity - $5,000 (Narrow Based/Equity Options) minimum equity - Cash or MCA to cover the difference in strike prices. Plus any other requirements.
Tips on Entering Order - (Chart Referred to is in Print Copy)
Enter the buy side first. When to use: If you think the market will go up somewhat or at least is a bit more likely to rise than fall. Good position if you want to be in the market but are unsure of bullish expectations. You're in good company: This is the most popular bullish trade.
Profit characteristics: Profit limited, reaching maximum if market ends at or above B at expiration*.
If call vs. call version (most common used), break-even is at A divide net cost of spread. Loss characteristics: What is gained by limiting profit potential is mainly a limit to loss if you guessed wrong on market.
Maximum loss if market at expiration is at or below A. With call vs. call version, maximum loss is net cost of spread.
Decay characteristics: If market is midway between A and B, no time effect. At B, profits increase at fastest rate with time. At A, losses increase at maximum rate with time. -Short side carries the risk of early assignment.
The Bullish Put Spread
In the put market, the bull call spread has an equivalent - sell the higher strike put and buy the lower strike put.
This would create a net credit because the premium of the sold put is higher than the one of the purchased put. The maximum profit of this position is the credit.
If the price of the underlying is above the strike price of the short put at expiration, both options expire worthless.
The bullish short put spread can have a distinct advantage over the bullish long call spread. Because the long call spread results in an initial debit, it must be paid for in full when it is established.
The short put spread results in an initial credit. Under current margin rules, it is only necessary for the risk of the spread, i.e., the credit received minus its maximum value, to be available in the account. There need not be an initial cash outlay if the margin account has excess equity.
Special Risks of Early Assignment
The second special situation that a spreader should be aware of involves spreads of American index options. If the short option in an index spread of this type is assigned early, the cash settlement mechanism of index options creates a debit in the account for the amount that the short option is in-the-money at the end of that business day, adjusted by the multiplier of the index.
When the long option is exercised, the amount credited to the account will be determined by the settlement value of the index on the DAY it is exercised. There is a full one day's risk if the long option is not sold at some time during the next trading day!
Summary of Spreading
The general rules of spreading are simple:
- A spread can only be worth as much as the difference of the strike prices of the options that define it.
- If a spread is sold, the maximum profit is the net amount received. The maximum loss is the maximum value of the spread minus that amount.
- Spreads must be done in a margin account. If a spread is sold, the difference between the credit received and the maximum value of the spread must be available.
The Trade-Offs of Spreading
The major trade-off of spreading is the elimination of the unlimited profit potential that goes with a long option position. The spreader trades in immediate performance for a lower cost of entry.
Ways to Improve A System's Rollovers & Contract Months
These are some of my thoughts on ways to improve a trading system I am now using. These ideas could also be implemented by other systems:
Why not improve the data in particular with regard to rollovers. I have three suggestions:
1. Provide for automatic "close-to-close" rollover adjustments; 2. Include all "active contracts for each commodity and; 3. Revise rollover dates to better coincide with the current dates for the switchover to "lead contract" in the pits.
I've been using this system for almost two years and have developed ways of "fooling the system" to overcome the first two deficiencies noted above.
I believe these changes are essential; and I believe most "serous" system users, e.g., those trading "real money" will not object to changes which better reflect what is happening in the real world even if it means an extra rollover or two per year for certain commodities.
After all, my system's automatic rollovers are so quick and easy that a few more rollovers and rollover dates would be little if any bother. Certainly this would be a lot less bother than the extra procedures I now go through in order to assure that the data I use doe not have artificial gaps.
These gaps introduced by the "close-to-open" rollover adjustments (instead of close-close) can be quite large and also there's usually artificially reduced levels of volatility associated with rolling to a more deferred contract rather than the next month.
Dealing With Ever Changing Parameters By Using
Multiple Computers - Bill Taaffe
My following ideas may not be terrific for the hobbyist that needs everything boiled down to a "no brainer" situation. But for the trader whose family and personal future depends upon his success (is that you, too?), there may be some promise here.
First, what would happen if we operated with two or three separate computers, each receiving the same data downloading?
Computer #1 operates just like we are now doing: downloading, reharmonizing, rolling over contracts, market tagging, trend ranking, generating trade signals/initial stops, targets/follow-up stops & targets.
At the appropriate time, the next parameter set is determined and installed. The data base on this computer will be lengthy and additive as each month passes.
During each new calendar month new trade signals and follow-up stops & targets will be taken from this computer as well as trades from last month which DID carry over under the new parameter set (i.e., trades which did not disappear and are still open carrying over from last month).
Computer #2 runs just the same as computer #1, except for only one thing: it always operates on last month's parameter set.
So, when active trades disappear (due to new parameters) or are no longer open on computer #1 they will appear on #2, because #2 has the parameter under which the trade signal and any follow-up was originally generated.
Computer #3 simply extends the time frame open trades could be properly maintained.
It could turn into a lot of hardware all lined up, but it would be impressive to show your kids and friends! But, seriously, what does a person do when his working life is soberly devoted to making money and building capital through the futures markets.
I can say that I wouldn't look forward to acquiring more machines. But, if my trading system is otherwise as good as it appears to be, must its utility extend only to the amateur and hobbyist appetite?
A related solution...I am definitely not in love with the idea of a multiple computer operation. It's just that I can't seem to give up on being able to solve the changing parameters set challenge.
So to avoid having to have all that hardware, how about this alternative (which you could profitably sell)? What I have in mind is a drastically cut down version of my trading system, a "shadow" software program.
This same program could have two or more versions with the difference between them only being the name which the computer would recognize, such as "Shadow1" - "Shadow2" - etc.
As I said, this would not be a complete, full-featured program. Rather, it would only contain the modules which read price data files, produce trading signals, and produce updates for trades still open from the previous one or two months.
As I see it, virtually everything needed for the "shadow" programs should already exist on the real trading program.
We would mostly be eliminating what is not needed, such as trend ranking, over-night runs, charting, some or most of the utilities, etc. Parameter sets would be generated by the real program and manually backed up on floppy disk. They would be manually installed on the "shadow" programs as needed to keep them operating on "today's" price/volume data but using the parameters from last month (on Shadow 1), and the month before (on Shadow2).
Following this strategy, the needed on-going minimum of 19 days of patterns would always be present.
Weekly trend ranking used in trading all contracts from current and prior months would be as generated by the real program.
I hope that you can see my level of enthusiasm for all that my trading system has accomplished. I admire the system developer's work very much and quite obviously want to use it as my vehicle to do well for myself and my family.
If anything I can come up will help, then terrific!
If Hillary Clinton Made Money in Commodities, Why Can't You? Well, Let's Count the Reasons
. . . reprinted with permission of The Wall Street Journal
Looking for a way to make some money in a hurry? You could always hit the lottery, or go to Las Vegas and bet on red seven. Or you might play the commodity markets.
That's what Hillary Rodham Clinton did back in the late 1970s. Much of the money she and Bill used to buy a home and invest in securities and real estate came from commodity speculation, it was recently reported.
According to an account in the New York Times, Mrs. Clinton began trading live cattle futures in mid-October 1978, and generated profits of $100,000 over the next 12-months.
If Mrs. Clinton can do it, why not you? Well, for a start, you could easily lose your shirt. During any one year, three of every four individual investors who trade commodities lose money, says Charles K. Levitt, senior meat analyst at Alaron Trading Corp., a Chicago commodities broker.
And over the long run, an estimated 95% of individuals who speculate in commodities futures lose money, according to Bruce Babcock, editor of Commodity Traders Consumer Report, a Sacramento, Calif., newsletter.
The lousy odds come from the nature of commodities futures themselves and the fierce competition that the individual trader is up against. A futures contract is an obligation to buy or sell a specific quantity of a commodity - in Mrs. Clinton's case, live cattle - at a fixed price at a particular date in the future.
For example, when Mrs. Clinton bought cattle futures, each contract she bought called for the delivery of 40,000 pounds of live cattle, or one truck load. Obviously, she didn't do that; the delivery of even one contract would produce the raw material for a lifetime supply of Big Macs, one of President Clinton's fast-food favorites.Chart in Print Copy
Rather than actually take delivery of the underlying commodity, most investors hope to make money by selling the contract at a higher price than they bought it.
The potential for huge profits - and devastating losses - comes from the fact that traders only have to put up a small percentage, usually between 5% and 10% of the contract's value to play the game. As the price of the underlying commodity rises or falls, the value of the contract surges or plunges, magnified by the leverage involved.
Small Beginning Stake Results In Big Profits
It wasn't reported how much money Mrs. Clinton started with. But Mr. Levitt, a pro who has been trading and studying cattle futures for 30 years, speculates that a beginning stake of $10,000 could have produced profits of $100,000 during the period she was in the market. (Note: It was later revealed that she started with just $1000)!
Small investors like Mrs. Clinton are competing against pros from giant agricultural and food companies trying to hedge their firms' food costs and price risks, as well as against institutional traders and investment banks. These pros have access to even the most arcane information about fundamentals that might affect prices.
So, if you plan to take a flier in commodities futures, you better know what you are doing. A spokesman for Mrs. Clinton was quoted as saying she "consulted with numerous people and she did her own research," including reading The Wall Street Journal. According to published accounts, she also had a very good adviser: James B. Blair, a friend who at the time was the primary outside attorney for Tyson Foods Inc. of Springdale, Ark., one of the nation's largest poultry companies.
Made Millions Trading Commodities and
Told Mrs. Clinton to Start Trading Cattle Futures
Mr. Blair told reporters that he had made millions of dollars trading commodities for his account, and that he had advised Mrs. Clinton to get into cattle futures, because "I thought I knew what I was doing."
It also helps to be lucky. "My guess is that an awful lot of her success was luck," says Mr. Babcock, the Sacramento newsletter editor. "She happened to get into a good trending situation at the right time."
Mrs. Clinton did her trading during one of the great cattle bull markets. "It was relatively easy to make money in cattle futures," says Mr. Levitt. "You didn't have to do a lot of trading. All you had to do was hold your position."
Mrs. Clinton "was also lucky that she stopped," Mr. Babcock says. "If she had continued to trade cattle futures after October 1979, the chances are she wouldn't have done so well."
A clear trend, such as the big 1978-79 cattle rally, gives a trader "a statistical advantage," the same kind of thing you need in playing Black Jack in Las Vegas, Mr. Babcock explains. "If you play Black Jack, you must be a card counter. Otherwise, the longer you gamble, the more your lose."
Working With FutureLink Data and Updating in CSI Format - Ken Thompson
Flip-flopping between import and export commands, many FutureLink subscribers save data in ASCII files in order to maintain portfolios.
Most trading and analysis programs do not read ASCII files directly. This necessitates the use of additional computer commands, creating a complicated portfolio update procedure.
This procedure can be simplified by exporting the FutureLink data in CSI format. The use of the CSI format, compatible with most trading and analysis software, enables direct access to data files, eliminating time consuming file handling steps. After completing the procedure outlined below, unlimited portfolio files can be maintained with one keystroke.
To utilize this approach, FutureLink's Links Data Export Software and data feed as well as Trend Index Utility Software are necessary.
One word of caution: although Investograph analysis software claims an ability to read CSI files directly, massive data loss occurred with this particular software's attempt to read files.
STEP 1: Trend Index Utility Configuration
This step sets up data files which will receive information from FutureLink.
- enter Trend Index Utility program's utility sub-menu
- verify data path and note, i.e. C:\TRENDXUT\
- enter the commend to start a new data file
- enter the correct symbol (found in the FutureLink manual) and the correct values (found in the Trend Index manual) for each contract requiring CSI formatted data.
Note: A trading system with a pre-programmed symbol list can not read a data file without a matching symbol. If this occurs, change the symbol in the pre-programmed list to match the data file symbol for that particular commodity. Consult software manual.
STEP 2: FutureLink Configuration
This step reads chart data for export.
- enter configuration menu for charts in FutureLink
- turn on daily, weekly and monthly charts for contracts being followed
STEP 3: Links Data Export Configuration
During this phase, contracts to be updated will be specified.
- enter Links Data Export Utility and specify the portfolio contracts to be updated
- specify where data will be derived: charts or TSR; see note below
- specify fill or fix; see note below
- specify data format: CSI
- change data path to the location of CSI data files (derived in first step) i.e. C:\TRENDXUT (the omission of the second slash is intentional)
*NOTE: Charts are appropriate for analysis programs which do not need an actual open. They also provide 150 days worth of historical data including volume and open interest.
TSR gives today's data only and offers an actual open but no volume and open interest. For 24 hour markets, it is nearly impossible to export data at the settlement price using TSR. If neither charts nor TSR are adequate, a combination of the two can be utilized within the same contract.
The following procedure will provide 150 days of data. The date of the update will be the 150th day. This date and all future updates will include an actual open.
- list each contract twice
- the first time contract is listed, specify "TSR & fill"
- the second time the contract is listed, specify "charts & fix"; the fix command will overwrite the high, low and close with the actual settlement prices, if the prices differ.
STEP 4: Change Software Path - to automatically read the data files, the data path of the trading and analysis software must be changed to the location of the CSI data files. i.e. C:\TRENDXUT\
With this basic configuration complete, enter the Links Data Export program and press GO. Retrieving 150 days of historical data takes about one second per contract. A daily update for a 30 market portfolio can be obtained in under one minute.
Editor Comments The Purpose and Objectives of
Commodity Traders Club News - Dave Green
My original idea was to start a newsletter similar to Club 3000, but geared specifically more to trading ideas and info on how to trade profitably. In addition, I wanted it written almost exclusively by individual traders, with more Editor comments about articles, and with far fewer articles by Vendors.
One thing I have heard many times from a number of Club 3000 members, is they were unhappy due to the preponderance of space taken up in it by Vendors or by prospective Vendors. Certain Vendors it seems, are constantly either pushing themselves or criticizing others.
Also, a lot of their members were disappointed or felt somewhat mislead (not by Bo Thunman . . . but by the Vendors) due to many articles written by so called "vendors in disguise."
They then went on to use it as their main advertising media to promote themselves. After extensive free advertising thanks to Bo, they suddenly became vendors and made lots of money. This is especially true of one well known vendor, who made (in an approximate 2-year time period) an estimated 1 million dollars plus, and became likely the most profitable Vendor of all time. Most of his success was due to his numerous Club 3000 articles, many of them free articles written as a "vendor in disguise."
He received lots of free publicity over a very long time period by writing a number of inordinately lengthy articles praising himself and his seemingly profitable trading methodology.
After getting lots of free publicity, he subsequently then announced he was in fact a Vendor, only too happy to sell his system to all those anxious Club 3000 Members. He then continued his publicity blitz after announcing he was really a Vendor. All told he took up a staggering amount of space in that newsletter.
After selling many systems (manuals, video tapes and software) and making bushels of money (much more than he made trading) he then announced in Club 3000 he's back to trading and no longer a Vendor. However, he has changed his mind and is now back in the vendor business selling his system again and managing money.
Now, he has a friend (who lives nearby in Reno) who has done the same thing. He wrote a myriad of lengthy free articles over a multi-year time period, telling everyone just how great he is and what a fantastically successful trader he is, and implying how much better he is than anyone else.
Subsequently, he announced he is now a Vendor and will sell his system, even after saying in Club 3000 while writing the barrage of articles, that he will never become a Vendor!
A number of others have done the same thing these two well-known parties did. They have taken up vast amounts of space in Club 3000, mostly for the purpose of getting all the members hyped up about them, and then announced they are all too willing to sell their methodology to the members.
It's been very lucrative for many vendors in disguise to use (or should I say misuse) Club 3000 in that manner. That's why I started a different kind of publication, one devoted almost completely to articles written by and for the benefit of small traders, and not promoting specific trading products.
Don't misunderstand, I'm NOT criticizing Bo or his fine newsletter. In fact, Bo Thunman is held in the highest esteem and is very highly regarded. I recommend to all CTCN or Swing Catcher System clients that they subscribe to it. My present system brochure also recommends subscribing to it and gives Bo's address, etc.
Commodity Traders Club News Brochure states on Page 5 "we prefer not to publish many articles referring to Swing Catcher." It goes on to say "we do not want or solicit letters devoted to praising the System." It also says "CTCN will be segregated as much as possible from system sales, including separate phone numbers."
I have actually received some complaints from system owners about that policy, because they wanted to read some articles about the system. Therefore, I have in fact been occasionally publishing articles written by members (not myself) referring to the system.
However, articles mentioning Swing Catcher have been kept to a minimum, and in fact some months we have had zero references to my system. An audit of all back issues reveals that only 2% of the articles are about Swing Catcher and just 9% briefly mention it. (Note: The actual lineage used is actually an even smaller percentage). That is evidence that articles about Swing Catcher are kept to a minimum so members can learn all about a large number of other products, services, systems and methodology.
I could have published many articles if I wanted to, because I have received a large number of complimentary letters about it. However, I don't want to do that. I want Commodity Traders Club News to be an unbiased open-forum which covers many different subjects so everyone benefits from a broad array of trading information.
The article about claiming trader status for tax purposes was written by Ted Tesser, a Certified Public Accountant in New York and also an active Futures Trader. He is the author of "The Serious Investor's Tax Survival Guide."
It is my understanding that even if you are not trading actively enough to qualify for "Trader Status," you can still deduct almost any purchase you make involving trading related products, if used to assist you in your investments. That would include trading systems, software, books, seminars, newsletters, etc. Check with the IRS or your accountant to be sure.
Special Note: Thanks to everyone who has contributed knowledge to this issue of Commodity Traders Club News. Without you it would not be possible. P.S. - Remember, as a special reward for making just one contribution/submission per year, you'll receive an automatic 50% price reduction on your renewal. Submissions can be any length, long or short; typed, handwritten or submitted on a disk. Formal or informal. Please participate by sharing your information and knowledge with other traders. Please make a contribution about your experiences, both good & bad with systems, services, advisors, data vendors, and other trading related product.
The reproduction, copying or publication of any part of this work beyond that permitted by Section 107 or 108 of the United States Copyright Act, and also World-Wide International Treaty Provisions, is unlawful. All Rights Reserved. Written permission from the Publisher/Editor is required for reproduction in any form (with proper credit to CTCN, including our address and phone number being required), and may be withdrawn at any time. Commodity Traders Club News (CTCN) is a 'Clearing House' or 'Information Exchange' for members only. We do not verify, (and we have not) verified the accuracy of the mathematics or numbers published herein, or accuracy of comments and remarks made by the authors. All information and remarks in the contributions are the opinions of the author or contributor, not the Editor or CTCN. You should be aware that P&L reports and advertisements are frequently based on hypothetical (not real-time/actual) trades. Article headlines or Sub-Headlines sometimes may be changed or written solely by the Editor, using verbiage the Editor believes highlights important points being made by the contributor. CTCN Membership, which includes our bi-monthly CTCN newsletter is "Your Guide To Profitable Trading and How To Save Money Along The Way." It's regularly priced at $100 (US) for 1-year. . . and includes free postage within USA & Canada (add $20 for Overseas Air Mail). Publisher: web.trading, D.B.A. Our E-mail address is: email@example.com Our Website address is www.web.trading Editor is Dave Green. The opinions and recommendations are those of our writers and not those of web.trading, CTCN, or its editor. (Note: There is high risk of loss in futures trading and past results may be difficult to achieve in the future and also may be based on hypothetical trading, with benefit of hindsight, and not actual trades) Note: We operate open member forums and consequently reserve the right to publish e-mail and other communications received. Therefore, please indicate "confidential" or "not-for-publication" on any e-mail or other correspondence sent us which you want kept private. Please contact us if we publish your comments and you object. Thank you.