Trade idea
Trade idea Call spreads
The speaker discusses the use of call spreads to capitalize on a bullish outlook. The idea is to sell a larger put and buy a call, allowing for profit if the market moves upward. The speaker also mentions the importance of adjusting the ratio of contracts based on the expected market movement, such as selling three puts for every two calls if the trader is slightly bullish.
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StrategyCall spreads
Time horizonShort-term, typically within a month
Entry / triggerWhen the trader has a bullish outlook and the market is expected to move upward
Target / exitProfit from the upward movement of the underlying asset
Invalidation / stopLoss if the market moves against the bullish outlook
SpeakerSpeaker
Risks- Market moving against the bullish outlook
- Limited upside potential
Trade idea
null Poor Man's Covered Call
The 'poor man's covered call' strategy is a viable method to reduce the cost of LEAPS by combining a long-term LEAP with a near-term out-of-the-money call. This approach leverages the lower cost of the near-term option to improve the basis of the long-term position, allowing traders to participate in long-term equity growth while managing risk and cost. The strategy is particularly useful for high-quality stocks where the upside potential is significant, and the cost of the LEAP is a concern.
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StrategyPoor Man's Covered Call
Assetnull
Expirationnull
Time horizonLong-term (150-300 days for LEAPs)
Entry / triggerBuy a long-term LEAP and sell a near-term out-of-the-money call against it
Target / exitReduce the cost of the LEAP while maintaining upside potential
Invalidation / stopIf the underlying stock significantly underperforms, the strategy may fail to capture upside
SpeakerSpeaker
Structure / legs- Long-term LEAP
- Near-term out-of-the-money call
Risks- Volatility risk
- Time decay on the LEAP
- Limited upside due to the short-term option sold
Trade idea
TQQQ volatility trading
Trading volatility through short puts and calls in TQQQ can be more profitable than in QQQ due to higher liquidity in TQQQ. However, the options in TQQQ are less liquid, which may affect the edge and risk profile. The underlying stock and options markets are influenced by the same models, but liquidity differences can impact trade execution and edge. The strategy is suitable for short-term trading, but traders should be cautious about the liquidity of options and the potential for wider spreads.
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Strategyvolatility trading
AssetETF
Time horizonshort-term (weeks to months)
Entry / triggerwhen the underlying stock is actively traded and options are less liquid
Invalidation / stopif the underlying stock or options show significant liquidity issues or market volatility beyond expected levels
SpeakerMitch
Risks- liquidity risk in options
- market volatility
- execution risk due to lower liquidity in options
Trade idea
Trade idea strangle
The speaker and their friend Jules attempted to sell a strangle in every strike of the S&P, which resulted in a significant loss. The trade was based on a lack of attention to volatility levels and market conditions. The trade idea highlights the importance of understanding volatility and market dynamics before entering complex options strategies. The failure of the trade serves as a cautionary tale about the risks of overleveraging and not considering market conditions.
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Strategystrangle
Time horizonshort-term
Entry / triggerselling a strangle in every single strike in the S&P
Invalidation / stopvolatility and market moves
SpeakerScott
Risks- volatility
- market moves
- overleveraging
Trade idea
COST Put selling
The speaker discusses selling puts on Costco stock at the 900 and 875 levels when the stock was trading around 850. The speaker believed that the stock would eventually rise above these levels, indicating a bullish outlook. The speaker also mentions that the stock has been on a tear to the upside after a period of weakness.
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StrategyPut selling
AssetEquity
ExpirationNot specified
Time horizonNot specified
Entry / triggerStock price at 850 level
Target / exitStock price above 900 level
Invalidation / stopStock price below 850 level
SpeakerThe speaker
Structure / legs- Put at 900 level
- Put at 875 level
Risks- The stock could fall below the put strike price, resulting in a loss
- Market volatility could impact the stock price
- The stock could trade below the put strike price before expiration
Insight
Choosing a Stock for Long-Term Holding
The discussion highlights the importance of selecting a stock that is widely recognized and has a strong public presence, as it is more likely to be passed on to an inheritor. Apple is suggested as a choice due to its public nature and widespread recognition.
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Applicable when- Long-term holding
- Inheritance of assets
Limitations- The recommendation is based on personal opinion and not on market data or analysis.
Insight
Skew and Delta Management in Options Trading
The speaker discusses the importance of managing delta and skew in options trading, emphasizing that the skew of delta is a critical factor in positioning. The idea is that traders should focus on the delta of the strike price they are long or short, rather than an uneven ratio of contracts. This approach allows for more precise control over risk and reward, especially when the market is expected to move in a particular direction.
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Applicable when- market direction expectations
- delta management
Limitations- Requires understanding of delta and skew concepts
- Not suitable for all market conditions
Insight
Strategic Use of LEAPS and Covered Calls
The speaker suggests using a 'poor man's covered call' strategy to reduce the cost of LEAPS (Long-Term Equity Anticipation Securities) without sacrificing a significant portion of the upside. This involves buying a long-term LEAP and selling a near-term out-of-the-money option against it. The rationale is that this strategy improves the basis (cost) of the LEAP by leveraging the lower cost of the near-term option, effectively reducing the overall cost of the long-term position. The practical implication is that this approach allows traders to participate in long-term equity growth while managing risk and cost.
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Applicable when- Trading high-quality stocks
- Use of LEAPS for long-term exposure
Limitations- Requires accurate volatility assessment
- May limit upside potential due to the short-term option sold
Insight
Importance of Starting Early for Wealth Growth
The transcript emphasizes that starting to think about wealth growth early is crucial. It highlights that waiting until retirement to begin building wealth is detrimental, as time allows for compounding returns and recovery from potential losses. The speaker suggests that young individuals should start investing without fear, as they have more time to recover from market fluctuations.
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Applicable when- young investors
- long-term wealth growth
Limitations- Does not address specific investment strategies or risk management techniques
Insight
Market Volatility and Political Dynamics
The transcript suggests a potential political tug-of-war where Trump might aim for higher market levels to look good for midterms, while others might want lower levels to put Trump in a difficult position. However, the speaker argues that neither scenario is likely due to the market's size and its indifference to political pressures. The market's behavior is seen as too large and independent to be significantly influenced by such political dynamics.
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Applicable when- political events
- market volatility
- midterms
Limitations- The analysis is speculative and based on assumptions about political intentions and market behavior.
- The actual impact of political events on the market is complex and influenced by many factors beyond the scope of this discussion.
Insight
Optimal Delta for Selling Puts
The optimal delta for selling puts with 45 days to expiration (DTE) is generally between 16 and 25, with 22 being the most ideal number. This range balances safety and profitability, as it captures the sweet spot of the decay curve where the premium decay is most favorable. Selling puts with a delta below 10 is considered safer but results in lower returns. For earnings events, lower deltas (e.g., 7-10) are preferred due to higher premiums, but traders should avoid being too close to 16 delta during such periods.
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Applicable when- 45 DTE
- put selling
- options trading
Limitations- The optimal delta may vary based on market conditions and volatility.
- Earnings events may require adjustments to delta ranges for risk management.
Insight
Technical Analysis as Engagement Tool
Technical analysis is viewed as an engagement feature rather than a predictive tool. It allows traders to visualize and interact with market data, which can be valuable for participation in trading. However, there is no mathematical support for its effectiveness in generating profits. The practical implication is that while technical analysis can be useful for engagement, it should not be relied upon for making money. This insight applies to traders who use technical analysis as a tool for interaction with the markets, but it is important to recognize its limitations in terms of profitability.
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Applicable when- trading engagement
- visualization of market data
Limitations- lack of mathematical support for profitability
- not a reliable method for generating profits
Insight
Leveraged ETFs and Volatility Trading
Trading volatility through short puts and calls in leveraged ETFs like TQQQ can be more profitable than in QQQ due to higher liquidity in TQQQ. However, the options in TQQQ are less liquid, which may affect the edge and risk profile. The underlying stock and options markets are influenced by the same models, but liquidity differences can impact trade execution and edge.
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Applicable when- leveraged ETFs
- volatility trading
- options trading
Limitations- Options in TQQQ are less liquid
- Higher liquidity in QQQ may offer better execution for options traders
- The edge is theoretically the same, but practical execution may differ due to liquidity and market dynamics
Insight
Puts as Schmutz
Puts are referred to as 'schmutz' due to their frequent use in the market, particularly over the last 20 years. This term implies that puts are seen as a form of garbage or unnecessary trading activity, as they are often sold freely by traders to collect premiums. The speaker suggests that this practice may change if there is a market correction, indicating that the current environment may not be sustainable for such strategies.
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Applicable when- Market correction
- Long-term market trends
Limitations- The term 'schmutz' is subjective and may not be universally accepted in trading circles.
- The speaker's opinion is based on personal experience and may not reflect broader market sentiment.
Insight
Naked Puts as a Consistently Successful Strategy
Selling naked puts has been consistently the most successful strategy with options, according to historical data from 1976 to 2009. This strategy is often referred to as 'puts or schmutz' on trading floors, indicating its long-standing popularity and effectiveness in the market.
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Applicable when- long-term market trends
- options trading strategies
Limitations- Requires market stability
- Potential for large losses if the underlying asset drops sharply
Insight
Understanding Option Display Conventions
The display of options on trading platforms has evolved from traditional trading floor methods to modern digital formats. The convention of placing lower strike prices at the bottom and higher ones at the top originated from trading floors and was adopted by platforms like Thinker Swim and later copied by others. This display method is still prevalent, though some platforms like Tasty allow users to flip the order. The rationale behind this convention is rooted in historical practices, even though the specific reasons for its adoption on trading floors remain unclear.
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Applicable when- trading platforms
- option display conventions
Limitations- The origin of the convention on trading floors is not explicitly stated
- The impact of display conventions on trading decisions is not quantified
Insight
Crypto's Challenges and Market Response
The discussion highlights that cryptocurrencies face significant challenges, particularly after a substantial selloff. The speaker notes that the market has shifted, and crypto firms must now prove the value of their technology. This is evident in the declining price of Bitcoin and the struggles of crypto-based stocks like Coinbase and Robin Hood. The speaker suggests that crypto may need to form a base and regroup, indicating a potential long-term bullish outlook but with increased difficulty in the short term.
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Applicable when- market volatility
- regulatory scrutiny
- technological validation
Limitations- Uncertainty about the exact price levels for a base
- Potential for further market downturns
- Dependence on regulatory developments
Insight
Digitization and AI as Future Drivers
The speaker emphasizes that digitization and AI are key drivers of future growth, suggesting that these technologies will significantly impact various industries. The speaker believes that the digitization movement, along with AI, represents the future of technological advancement and economic growth.
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Applicable when- Long-term investment in technology sectors
- Interest in digital transformation
Limitations- The speaker's views are speculative and not based on concrete data
- The impact of digitization and AI may vary across different industries and regions
Insight
Premium Opportunities in Out-of-the-Money Puts
The speaker highlights that there is significant premium in out-of-the-money puts for Coinbase, particularly around strike prices of 120, 125, and 130. This premium is attributed to the potential for a $12 expected move by Friday, making these options attractive for traders bullish on cryptocurrencies and Bitcoin. The premium is noted to be substantial, with the March 120 puts priced at 350-370, representing a significant value for traders.
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Applicable when- cryptocurrency market volatility
- earnings announcements
Limitations- The premium is dependent on the actual price movement of Coinbase, which may not materialize as expected.
- The options discussed are for the March expiration, which may not be suitable for all risk tolerances or time horizons.
Q&A
Why don't we do delta depend versus delta neutral?
The question is about the difference between delta dependence and delta neutrality in trading. The answer explains that delta neutrality is a common approach in trading, while delta directionality is also possible, depending on the trader's strategy.
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Actionable takeawayUnderstanding the difference between delta neutrality and delta directionality is important for traders to choose the appropriate strategy based on their market outlook.
Q&A
How do I decide how to play the skew if I have an opinion of what the skew is going to be on the underlying?
The speaker explains that skew is typically managed by adjusting the delta of the strike price you're long or short, rather than using an uneven ratio of contracts. If the trader is bullish, they should short a bigger put, and if they're bearish, they should short a bigger call. The speaker also mentions that they occasionally use an uneven ratio of contracts, such as selling three puts for every two calls, if they're slightly bullish.
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Actionable takeawayAdjust the delta of the strike price based on your market outlook rather than using an uneven ratio of contracts.
Q&A
How to decrease the cost of LEAPS without sacrificing a huge chunk of the upside?
The speaker suggests using a 'poor man's covered call' strategy, which involves buying a long-term LEAP and selling a near-term out-of-the-money call against it. This reduces the cost of the LEAP by leveraging the lower cost of the near-term option, improving the basis of the long-term position.
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Actionable takeawayUse a 'poor man's covered call' strategy to reduce the cost of LEAPS while maintaining upside potential.
Q&A
What is the recommended approach for retirees regarding their investments?
The speaker suggests that retirees should consider a balanced portfolio, mixing risk-free assets (like cash) with higher-return investments (like the S&P 500). They recommend a mix of 30-40% risk-free and 60% higher-return assets to achieve a target return exceeding 7-8%.
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Actionable takeawayRetirees should diversify their investments between low-risk and higher-risk assets to balance growth and safety.
Q&A
Are you a polyglot? Is that something that you enjoy doing?
The speaker is not a polyglot, only fluent in two languages, and enjoys learning languages for their utility in fields like medicine and law. They mention Latin as a root language of many others, but note that it's not spoken by many.
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Actionable takeawayThe speaker's interest in languages is driven by practical applications in professional fields, not just linguistic curiosity.
Q&A
What is an ideal delta for selling puts with 45 DTE?
The ideal delta for selling puts with 45 DTE is generally between 16 and 25, with 22 being the most optimal. This range balances safety and profitability, capturing the sweet spot of the decay curve. For earnings events, lower deltas (e.g., 7-10) are preferred due to higher premiums.
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Actionable takeawayTraders should consider selling puts with a delta between 16 and 25 for 45 DTE, with 22 being the most ideal. Adjustments may be needed for earnings events.
Q&A
What does the pie icon with a piece coming out mean on the Tasty platform?
The pie icon with a piece coming out indicates whether earnings are scheduled before or after the market bell. If the icon is pointing up, it means the earnings are after the market bell. If it's pointing down, it means the earnings are before the market bell. The symbol for Microchip is MCHP, and the icon appears between February 20th and February 27th.
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Actionable takeawayThe pie icon on the Tasty platform indicates the timing of earnings relative to the market bell. This can be useful for traders to plan their trading activities around earnings events.
Q&A
Is it more profitable to trade by selling volatility with short puts and short calls in a leveraged bull ETF like TQQQ rather than QQQ?
It can be more profitable to trade by selling volatility with short puts and short calls in TQQQ due to higher liquidity in the underlying stock. However, the options in TQQQ are less liquid, which may affect the edge and risk profile. The underlying stock and options markets are influenced by the same models, but liquidity differences can impact trade execution and edge.
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Actionable takeawayConsider trading in TQQQ for higher liquidity in the underlying stock, but be cautious about the liquidity of options and the potential for wider spreads.
Q&A
What do you mean by 'puts are schmutz'?
The speaker refers to puts as 'schmutz' (garbage) because they have been frequently sold in the market over the last 20 years, often to collect premiums. This implies that the practice may not be sustainable in the long term, especially if there is a market correction.
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Actionable takeawayPuts are seen as a form of unnecessary trading activity due to their frequent use and the potential for market correction to change their viability.
Q&A
What do you recommend for a third-year student who receives a return job offer from their summer internship?
It is recommended to consider the job offer but also explore other opportunities. The advice includes evaluating the job's potential for growth, the company's reputation, and the overall package, including salary, bonuses, and benefits. It is suggested to either accept the offer or continue searching for better opportunities, depending on the individual's confidence in their abilities and the job market conditions.
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Actionable takeawayEvaluate the job offer's value beyond salary, consider potential for growth, and explore other opportunities if possible.
Q&A
Could you tell the sell Every strike story?
The speaker and their friend Jules attempted to sell a strangle in every strike of the S&P, which resulted in a significant loss. The trade was based on a lack of attention to volatility levels and market conditions. The trade idea highlights the importance of understanding volatility and market dynamics before entering complex options strategies. The failure of the trade serves as a cautionary tale about the risks of overleveraging and not considering market conditions.
View full notes
Actionable takeawayAvoid overleveraging and ensure proper consideration of market conditions before entering complex options strategies.
Q&A
Do you think that our lawmakers and our politicians are going to have a bullish or a bearish opinion after this criminal organization has attempted to use Bitcoin to get payment for the hostage that they've taken in Arizona?
The speaker believes that politicians are unlikely to have a bullish opinion on cryptocurrencies after this incident. They argue that the use of crypto for criminal activities is unlikely to be effectively regulated, and the market has already shown a significant selloff, indicating a bearish sentiment.
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Actionable takeawayThe speaker suggests that the incident may have a bearish impact on cryptocurrencies, as it highlights the challenges and risks associated with their use in criminal activities.
Q&A
Does Tom like Costco stock?
The speaker states that they do not like Costco stock at these levels, but they do like the stock in general. The speaker mentions that Costco stock got super cheap and has been on a tear to the upside.
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Actionable takeawayThe speaker's opinion on Costco stock is mixed, with a preference for the stock at lower levels but a reluctance to buy at current levels.
Q&A
What is the expected price movement for Coinbase by Friday?
The speaker expects Coinbase to move by $12 by Friday, with a potential range of 104 to 457 for the year. This is based on the current price of 150 and the anticipated earnings report.
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Actionable takeawayTraders should consider the potential for a $12 move in Coinbase by Friday, which could impact the value of out-of-the-money puts.