Trade idea
MSFT options trading
The speaker believes that software stocks, such as Microsoft, offer more tangible opportunities for growth compared to Bitcoin. This is based on the idea that software stocks have already experienced significant growth and may have more room for further appreciation. The speaker suggests that the market may not validate long-term predictions as expected, but the potential for capital appreciation remains.
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Strategyoptions trading
Assetstock
Time horizonShort to medium term
Entry / triggerIf the market shows continued interest in software stocks and the stock price is undervalued relative to its fundamentals
Target / exitPotential for capital appreciation based on the company's growth prospects and market position
Invalidation / stopIf the stock underperforms due to market conditions or a decline in the company's fundamentals
SpeakerParticipant 1
Risks- Market volatility
- Regulatory changes affecting the software industry
- Underperformance due to macroeconomic factors
Insight
At-the-Money Vertical Spread Pricing
An at-the-money vertical spread typically trades around half the width of the strikes. The call and put spreads are each approximately half the width of the spread, though there may be slight variations due to pricing skew. The price is not usually a flat $2.50 on each side for a $5 wide spread, but rather wrapped around the 250 level. Implied volatility and days to expiration do not affect this particular example.
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Applicable when- at-the-money spreads
- vertical spreads
Limitations- Variations may occur due to pricing skew
- Implied volatility and days to expiration do not affect this example
Insight
Managing Assignment Risk in Options Trading
To minimize assignment risk in options trading, traders should consider three strategies: reducing delta, extending the time to expiration, and managing the trade early. These actions help eliminate the risk of being assigned an option, especially when selling calls. The speaker emphasizes that managing the trade early provides clarity on whether the options are approaching assignment, allowing for proactive adjustments such as rolling out the position.
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Applicable when- selling calls
- short options positions
Limitations- Requires active monitoring and timely adjustments
- Not applicable for all market conditions or instruments
Insight
22 Delta Strike Strategy Applicability
The use of 22 delta strikes as a strategy is applicable across various trade durations, including one-day, seven-day, and 45-day options. The model remains consistent regardless of the time frame, fitting the same spot in the decay curve. This approach is considered a 'magic number' by some traders, though individual preferences may vary.
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Applicable when- various trade durations
- consistent model application
Limitations- individual preferences may vary
- requires understanding of decay curve dynamics
Insight
Long Put Vertical Spreads vs. Pure Deltas for Shorting the Market
Long put vertical spreads provide a structured way to hold positions with defined risk, but they may not offer sufficient reward for significant market declines. Pure delta strategies, such as shorting ES or NQ futures or selling naked calls in SPY, are more effective for capturing large down moves. The key is to balance risk and reward based on market conditions and individual risk tolerance.
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Applicable when- market decline
- defined risk
- short delta exposure
Limitations- Long put verticals may not provide enough reward for large market moves
- Pure delta strategies carry higher risk and require proper risk management
Insight
Entering Vertical Spreads as a Single Order
When entering vertical spreads, it is crucial to do so as a single order rather than two separate orders. This prevents the risk of selling one leg and buying the other at unfavorable prices, especially in illiquid markets. The speaker emphasizes that entering as a spread ensures the trade is executed correctly and avoids potential losses due to market gaps or slippage.
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Applicable when- liquid stocks
- vertical spreads
Limitations- Requires proper trading platform support
- Not applicable for all types of spreads
Insight
Iron Condors as a Learning Tool
Iron condors are presented as a useful tool for traders to learn about delta-neutral strategies and options trading. They are highlighted as a low-risk entry point for beginners due to their minimal requirements and the ability to trade 24/7. The speaker emphasizes that they are a good way to understand the mechanics of options trading without significant capital exposure.
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Applicable when- beginner traders
- delta-neutral strategies
- low-risk trading
Limitations- Not suitable for high-risk or aggressive trading strategies
- Requires understanding of options mechanics and market dynamics
Insight
Call Diagonal Spread Strategy
A bullish diagonal spread involves buying a call option with a later expiration and selling a call option with an earlier expiration at a higher strike price. This strategy allows traders to capitalize on the price movement of the underlying asset while managing risk. The example provided uses SpaceX stock, where a call diagonal was executed by buying the AUG210 call and selling the July 230 call, resulting in a $14.25 debit. The potential reward is around $6 if the stock moves within the strike width, offering a favorable risk-reward ratio.
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Applicable when- bullish market sentiment
- limited price movement
- volatility expectations
Limitations- Requires accurate prediction of price movement
- Limited profit potential if the stock doesn't move within the strike width
- Higher risk if the stock moves significantly against the trade
Insight
Complexity of Multi-Leg Options Strategies
Multi-leg options strategies, such as iron condors, are complex and require significant platform space and computational effort. The complexity of managing eight legs is considered a pain in the ass due to the need for extensive calculations and the impact on platform usability. The practicality of such strategies is questioned, as the benefits are minimal for most traders, and the effort required outweighs the potential gains.
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Applicable when- multi-leg strategies
- platform usability
- complexity management
Limitations- Not practical for most traders
- High computational requirements
- Platform space constraints
Insight
Probability of Profit in Put Spread Trades
Selling a put spread can offer a high probability of profit, as demonstrated by the 90% probability mentioned in the transcript. This is calculated based on the width of the strikes and the premium collected. The trade involves selling a put spread with a 10% width of the strike range, which translates to a 90% probability of profit. The trade's risk-reward ratio is considered favorable, with the expected move being 32 points, and the trade being positioned 1.5 to 1.25 times outside this expected move.
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Applicable when- strike width
- premium collected
- probability of profit
Limitations- The probability is based on historical data and may not reflect future performance.
- The trade's success depends on the underlying asset's price movement and volatility.
Insight
High Probability of Profit in Put Spreads
Selling put spreads in stocks with high implied volatility can offer a high probability of profit. The example given with SpaceX's August 21st 8100 put spread had a 96% probability of profit and an annualized return of 30% plus, due to its high volatility and favorable expected move. This strategy is effective when the stock is near its expected move range and the implied volatility is elevated.
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Applicable when- high implied volatility
- stock near expected move range
- defined risk trade
Limitations- Requires accurate expected move calculation
- Risk of losing the premium if the stock moves against the trade
Insight
Understanding Option Exercise Timing
The timing of option exercise is crucial for traders, as it can affect the risk exposure of a trade. The Options Clearing Corporation (OCC) manages the exercise and assignment of options, with retail traders having until about 4:30 Central Time and professionals until 5:30 or 6:00 Central Time. The market can still move after the close, and traders should be aware that the final settlement price is determined by the OCC. If the underlying asset does not drop below the strike price after hours, the trader is not at risk. This highlights the importance of understanding the settlement process and the potential for market movements post-close.
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Applicable when- Options trading
- Market close timing
- Risk management
Limitations- The exact cutoff times may vary by firm
- Market movements after close are unpredictable
- The OCC's settlement process is not always transparent to individual traders
Insight
Efficient Capital Use in Options Trading
Studies indicate that managing early 21 days to expiration or at 50% profit is most efficient for capital use. This approach is recommended to free up capital for subsequent trades, as it allows traders to exit positions before significant market movements can impact the position. However, when a position is underwater, the strategy shifts to focus on risk management and potential recovery.
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Applicable when- short puts
- capital efficiency
- position management
Limitations- The study does not specify the exact market conditions or instruments tested.
- The effectiveness may vary depending on market volatility and liquidity.
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
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
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.
Insight
Option Volume and Market Liquidity
Option volume is a critical factor in determining the liquidity of a stock for options trading. The speaker suggests that for most stocks, a few dozen to a few hundred options per strike are sufficient for trading, especially in less liquid markets. However, in highly liquid markets, thousands of options per strike may be common. The speaker also notes that in tight markets, the volume itself may not be as important as the market's width, which refers to the difference between bid and ask prices.
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Applicable when- Less liquid markets
- Highly liquid markets
Limitations- The speaker does not provide specific examples of stocks with high or low option volume
- The speaker does not elaborate on how to interpret market width in different contexts
Insight
Sell IVR When It's Over 100
The speaker suggests selling options when the Implied Volatility Ratio (IVR) is over 100, as it indicates overvaluation. This strategy is based on the idea that high IVR can lead to potential profit when it declines, as seen in the example of the gold strangle trade where IVR dropped from 100 to 35.
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Applicable when- high IVR
- overvalued options
Limitations- IVR can fluctuate rapidly
- market conditions can change quickly
- not always profitable in all scenarios
Insight
Probability of Profit and Delta Relationship
The probability of profit in options trading is inversely related to the delta of the option. A 10 delta put has a 91% probability of profit, calculated as 100 minus the delta. This mathematical relationship is crucial for assessing trade viability.
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Applicable when- options with known delta values
Limitations- This applies to specific options and market conditions; not all options follow this exact relationship due to volatility and time decay factors.
Insight
Managing Volatility in Options Trading
When managing options trades, especially iron condors, it's important to be prepared for volatility and to adjust positions as needed. If a trade breaches a key strike price, rolling the position to a new strike can be a viable strategy. However, it's crucial to understand the risks involved, such as the potential for large losses if the underlying asset moves significantly against the position. Adjustments should be made with a clear understanding of the trade's risk profile and the market conditions.
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Applicable when- volatility
- options strategies
- position adjustments
Limitations- Requires market knowledge and risk management skills
- Not suitable for all traders or account sizes
- Can lead to significant losses if not managed properly
Insight
Straddle vs. Strangle in Natural Gas Trading
Trading strangles is preferred over straddles in natural gas due to the commodity's high volatility and limited downside potential. Strangles allow for skew consideration, with calls placed further out of the money than puts. The speaker suggests using deltas between 16 and 20 for strangles, with calls 2.5 times further out of the money than puts. This approach accounts for the asymmetric risk profile of natural gas, where upside potential is theoretically unlimited while downside is capped.
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Applicable when- natural gas trading
- high volatility assets
Limitations- Requires experience with natural gas market dynamics
- May not apply to other commodities with different risk profiles
Insight
Capital Efficiency in Options Strategies
Selling a put and buying a call is a capital-efficient way to buy stock, as it allows investors to use the proceeds from the put to fund the call, with only a 20% margin requirement for the put. This strategy is described as cost-effective and has historically performed well over the past 20 years.
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Applicable when- capital efficiency
- options strategies
- stock purchase
Limitations- The strategy requires sufficient capital to cover the put's margin requirement
- The effectiveness depends on market conditions and the underlying asset's performance
Insight
Risk Management in Options Trading
The speaker emphasizes the importance of risk management in options trading, particularly when dealing with volatile assets like AI stocks. Selling upside calls is suggested as a strategy to capitalize on potential price increases while limiting downside risk. The speaker also highlights the importance of timing and the difficulty of shorting overvalued stocks, noting that it requires careful execution and patience.
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Applicable when- high_volatility_assets
- overvalued_stocks
Limitations- requires precise timing
- not suitable for novice traders
- can lead to significant losses if market moves against the position
Insight
Understanding Gamma and Delta Exposure in Options Trading
Gamma measures the rate of change of delta exposure for options, which indicates how sensitive the delta is to changes in the underlying asset's price. The GEX (S&P 500 Gamma Exposure) index is a new tool that quantifies this change in delta exposure. While it provides insight into potential market movements, it is not a tradable asset itself and is more of a reference point for understanding market dynamics. This index can be valuable for traders analyzing the behavior of options and anticipating shifts in market sentiment, particularly for zero DTE SPX options.
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Applicable when- analysis of options behavior
- understanding market sentiment
Limitations- The index is not tradable
- It is a new tool with limited historical data
Insight
Sheridan Paradox
The Sheridan Paradox refers to the situation where Scott Sheridan executes a short call spread, expecting the stock to move within a certain range. This strategy is based on the belief that the stock's movement is overestimated, allowing for a profitable trade. The paradox arises from the contrast between the trader's expectations and the actual market behavior, highlighting the importance of market sentiment and volatility in options trading.
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Applicable when- market sentiment
- volatility expectations
Limitations- Requires accurate prediction of stock movement
- Risk of unexpected market shifts
Insight
Optimal Put Selection Based on Delta
To select the optimal put for selling, traders should base their decision on delta rather than the strike price or volatility alone. The 25 delta put is considered optimal as it offers the highest amount of money with the least risk, providing an 80% probability of profit. This approach ensures a balanced risk-reward profile.
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Applicable when- Trading puts
- Volatility analysis
- Risk management
Limitations- Requires access to delta and volatility data
- Assumes market conditions remain stable
- Not suitable for all market regimes
Insight
Defined vs. Undefined Risk in Options Trading
The speaker explains that defined risk strategies, like iron condors, involve buying protection (wings) which reduces the probability of profit but provides a higher credit. Undefined risk strategies, like strangles, do not require buying protection, allowing for a higher probability of profit and a greater credit. The choice between the two depends on the trader's risk tolerance and comfort with the extra risk for the potential higher return. The speaker emphasizes that there is no theoretical pricing advantage or disadvantage, and the decision is about how the trader wants to live with the risk.
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Applicable when- trading with defined risk
- trading with undefined risk
Limitations- Requires trader to be comfortable with higher risk
- Higher probability of profit may not always materialize
Insight
Managing Narrow Iron Condors
A narrow iron condor, such as the $15 wide one on Tesla, is a high-risk trade due to its tight strike range. The speaker suggests widening the strikes or moving the trade to a later expiration to reduce risk. This is particularly relevant when the trade is close to expiration, as the time decay accelerates. The trade's profitability is also dependent on the stock's movement, and the speaker advises considering alternative strategies if the trade is not performing well.
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Applicable when- narrow strike ranges
- close to expiration
- high volatility
Limitations- Requires market movement in the desired direction
- Time decay can reduce profitability if the trade is held too long
Insight
Strangles in Futures Options
Trading only strangles in futures options is a viable strategy, but it limits the trader's exposure to a narrower set of instruments. The speaker acknowledges that while it's not inherently flawed, it restricts the trader's ability to explore other options strategies. The key takeaway is that traders should remain open to expanding their strategies if they feel comfortable and their current approach is profitable.
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Applicable when- trading only strangles
- futures options
Limitations- limits exposure to a narrower set of instruments
- may not be suitable for traders seeking diversification
Insight
Risk Management in Options Trading
The speaker emphasizes the importance of managing risk in options trading, particularly for new traders with limited capital. They highlight the trade-off between taking more risk with naked puts and using spreads to limit potential losses. The key takeaway is that while naked puts offer higher potential returns, they also expose traders to greater risk, especially if the stock moves against them. The speaker suggests that traders should consider the cost of spreads and the potential for adjustments when deciding between strategies.
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Applicable when- limited capital
- new traders
- risk management
Limitations- The analysis assumes a specific market environment and does not account for all possible market conditions or individual risk tolerance levels.
Insight
Calendar Spread Risk-Reward Dynamics
Calendar spreads involve selling a shorter-term option and buying a longer-term option with the same strike price. The risk is typically limited to the debit paid for the spread, while the potential reward is usually between 20% to 50% of that debit. The ideal scenario is for the underlying asset to trade near the strike price, allowing the short-term option to expire worthless while the long-term option retains value. This strategy is low-risk and low-reward, making it suitable for learning purposes.
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Applicable when- calendar spreads
- low-risk strategies
- learning experience
Limitations- Limited upside potential
- Requires the underlying asset to trade near the strike price
- Not ideal for significant downside protection
Insight
Strategic Spread Delta Management
The delta of a spread is crucial for determining the net delta exposure. The speaker emphasizes selecting the short strike between 25 and 30 delta, with the long strike being flexible. The combination of deltas from both strikes determines the overall delta of the spread, and the width of the strikes influences the net delta. This approach allows traders to manage risk and exposure effectively by focusing on the short strike's delta.
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Applicable when- spread trading
- delta management
Limitations- The method assumes a clear understanding of delta and strike selection, which may vary based on market conditions and individual strategies.
Insight
Ratio Spread Strategy
A ratio spread is a strategy where an investor buys one option and sells multiple options of the same type (calls or puts) at a different strike price. This strategy is used to generate income while limiting risk. The speaker mentions a classic ratio spread with an 85% pop and a $2.20 credit, indicating a high probability of success. The strategy is described as omnidirectional and bullish, with the potential to make $1,500 if the underlying asset drops to a specific strike price.
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Applicable when- neutral to bullish market conditions
- short-term trading horizon
Limitations- The strategy requires careful selection of strike prices and expiration dates
- It may not be suitable for all market conditions or investor risk profiles
Insight
Probability of Profit in Call Spreads
The probability of profit in a debit call spread depends on the strike prices chosen. In-the-money call spreads have a higher probability of profit, while out-of-the-money call spreads have a lower probability. The speaker explains that buying an in-the-money call spread, such as Netflix's 106s and 109s, provides a statistically high probability of profit, whereas an out-of-the-money spread would result in a negative probability of profit.
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Applicable when- In-the-money call spreads
- Out-of-the-money call spreads
Limitations- The probability of profit is not guaranteed and depends on market movement and volatility.
- The speaker's explanation is based on a specific example and may not apply universally.
Insight
Covered Call Strategy Adjustment
A covered call strategy involves owning the underlying stock and selling a call option. If the stock is near its high and the call is getting 'destroyed,' the position is still a winner, but the profit potential is capped. The recommended action is to close the covered call and sell an out-of-the-money put to maintain a long delta position with higher capital efficiency and a better probability of profit. This approach allows the trader to stay long the stock while managing risk.
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Applicable when- covered call strategy
- stock near all-time high
- call option getting 'destroyed'
Limitations- Requires the trader to close the existing position and enter a new one
- The put option may not be as profitable as the original call if the stock continues to rise
Insight
Optimal Timeframe for Options Selling
The optimal timeframe for options selling is 45 to 21 days to expiration. This timeframe balances the trade-off between time decay and the probability of the underlying asset moving significantly. The mechanism involves maximizing the premium collected while minimizing the risk of the option expiring out-of-the-money.
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Applicable when- options trading strategies
- time decay management
Limitations- This is a general guideline and may vary based on market conditions and specific assets being traded.
Insight
Sweet Spot for Vertical Spread Width
The optimal width for vertical spreads, such as bull put spreads or iron condors, is approximately 30% of the width of the strikes. This applies to a distance of one strike width. However, for the best return on investment (ROI), wider strikes are preferable. The wider the strikes, the better the ROI, as supported by extensive research. The sweet spot is around 30% of the strike width, but the best ROI is achieved by maximizing the width of the strikes.
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Applicable when- vertical spreads
- iron condors
- bull put spreads
Limitations- The research applies to a distance of one strike width; wider spreads may have diminishing returns.
- The effectiveness may vary based on market conditions and volatility.
Insight
Earnings Trade Strategy for Marvell (MRVL)
The speaker suggests a specific options strategy for Marvell (MRVL) ahead of its earnings report. The strategy involves buying the 250 calls, selling two of the 260s, and buying one of the 280s. This is a bullish vertical spread with a limited risk and potential reward. The speaker estimates the cost to be around a dollar 20 credit, with a 90% probability of profit. The expected move is $36, and the trade is considered outside the expected range. The speaker also notes that if the earnings are blowout, the 260 strike price could be a target.
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Applicable when- earnings report
- options trading
- bullish vertical spread
Limitations- The trade is outside the expected move
- The speaker estimates the cost and probability of profit
- The trade is for July, which is before the earnings report
Insight
Optimal Timing for Rolling Put Positions
Rolling put positions to the next month with at least 21 days to expiration (DTE) is statistically optimal for maximizing returns over long periods. This timing allows for capturing the most credit with the least risk, as it aligns with the decay curve where the probability of profit is highest. The strategy is particularly effective for perpetual put selling strategies, such as those involving the S&P 500 index.
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Applicable when- perpetual put selling strategy
- S&P 500 index
- long-term trading
Limitations- Requires consistent rolling of positions
- May not be optimal in volatile market conditions
Insight
Strangle Rolling Strategy
When rolling strangles, it's recommended to pair options based on price to minimize roll risk. The speaker suggests aligning options in price, such as pairing a $5 call with a $5 put, rather than mismatched strikes like a $1 put and a $10 call. This approach helps maintain balance and reduces the risk of the underlying moving significantly during the roll. The strategy emphasizes adjusting strikes based on the underlying's movement and the trader's position.
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Applicable when- multiple_strikes
- rolling_strangles
- price_alignment
Limitations- Requires understanding of underlying movement
- Not a static strategy
- May need adjustments based on market conditions
Insight
Trading Zero DTE Options Strategy
Trading zero days to expiration (DTE) options involves selling premium either through calls or puts, with a focus on small positions due to the lack of time to adjust. The strategy emphasizes making a decision based on the expected market movement for the day, with the trader typically acting as a seller rather than a buyer. The key is to stay small and be cautious due to the high risk of rapid price movements without time to respond.
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Applicable when- zero DTE options
- short-term market direction
Limitations- High risk due to lack of time to adjust
- Requires strong conviction in market direction
- Small position sizing is critical to manage risk
Insight
Risk of Early Assignment in Options
The risk of early assignment in options is zero if the underlying stock does not reach a specific price level before expiration. The speaker explains that for a short position in options, the risk of assignment is only relevant if the stock price drops significantly below the strike price. For example, if the stock is short 130-140 calls with an expiration in July, the risk of assignment is zero unless the stock price falls below 125 by the end of July. The speaker suggests a 'wheel strategy' if assignment occurs, involving selling a call or put based on the delta.
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Applicable when- short options positions
- specific strike prices
- expiration dates
Limitations- Assumes the stock price does not move significantly before expiration
- Does not account for market volatility or unexpected events
Insight
Broken Wing Butterfly Strategy
A broken wing butterfly is a defined risk trade that involves buying one strike, selling two strikes, and buying another strike. It is a long butterfly with an embedded put spread, offering a low risk and low reward profile. The strategy is suitable for markets with a limited expected move, as it allows for a small credit while limiting downside risk. The trade is particularly effective when the market is expected to move within a narrow range, and the implied volatility is high.
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Applicable when- limited expected move
- high implied volatility
Limitations- low reward potential
- requires precise strike selection
Insight
Iron Butterfly Strategy for Earnings Periods
The iron butterfly strategy is presented as a low-risk, high-reward option for earnings periods when the expected price movement is minimal. The strategy involves selling an at-the-money straddle and buying out-of-the-money wings. It is considered effective if the stock remains within the expected range, offering a high potential return with limited risk. However, the speaker expresses a personal preference for selling strangles over iron butterflies due to better payout potential, though acknowledges the strategy's appeal for traders seeking low-risk opportunities.
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Applicable when- earnings periods
- low expected price movement
Limitations- Requires accurate prediction of price range
- Limited risk but potential for lower returns compared to other strategies
Insight
Diagonal Spread Strategy
A diagonal spread involves buying a call option with a later expiration and a lower strike price, while selling a call option with an earlier expiration and a higher strike price. This strategy is used to take advantage of time decay and the potential for price appreciation. The speaker mentions a specific example of buying the August 210 call and selling the July 225 call, which creates a $15 wide spread. The trade is structured as a debit spread, with a defined risk of $8.80 and a potential profit range of $3 to $6. The strategy is favored for its defined risk and the ability to benefit from time decay and price movement.
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Applicable when- defined risk
- time decay
- price appreciation
Limitations- requires accurate prediction of price movement
- limited profit potential
- time decay can reduce profitability if the underlying asset doesn't move as expected
Insight
Straddle and Strangle Strategy
A straddle involves buying or selling both a call and a put with the same strike price and expiration, while a strangle involves different strike prices. The strategy can be rolled up by adjusting the strike prices to manage risk and potential profit. This approach is useful when the market is expected to remain within a certain range, allowing the trader to profit from time decay and potentially benefit from volatility.
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Applicable when- market range-bound conditions
- volatility expectations
Limitations- Requires market to remain within a range
- Potential for assignment if the market moves significantly
Insight
Dividend Consideration for Short Call Positions
When holding a short call position on a stock with a dividend, the value of the corresponding put should be above the dividend amount to avoid risk of assignment. If the put is significantly below the dividend, the position should be exited to mitigate risk.
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Applicable when- Short call positions
- Dividend-paying stocks
Limitations- This applies to positions with a short call and a corresponding put
- Assumes the put is the same strike and expiration as the call
Insight
Option Pricing Skew and Its Impact on Spread Trading
The transcript discusses the concept of option pricing skew, particularly call skew, where calls are more expensive than puts. This skew affects the relative pricing of call and put spreads, making call spreads cheaper and put spreads more expensive. This insight highlights the importance of understanding skew when trading options on new offerings like SpaceX, as it can significantly impact the cost and effectiveness of spread strategies.
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Applicable when- new stock offerings
- high volatility environments
Limitations- Skew can change rapidly with market conditions
- Historical skew patterns may not always repeat
Insight
Managing Options in Low Volatility Environments
In low volatility environments, the management of options trades, particularly defined and undefined risk trades, requires strategic adjustments. Defined risk trades like iron condors offer more leeway, allowing for a longer time frame before needing to close or adjust positions. Undefined risk trades, however, should be managed with a strict adherence to the 21-day timeframe to mitigate the risk of reaching maximum loss. This approach is mathematically sound and provides a marginal edge in closing positions effectively.
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Applicable when- low volatility environments
- defined risk trades
- undefined risk trades
Limitations- The effectiveness of the 21-day rule may vary depending on market conditions and the specific trade setup.
Insight
Shorting Premium vs. Underlying
Shorting premium refers to selling options without owning the underlying asset, whereas shorting the underlying involves selling the actual asset. The speaker is currently shorting premium, not the underlying, and is waiting for an opportunity to short the underlying. This distinction is important for risk management and position sizing.
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Applicable when- shorting strategies
- premium trading
Limitations- Requires market conditions that allow for shorting the underlying asset
- Potential for increased risk if the underlying moves against the position
Insight
Capital Efficiency vs. Probability Trade-off in Iron Condors
The discussion highlights the trade-off between capital efficiency and probability in SPX iron condors. Wider spreads (e.g., 150 points) offer higher potential returns but require more capital and increase the risk of adverse price movements. Narrower spreads (e.g., 50 or 100 points) are more capital-efficient and reduce the risk of large losses, though they may offer lower returns. The speaker suggests that 50 points is sufficient for most traders, with 100 points being a maximum, and 150 points being too risky due to the capital required and the potential for significant losses.
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Applicable when- SPX iron condors
- capital efficiency
- probability trade-off
Limitations- The analysis is based on personal trading preferences and may not apply universally.
- The effectiveness of wider spreads may vary depending on market conditions and volatility.
Insight
Defending a Naked Put Strategy
When defending a naked put, rolling out in time reduces risk by about 30%. Rolling out in time also gives the opportunity to move the strike down by a full strike width, which provides additional duration and wiggle room. If the strikes are five-point wide, moving down a five-point wide strike is recommended; if one-point wide, moving down five points is advised. This strategy is part of a defensive approach that includes selling a call with half the deltas against the put.
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Applicable when- Defending a naked put
- Rolling out in time
Limitations- Requires understanding of strike widths and market conditions
- Not suitable for all market regimes
Insight
Call Skew and Volatility Advantage
The speaker highlights the significant call skew in the August options for SpaceX, where calls are 40-50% more expensive than puts. This skew indicates higher demand for calls, suggesting a bullish sentiment or anticipated volatility. The expected move of $73 higher or lower, combined with 111% volatility, creates a favorable environment for strangle strategies. The trade idea leverages this skew to capture potential price movements while collecting a credit.
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Applicable when- High volatility
- Significant call skew
- Expected price movement
Limitations- Volatility may not materialize as expected
- Market conditions can change rapidly
- Liquidity issues in specific strike prices
Q&A
What is the honest take on the concept of a stock you'd be happy to own as a justification for selling puts?
The speaker states that selling puts is not about being happy to own the stock but about taking on risk. They mention that they would be happy to own the stock at a certain price, but it's not a justification for selling puts.
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Actionable takeawaySelling puts is a risk-taking strategy, and being happy to own the stock is not a justification for the trade.
Q&A
Can you trade options?
The speaker acknowledges that trading options is possible but notes that it's harder to open trades when there are wide markets.
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Actionable takeawayTrading options is possible, but it's more challenging in markets with wide bid-ask spreads.
Q&A
Should I always be able to sell an at-the-money vertical spread for approximately one half the width of the spread?
Yes, an at-the-money vertical spread typically trades around half the width of the spread. The call and put spreads are each approximately half the width of the spread, though there may be slight variations due to pricing skew.
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Actionable takeawayAt-the-money vertical spreads are generally priced around half the width of the spread, with slight variations possible due to pricing skew.
Q&A
What would you do if you want to sell covered calls but don't want a huge tax bill if assigned?
The speaker suggests selling covered calls at a low delta and/or further out in time instead of using the 45 21 mechanics.
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Actionable takeawayTo minimize the risk of a large tax bill from being assigned on covered calls, consider selling calls with a low delta and/or further out in time.
Q&A
Why do you not like comparing selling insurance to selling options?
The speaker suggests that selling insurance and selling options are fundamentally different. Insurance involves risk transfer and is typically a one-time event, while options trading involves complex market dynamics and requires a deep understanding of volatility and market behavior. The speaker emphasizes that these two activities are not comparable due to their distinct risk profiles and market mechanisms.
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Actionable takeawayAvoid comparing insurance and options trading due to their differing risk and market dynamics.
Q&A
What causes a large discrepancy between delta and probability in the money?
A discrepancy between delta and probability in the money can be caused by factors such as individual strike volatility, skew, and market conditions like upcoming earnings or events. The delta is generally more accurate as it is calculated per strike, while the probability in the money is a simplified measure based on distance from the strike. The difference is usually small, but large discrepancies can occur due to high volatility or unusual market conditions.
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Actionable takeawayUnderstanding the factors that influence delta and probability in the money can help traders make more informed decisions when evaluating options strategies.
Q&A
Do hedge funds today have similar buying power requirements on options that we have on our retail accounts?
The speaker suggests that while hedge funds may have different capabilities, the core issue of size leading to failure remains. He references a case where a trader named Captain Condor, who used iron condors, faced significant losses due to over-leveraging and consecutive losses, highlighting the risks of size in trading.
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Actionable takeawayHedge funds may have more resources, but the risk of over-leveraging and size remains a critical factor in trading success.
Q&A
Why wouldn't traders buy VIX puts three months out?
Traders typically buy VIX puts for the front month because they get paid more if they are correct, and it offers a faster return. Buying puts three months out is less attractive due to the higher cost and the reduced likelihood of being correct over a longer period. The speaker explains that the VIX has a floor built in, making long-dated puts less valuable and less effective for hedging.
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Actionable takeawayShort-dated options are more attractive for traders due to their higher payoff potential and lower cost, even though they carry higher risk.
Q&A
Is the 22 delta strike strategy applicable only to trades of a certain duration?
The 22 delta strike strategy is applicable across various trade durations, including one-day, seven-day, and 45-day options. The model remains consistent regardless of the time frame, fitting the same spot in the decay curve.
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Actionable takeawayThe 22 delta strike strategy can be applied to different trade durations, as the model remains consistent.
Q&A
If you have a short put trade on and it's working, showing a profit but not near 50% yet, and not closer to 21 days to expiration, but your delta has decreased, would you roll your put strike to take additional credit? And is this an offensive roll?
Rolling the put strike to take additional credit is considered an offensive roll if the trader is bullish on the underlying asset. However, the speaker suggests that taking profits is a more common approach, especially if the trade is already profitable and the time to expiration is approaching.
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Actionable takeawayRolling the strike can be an offensive strategy if the trader is bullish, but taking profits is often preferred in profitable trades.
Q&A
Which currency is a good starter for a strangle and why?
The euro (6E) is recommended as a good starter for a strangle due to its liquid markets and the lack of skew in currency options. The speaker also mentions that the British pound (6B) is less favorable due to its smaller contract size and less liquid options market.
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Actionable takeawayThe euro is a better choice for a strangle due to its higher liquidity and better market conditions compared to the British pound.
Q&A
Any experience trading Bloom Energy BE?
The speaker mentions having traded Bloom Energy (BE) once in the last two years, but does not recall the specifics of the trade. They note that the stock has experienced significant volatility with +5% daily moves and that the options market is wide. The speaker suggests that the volatility is around 120 and that spreads may not move significantly, so the strategy involves trading around mid-price. The speaker also notes that they would not trade anything naked in this environment due to the high volatility and risk.
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Actionable takeawayThe speaker suggests that trading Bloom Energy (BE) with a strangles strategy may be possible, but the high volatility and wide options market make it a risky proposition. The speaker also notes that they would not trade anything naked in this environment due to the high volatility and risk.
Q&A
What option strategies are your go-tos when leaning short?
The go-to strategies for shorting the market include short skew strangles, flatout shorts, ES micro contracts, diagonals, and naked calls in SPY. These strategies provide pure short delta exposure and are suitable for capturing market declines.
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Actionable takeawayShort skew strangles, flatout shorts, ES micro contracts, diagonals, and naked calls in SPY are effective strategies for shorting the market.
Q&A
Have you used the option binomial strategy using the 100-step method?
The speaker has not used the option binomial strategy using the 100-step method, and it is explained as a complex model developed by John Cox, Steven Ross, and Mark Rubenstein in the 1970s. The method involves breaking the time to option expiration into 100 discrete intervals to create a tree that models possible future price movements of the underlying asset. The speaker acknowledges the complexity and lack of personal experience with the strategy.
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Actionable takeawayThe 100-step binomial model is a sophisticated tool for pricing options, particularly American-style options, but it is not commonly used by the speaker, indicating it may be complex or less practical for everyday trading.
Q&A
How should active options traders adapt when the traditional edge in premium selling is compressed?
Active options traders should adapt by trading smaller, wider, and longer-dated positions. They can selectively reintroduce directional risk while taking less of it. This approach helps mitigate the risk of complacency and outlier losses in low volatility environments.
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Actionable takeawayAdapt by trading smaller, wider, and longer-dated positions to replicate higher volatility and reduce directional risk exposure.
Q&A
What are the pros and cons of doing the strategy on the same day versus the next day or later?
The pros of doing the strategy on the same day include less bid-ask differential and avoiding premium decay. The cons of extending the time frame include higher premium decay and the risk of wasting premium. The speaker prefers the same day for simplicity and efficiency.
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Actionable takeawayUse the same day for simplicity and to minimize bid-ask differential, but be aware of premium decay if extending the time frame.
Q&A
Is there ever a mechanical reason to exercise options that go in the money?
There is never a mechanical reason to exercise options that go in the money. Exercising such options is typically a strategic decision based on market conditions and personal trading goals, not a mechanical necessity.
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Actionable takeawayTraders should not expect automatic exercise of in-the-money options; it is a discretionary decision.
Q&A
How much BP reserve should I maintain for market downturns and how much powder should I keep dry to take advantage of high IV to place other trades?
The speaker suggests maintaining a portion of capital as dry powder, typically around 25% to 50%, depending on the trader's risk tolerance and market conditions. The exact allocation may vary based on implied volatility (IVR) and the trader's account size. The speaker also mentions that smaller accounts may allocate up to 70% of their capital to dry powder, while larger accounts may use a smaller percentage.
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Actionable takeawayMaintain a portion of capital as dry powder, typically 25% to 50%, to take advantage of high implied volatility and market downturns.
Q&A
What is the expected move in Coinbase?
The expected move in Coinbase is $36, with the speaker noting that the stock is down $6 today, so the actual profit may be lower than the $200 credit. The speaker advises waiting to see if Coinbase rallies before entering the trade.
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Actionable takeawayThe expected move in Coinbase is $36, but the actual profit may be lower due to the current market conditions. The speaker suggests waiting for a potential rally before entering the trade.
Q&A
Why is the bid sometimes higher than the ask when selling put spreads?
The bid being higher than the ask can occur due to market dynamics and liquidity. When selling put spreads, traders may aim to be slightly above the bid to avoid being filled on the offer side, which is less likely. The inversion of bid and ask prices can be influenced by factors such as market sentiment, order book depth, and the specific strike prices involved.
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Actionable takeawayTraders should be aware of bid-ask spreads and market liquidity when executing trades, especially with options strategies like put spreads.
Q&A
How do you manage actual capital at risk from possible assignments separately from buying power used as a percentage of net liquid value?
The speaker explains that if you get assigned early, you don't worry about it. You roll, you get out, but on the off chance that you do get assigned, it's not a big deal. You just cover it, you do whatever the position is, you get out of the remaining option that you're long with the stock, you can exercise depending on where you are, and just move on. It's not a big deal. The speaker also mentions managing trades early to avoid assignment risk.
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Actionable takeawayThe speaker suggests managing trades early to avoid assignment risk and not to worry about it if you get assigned early. The speaker also mentions that if you do get assigned, it's not a big deal and you can just cover it and move on.
Q&A
Why is the call diagonal spread more favorable than the put diagonal spread?
The call diagonal spread is more favorable because it offers a better risk-reward ratio. Call spreads trade cheaper compared to put spreads, which are more expensive. This makes the call diagonal spread a more attractive option for traders who are bullish on the stock.
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Actionable takeawayCall diagonal spreads are more favorable due to their lower cost and better risk-reward ratio compared to put diagonal spreads.
Q&A
What is pin risk and what about at the money options expiring today?
Pin risk occurs when a stock closes at a strike price, and the trader is short options. This can lead to the options being exercised, resulting in a loss. The speaker explains that if you're long options, you have the choice to exercise, but if you're short, you're at risk. The speaker also mentions that if you're short options close to the money, you need to make a decision by the end of the day.
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Actionable takeawayTraders should be aware of pin risk when holding options close to the money and consider rolling or closing positions before expiration.
Q&A
Does no one seem to support the use of eight-leg options strategies?
The use of eight-leg options strategies is not supported by brokers due to the complexity and space they take on trading platforms. The practicality is questioned, as the benefits are minimal for most traders, and the effort required outweighs the potential gains.
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Actionable takeawayEight-leg options strategies are not practical for most traders due to platform constraints and complexity.
Q&A
What should I do with my United Health short put?
The speaker suggests rolling the short Jan 300 puts down to the March 290s or 290s calls to convert the position into a longer-term trade. This strategy aims to capitalize on potential price movements while managing risk through the credit or even money generated from the call sale.
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Actionable takeawayRoll the short put down and sell calls to convert the position into a longer-term trade.
Q&A
When should you convert an iron condor to a long straddle?
The speaker states that there is no point at which you should convert an iron condor to a long straddle. The reason is that an iron condor is a defined risk trade, and converting it to a long straddle would introduce unlimited risk. The speaker suggests that the only time you would consider such a conversion is if your opinion on the underlying asset has changed and you are hoping for a significant move.
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Actionable takeawayAvoid converting an iron condor to a long straddle unless your opinion on the underlying asset has changed and you are willing to accept unlimited risk.
Q&A
What futures options instrument would you suggest for another position?
The speaker suggests micro crude (MCL) or micro ES (MES) as suitable future options instruments. They also mention that ZFM6 is a viable option for micro futures trading, but other instruments like ZN or ZB are recommended for longer-term bond trading.
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Actionable takeawayConsider micro crude or micro ES for additional positions, or ZN/ZB for longer-term bond trading.
Q&A
When should I take my strangle off?
The speaker advises exiting the strangle before the earnings date, as volatility is expected to increase significantly around the earnings period. The optimal time to exit is before the earnings announcement, ideally within a few days.
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Actionable takeawayExit the strangle before the earnings date to avoid potential losses from increased volatility.
Q&A
Which expiration do you prefer when scalping options?
The speaker prefers options with a short to zero days to expiration (DTE), typically within a week, as they offer more liquidity. For monthly options, the speaker prefers the monthly expiration, but for scalping, the active month is preferred. If the speaker has an opinion on a specific day, the zero-day SPX is used.
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Actionable takeawayWhen scalping options, prioritize options with short to zero days to expiration for better liquidity. For monthly options, the monthly expiration is preferred, but the active month is used for scalping.
Q&A
How do I calculate buying power for stock positions if the platform only shows it for options?
The speaker explains that buying power for stocks in a Reg T account is typically double the available cash. They suggest checking the platform's positions tab for a breakdown of buying power requirements and recommend switching platforms if the information is not clearly displayed.
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Actionable takeawayEnsure your trading platform provides clear visibility into both stock and options buying power. If not, consider switching to a platform that offers this functionality.
Q&A
Is there a rule on how to calculate an acceptable debit to pay when buying the guts and selling the wings?
There is no rule on an acceptable debit to pay when buying the guts and selling the wings. The amount paid does not affect the P&L, as long as the theoretical price is considered. The key is how much of a theoretical price is given up around mid price.
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Actionable takeawayThe amount paid for a strangle does not affect the P&L, as long as the theoretical price is considered. The key is how much of a theoretical price is given up around mid price.
Q&A
What is the expected move for the August 21st 8100 put spread in SpaceX?
The expected move for the August 21st 8100 put spread in SpaceX is $32, with the stock currently at $154. The trade has a 96% probability of profit and an annualized return of 30% plus.
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Actionable takeawayThe expected move for the August 21st 8100 put spread in SpaceX is $32, indicating a high probability of profit.
Q&A
Is media consolidation creating a new trading landscape or just reshuffling declining assets? How should traders approach options run on certain deals for regulatory outcome even after DOJ clearance?
Media consolidation may create a new trading landscape, but traders should be cautious. They should consider regulatory risks even after DOJ clearance, as seen in the Paramount Warner Brothers deal, which is being challenged by 12 states. Traders should be aware that regulatory risks can persist and that prices may not necessarily reflect the true value of assets post-deal.
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Actionable takeawayTraders should approach options on deals with caution, considering ongoing regulatory risks and potential price fluctuations post-deal.
Q&A
What's the best management strategy for a putback ratio?
A putback ratio strategy with AVGO can be used to manage risk and potential profit. The speaker suggests buying the 310 put if the trade is no longer desired, creating a free butterfly with potential profit.
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Actionable takeawayBuy the 310 put to create a free butterfly with potential profit.
Q&A
Is selling naked puts a good strategy for hedging?
Selling naked puts can be a good strategy for hedging, but it leaves the trader exposed to directional risk. It is more capital efficient than buying options, but requires careful risk management.
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Actionable takeawaySelling naked puts can be effective for hedging, but it is important to manage the directional risk and consider alternative strategies like call spreads for additional protection.
Q&A
Does the NBBO affect the ability to execute trades outside the bid or ask?
The NBBO (National Best Bid or Offer) is crucial for order execution. The transcript explains that traders cannot get filled outside the NBBO, meaning they must execute trades within the bid or ask. This is a key consideration for options trading.
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Actionable takeawayTraders should always execute orders within the NBBO to avoid slippage and ensure fair execution.
Q&A
Does zero DTE mean same day of expiration?
Zero DTE (Days to Expiration) refers to options that expire on the same day they are traded. These are typically listed on the platform and have no overnight risk. The speaker explains that zero DTE trades are popular due to their lack of overnight risk and the instant gratification or pain they provide.
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Actionable takeawayZero DTE options are traded on the same day they expire, offering no overnight risk and instant results.
Q&A
Is an eight-legged spread a viable alternative for an additional weekly volatility trade?
An eight-legged spread is not recommended due to its complexity and difficulty in management. Scaling the original four-legged trade by increasing the size or widening the strikes is a more effective approach.
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Actionable takeawayAvoid complex spreads and focus on scaling existing positions for better risk management.
Q&A
Do you ever adjust by adding an unbalanced to your strangle?
The speaker confirms that on occasion, they add an extra put or call to their strangle position, typically an extra put due to the higher risk of upside moves in natural gas.
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Actionable takeawayAdding an unbalanced leg to a strangle can be a strategy to manage risk, but it should be done cautiously, especially in volatile assets like natural gas.
Q&A
Why is it better to adjust options rather than trade futures to balance delta?
Adjusting options is better because it allows for more controlled risk management and avoids the complexity and risk of futures trading. Futures can lead to larger losses and make it difficult to exit the position.
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Actionable takeawayAvoid futures trading for delta balancing; use options instead.
Q&A
What is the recommended trade for Netflix (NFLX)?
The speaker recommends selling the 75 puts on Netflix (NFLX) for 107, with the expectation that the stock price will remain within a certain range. The trade is considered a short-term opportunity given the stock's volatility and recent price movements.
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Actionable takeawaySell the 75 puts on Netflix (NFLX) for 107, with the expectation of profit from volatility and price range.
Q&A
What is the latest time a clearing firm can make an assignment?
The latest time a clearing firm can make an assignment depends on whether the trader is retail or professional. Retail traders have until about 4:30 Central Time, while professionals have until 5:30 or 6:00 Central Time. The Options Clearing Corporation (OCC) manages the exercise and assignment of options, and the final settlement price is determined by the OCC.
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Actionable takeawayTraders should be aware of the cutoff times for option assignments, as they can affect the risk exposure of a trade.
Q&A
Is there a difference between buying a debit spread and selling a credit spread at the same strike?
The speaker clarifies that at the same strike, buying a debit spread and selling a credit spread are essentially the same in terms of pricing and risk. They mention that both are priced the same and are referred to as put-call parity. However, the speaker suggests that traders should focus on selling spreads consistently rather than buying them, as it helps maintain a consistent trading approach.
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Actionable takeawayAt-the-money spreads are priced the same regardless of whether they are bought or sold, and traders should focus on selling spreads for consistency.
Q&A
What is your opinion of using convexity models in SPX, SPY, and precious metal options?
Convexity models in options trading are strategies that exploit the non-linear relationship between an asset's price and changes in its underlying driver. These models are often used to gain from high volatility or market trends, with options exhibiting high convexity due to their disproportionate price reactions to changes in underlying asset prices, especially near expiration. The concept is closely related to volatility dispersion trading, where the idea is to sell overvalued options and buy undervalued ones to create a profitable non-linear payoff.
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Actionable takeawayConvexity models are complex strategies that require significant capital and expertise, and are generally not feasible for retail traders.
Q&A
Is there a point where a stock is just too cheap for its options to be worth trading?
The speaker suggests that stocks under $30 can be viable for trading, but stocks under $15 are less popular for selling premium. They also mention that the liquidity and premium available are more important factors than the stock price itself.
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Actionable takeawayStocks under $30 can be viable for trading, but stocks under $15 are less popular for selling premium. Liquidity and premium availability are more important factors.
Q&A
Have you ever been short an option and a three standard deviation move happens overnight?
Yes, the speaker has experienced this multiple times, including in silver and Micron this year. They mention that such events happen roughly 1% of the time and have occurred more frequently than they would like.
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Actionable takeawayThree-standard deviation moves are rare but can occur, and traders should be prepared for such events, especially when shorting options.
Q&A
ask a question about selling puts in the Q's maybe like 7 days out versus selling 45day SI puts versus selling uh NQ future
The speaker discusses selling puts in the Q's, 45-day SI puts, and NQ futures, but the answer is not fully provided in the transcript.
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Actionable takeawayThe question is about comparing different put-selling strategies, but the answer is not fully provided.
Q&A
Would you roll up the untested side of the GDX iron condor?
Roll up the untested side (put spread) with 44 days to expiration. The speaker suggests sitting on the trade unless the thesis changes.
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Actionable takeawayConsider rolling up the put spread if the thesis remains unchanged.
Q&A
Beyond collecting more premium, how does selling a 30 delta put change the riskreward profile compared with selling a 16 delta put? And is the lower probability of profit worth it?
Selling a 30 delta put collects significantly more premium compared to a 16 delta put. However, from a theoretical standpoint, the riskreward profiles are similar. The choice between the two depends on the stock price; for expensive stocks, the 16 delta put is preferred, while for cheaper stocks, the 30 delta put may be more practical.
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Actionable takeawayThe decision between selling a 30 delta put and a 16 delta put depends on the stock price and the trader's risk tolerance, with the 16 delta put being preferable for expensive stocks and the 30 delta put for cheaper stocks.
Q&A
How do I profit harvesting with short-term options?
To profit harvest with short-term options, aim for the midpoint of the time duration. For weeklies, target midday Wednesday optimally. If trading on Fridays, consider Tuesday or early Wednesday. Avoid carrying positions past midday unless trading dailies, in which case avoid going past 11:00 AM central time.
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Actionable takeawayProfit harvesting with short-term options involves timing the exit at the midpoint of the time duration, with optimal timing being midday Wednesday for weeklies.
Q&A
When does a margin call become likely in an underlying as an underlying approaches the call or put strike on a short strangle?
A margin call becomes likely if the position is too large relative to the account size, typically if using 3 to 5% of buying power. It depends on the stock's position relative to the strike price and the delta of the options. If the stock is at the money, the delta is 50%, and the position should not be in a call unless it has moved significantly in one direction. It's crucial to check buying power allocation to ensure positions are not too large.
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Actionable takeawayMonitor position size relative to buying power and ensure it's within recommended allocation (3-5%) to avoid margin calls. Check delta and strike price proximity to assess risk.
Q&A
Does the collar strategy sell calls against the underlying stock and buy puts?
Yes, the collar strategy involves selling calls and buying puts to limit both upside and downside risk.
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Actionable takeawayThe collar strategy is a way to limit both upside and downside risk by selling calls and buying puts.
Q&A
Can the statistical and machine learning approaches be combined?
The speaker acknowledges the question and states that it's an ongoing debate, referencing Nassim Taleb's work on black swan events and the importance of risk management. They emphasize the need for a consistent, high-probability approach with limited profitability.
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Actionable takeawayCombining statistical and machine learning approaches requires careful consideration of risk and the potential for outlier events.
Q&A
Is selling options the opposite of asymmetric risk?
Yes, selling options is considered the opposite of asymmetric risk. When you sell options, you are taking on the risk of unlimited downside while capturing a defined profit. This is the opposite of buying options, where the upside is potentially unlimited and the downside is limited. The speaker explains that this is akin to being the insurance company, where you take on the risk for a defined premium.
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Actionable takeawaySelling options involves taking on unlimited downside risk for a defined profit, which is the opposite of asymmetric risk where the upside is potentially unlimited.
Q&A
Is there a study that indicates an ideal or preferred exit management strategy when the position is underwater?
The transcript references a study suggesting that managing early 21 days to expiration or at 50% profit is most efficient for capital use. However, when a position is underwater, the strategy shifts to focus on risk management and potential recovery. The exact methodology and sample size of the study are not specified.
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Actionable takeawayWhen a position is underwater, the focus should shift to risk management and potential recovery strategies, rather than strict adherence to the 21-day or 50% profit rule.
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 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
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
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.
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Actionable takeawayAvoid overleveraging and ensure proper consideration of market conditions before entering complex options strategies.
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.
Q&A
What is the expected move for HOOD after earnings?
The expected move for HOOD after earnings is 8 bucks, based on the current price of $87. The speaker is short a bunch of puts and is fingers crossed for the outcome.
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Actionable takeawayThe expected move for HOOD after earnings is 8 bucks, with the speaker shorting puts based on this expectation.
Q&A
Is it better to concentrate three, four iron condors for expiry, few expiries, or ladder across many expirations?
Rodrigo suggests that the choice between concentrating iron condors on a few expirations or laddering across many depends on the current state of volatility. If volatility is low, laddering across multiple expirations is preferred to synthetically create higher implied volatility in longer durations. If volatility is high, focusing on near-month expirations is more effective. The strategy involves opening one iron condor per day, with a focus on the front month and the next month.
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Actionable takeawayThe decision to concentrate or ladder iron condors should be based on the current volatility environment. Low volatility favors laddering, while high volatility favors focusing on near-month expirations.
Q&A
How is it possible for new options strikes to have open interest but zero volume?
New options strikes can have open interest but zero volume due to differences between volume and open interest. Open interest reflects the number of open contracts, while volume refers to the number of contracts traded. If a new strike is added to a platform before the market opens, it may show open interest but no volume until the market opens. This can occur due to delays in system updates or differences in how platforms handle new data.
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Actionable takeawayUnderstand the distinction between volume and open interest when analyzing new options strikes.
Q&A
What is your opinion on buying back the short leg of an untested iron condor for 5 cents and then selling a new credit spread on that same side in a later expiration?
The speaker suggests that buying back the short leg of an untested iron condor for 5 cents is a low-cost action, but they advise against selling a new credit spread on the same side in a later expiration. Instead, they recommend selling a new credit spread on the same side in the same expiration to avoid confusion and maintain simplicity. The rationale is to keep the trade within the same cycle and reduce margin requirements.
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Actionable takeawayAvoid breaking up expirations when managing credit spreads to prevent confusion and reduce margin requirements.
Q&A
How much option volume is necessary if you want to trade Rocket Labs?
The speaker states that for most stocks, a few dozen to a few hundred options per strike are sufficient for trading. However, in highly liquid markets, thousands of options per strike may be common. The speaker also notes that in tight markets, the volume itself may not be as important as the market's width, which refers to the difference between bid and ask prices.
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Actionable takeawayFor most stocks, a few dozen to a few hundred options per strike are sufficient for trading, especially in less liquid markets.
Q&A
What is the option strategy that makes a profit if the stock stays in a range that is above its current price?
The recommended strategy is to sell puts or put spreads. This is because if the stock remains above the strike price, the trader keeps the premium, generating profit. This strategy is suitable for traders who believe the stock will not experience a significant downward move.
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Actionable takeawaySelling puts or put spreads can be a profitable strategy in range-bound markets where the stock is expected to stay above its current price.
Q&A
What is the probability of profit for a 10 delta put?
The probability of profit for a 10 delta put is 91%, calculated as 100 minus the delta.
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Actionable takeawayThe probability of profit is inversely related to the delta of the option.
Q&A
Should you never average down on a losing option trade?
The speaker acknowledges that averaging down on losing option trades is not a hard rule and can make sense in certain situations. They mention that they have done it, but it's not a habit. They also note that averaging down on winning trades is not common.
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Actionable takeawayAveraging down on losing trades can be a strategy, but it's not a universal rule. It depends on the situation and should be used with caution.
Q&A
What is the expected move for the Apple strangle trade?
The expected move is $21.
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Actionable takeawayThe expected move for the Apple strangle trade is $21.
Q&A
How would you manage a volatile trade like the one Dylan is currently in?
Managing a volatile trade like Dylan's involves adjusting the position based on market movements. If the stock declines, selling an out-of-the-money put can be a strategy. If the stock rallies, rolling the put higher may be necessary. The key is to monitor the trade closely and make adjustments as needed, while being aware of the risks involved.
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Actionable takeawayAdjust positions based on market movements and monitor the trade closely.
Q&A
What about daily options? How do you feel about that for a place to go in this kind of market?
Daily options can be a viable place to trade, especially for those with limited capital. The speaker suggests that they are suitable for retail investors due to their liquidity and the potential for significant moves. However, they caution that traders should be cautious and have a clear strategy due to the high risk involved.
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Actionable takeawayDaily options can be a good option for retail traders with limited capital, but they require careful risk management and a clear strategy.
Q&A
What are the chances of a 20% or more meltdown in 2026?
The probability of a 20% meltdown in the SPX by December 2026 is 30%, based on the delta of the 5600 put. This is calculated as double the delta of the put option, which is 15%.
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Actionable takeawayTraders should consider the probability of market downturns and use options strategies like put spreads to manage risk.
Q&A
What is the difference between a straddle and a strangle in options trading?
The speaker discusses the difference between a straddle and a strangle, noting that a straddle involves buying or selling both a call and a put with the same strike price and expiration, while a strangle involves buying or selling calls and puts with different strike prices. The speaker also mentions the risk profile of each strategy, particularly in the context of natural gas trading.
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Actionable takeawayUnderstanding the risk and reward profiles of straddles and strangles is crucial for selecting the appropriate strategy based on market expectations and risk tolerance.
Q&A
Is it wrong to sell a straddle in natural gas?
The speaker suggests that selling straddles is not ideal for natural gas due to its high volatility and limited downside potential. Strangles are preferred as they allow for skew consideration and better risk management.
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Actionable takeawayStrangles are preferred over straddles in natural gas trading due to the commodity's high volatility and limited downside potential.
Q&A
Is there such a thing as a Fed put?
There is no such thing as a Fed put. However, traders can replicate the concept by buying puts on bonds or the stock market. There are no listed products that directly replicate a Fed put, though event-based contracts could theoretically be used to express the idea.
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Actionable takeawayThe concept of a Fed put is not a standard financial instrument, but traders can use puts on underlying assets to achieve similar risk management goals.
Q&A
Can you use the proceeds from selling a put to buy a call?
No, you cannot use the proceeds from selling a put to buy a call. You must have the capital to cover the put's margin requirement and the cost of the call.
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Actionable takeawayThe proceeds from selling a put cannot be used to buy a call; the capital required for the put and the call must be separate.
Q&A
What's the efficient way to play a potential recovery in a stock like Kendra Holdings (KDS)?
The efficient way to play a potential recovery in a stock like Kendra Holdings (KDS) is to sell puts, particularly the out-of-the-money strikes. This strategy allows for capturing premium while providing a hedge against further downside. The recommendation is to wait for options to be added to the platform, then sell the 10 or 11 puts depending on the stock's price movement.
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Actionable takeawaySell puts on KDS once options are available, targeting the 10 or 11 strike prices to capture premium while protecting against further downside.
Q&A
Why can't you roll the broken butterfly?
You cannot roll the broken butterfly because it would require six legs, and most platforms only support four legs. However, you can roll the put side and then the other side separately.
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Actionable takeawayUnderstand platform limitations when using complex options strategies like broken butterflies.
Q&A
What is the best way to manage a broken butterfly spread?
The speaker suggests rolling out the embedded put vertical and broken butterfly spreads as a strategy to manage risk. This approach allows traders to avoid the complexities of managing a single butterfly spread by breaking it into two separate trades.
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Actionable takeawayTraders should consider rolling out the spread into two separate trades to manage risk effectively.
Q&A
Why do spread orders sometimes not get filled even when the price moves past the limit?
Spread orders may not get filled due to the aggregation of prices from different exchanges and the use of aggregators. The platform provides a mid-price, but the actual execution depends on the best available price across exchanges. Canceling and replacing orders can sometimes result in fills if the order is sent to a different exchange with better liquidity.
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Actionable takeawayUnderstand the mechanics of spread order execution and consider canceling and replacing orders if the market moves past your limit, as it may lead to fills on different exchanges.
Q&A
What are your thoughts on where I should start my journey as a strategic options investor?
The response suggests starting with free educational resources, such as books, online shows, and platforms, rather than purchasing courses. It emphasizes the importance of practical engagement and starting with small trades to build experience.
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Actionable takeawayStart with free educational resources and practice with small trades.
Q&A
Does temperament matter more than intelligence for successful investing, especially for option traders?
Temperament is more important than intelligence for successful investing, especially for long-term investors like Warren Buffett. However, for option traders, intelligence is as important as temperament. Intelligence helps in understanding strategies and structures, while temperament helps in managing risk and making decisions under pressure. Reading books can provide information but is not enough on its own.
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Actionable takeawayTemperament is crucial for long-term investing, while intelligence is vital for option trading. Reading books can provide information but must be combined with practical experience and situational awareness.
Q&A
What are your suggestions to dig in and learn options trading?
The speaker suggests starting with small trades, using one lot, defining risk, and focusing on familiar stocks or indices. They emphasize the importance of liquidity and recommend resources like books and free online materials. They also caution against paying for unnecessary resources and suggest starting with simple strategies.
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Actionable takeawayBegin with small trades, focus on liquid assets, and use free educational resources to learn the basics of options trading.
Q&A
Is it better to go wider on the trade into earnings?
The speaker suggests that going wider on the trade into earnings is not necessarily better, as the trade is essentially a bet on whether the underlying will move outside the expected move or stay within it. The speaker notes that there is no edge either way, and the trade is priced to perfection.
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Actionable takeawayThere is no edge in earnings trades, and the trade is a bet on who is correct about the direction or magnitude of the move.
Q&A
What are the best prop firms right now in 2026 for options trading that actually support consistent long-term profitability over time rather than high-risk short-term blow up challenges?
The speaker cannot name specific prop firms and advises caution, noting that most prop firms focus on short-term fee generation and require intraday trading. They emphasize the importance of checking fine print and ensuring that the strategies you want to trade are allowed.
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Actionable takeawayAvoid prop firms that prioritize short-term fees over long-term profitability. Ensure the firm allows the strategies you wish to trade and be cautious of their fee structures and risk management policies.
Q&A
How can one play the AI bubble without buying puts?
The speaker suggests selling upside calls as a way to play the AI bubble without buying puts. This strategy allows traders to profit from potential price declines while limiting downside risk. However, the speaker notes that this is not an easy trade and requires precise timing.
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Actionable takeawaySelling upside calls can be a strategy to profit from potential price declines in overvalued stocks like AI stocks, but it requires careful timing and risk management.
Q&A
What is the value of using the GEX index for trading zero DTE SPX options?
The GEX index measures the change in delta exposure for options based on changes in the underlying price. While it provides insight into potential market movements, it is not a tradable asset itself and is more of a reference point for understanding market dynamics. Its value lies in helping traders analyze options behavior and anticipate shifts in market sentiment.
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Actionable takeawayThe GEX index can be a useful tool for understanding market dynamics and options behavior, but it is not directly tradable.
Q&A
What's the difference between selling a put on a stock you own versus just buying the stock outright?
Selling a put on a stock you own is a strategy that takes advantage of the probability that the option will expire worthless, whereas buying the stock outright is better if there is a significant upward move expected. The speaker suggests that selling puts is advantageous when the stock is expected to remain within a certain price range, as the premium received can be a profit if the option expires worthless.
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Actionable takeawaySelling puts can be a profitable strategy if the stock is expected to remain within a certain price range, while buying the stock outright is better if there is a significant upward move expected.
Q&A
What is the Sheridan Paradox?
The Sheridan Paradox is a situation where Scott Sheridan executes a short call spread, expecting the stock to move within a certain range. This strategy is based on the belief that the stock's movement is overestimated, allowing for a profitable trade.
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Actionable takeawayThe Sheridan Paradox highlights the importance of market sentiment and volatility in options trading.
Q&A
What do you think about SpaceX's butterfly spread being cheap?
The speaker believes that the butterfly spread on SpaceX is not cheap, and in fact, has become more expensive compared to previous periods. The speaker challenges the listener to review past trades and notes that the volatility in SpaceX is still relatively high, which could affect the cost of the butterfly spread.
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Actionable takeawayThe speaker suggests that the butterfly spread on SpaceX is more expensive now due to higher volatility, and recommends reviewing past trades for insights.
Q&A
Is beta something that is ever taken into account when looking for an underlying to sell options on, or is IV rank the only key metric?
The speaker states that IV rank is the key metric when looking to sell options, and beta has nothing to do with it. However, beta may be considered if the trader is concerned about portfolio concentration or risk correlation with the S&P.
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Actionable takeawayWhen selling options, focus on IV rank rather than beta. Beta is only relevant for assessing portfolio risk or correlation with broader indices.
Q&A
Is there a site or tool to determine which puts pay the most money?
The optimal put to sell is based on delta, not strike price or volatility alone. A 25 delta put offers the highest amount of money with the least risk, providing an 80% probability of profit. This approach ensures a balanced risk-reward profile.
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Actionable takeawayTraders should use delta to select the optimal put for selling, as it provides the highest return with the least risk.
Q&A
Is there any way to lock in some call pricing edge because of the high skew normally seen on individual speculative stocks?
The speaker explains that there is no free money in high skew scenarios. While high skew may make options appear more expensive, it does not provide a theoretical edge. The speaker advises that traders should not assume that high skew will lead to free money, as options are priced based on their intrinsic value and market conditions.
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Actionable takeawayHigh skew does not provide a pricing edge, and traders should not assume that options are mispriced due to skew.
Q&A
How would you structure a long-term investment in Blue Owl?
The speaker suggests buying the stock and selling calls or puts to manage risk while capitalizing on potential upside. The specific strategy involves buying the stock, selling 10 calls, and selling 8 puts, with the volatility and strike prices discussed in the conversation.
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Actionable takeawayBuy the stock and use options strategies like selling calls and puts to generate income and limit downside risk.
Q&A
What is the most probable way to leg a butterfly for free?
The most probable way to leg a butterfly for free is to buy one vertical spread and then sell the other vertical spread later. This approach involves taking market risk and requires careful execution to avoid paying for the trade.
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Actionable takeawayLegging a butterfly involves buying one vertical spread and selling another later, but it requires careful execution to avoid paying for the trade.
Q&A
Why did you choose to go outside the expected move for the SPY call spread?
To maximize the probability of a pop profit by positioning outside the expected move.
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Actionable takeawayPositioning outside the expected move can increase the probability of a pop profit in call spreads.
Q&A
What is the expected move for Snowflake?
The expected move for Snowflake is $30.
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Actionable takeawayTraders should consider the expected move when setting up their strangle strategy.
Q&A
Why would I do an undefined risk trade when I can do a defined risk trade?
The speaker explains that undefined risk trades, like strangles, offer a higher probability of profit and a greater credit compared to defined risk strategies like iron condors. The choice depends on the trader's risk tolerance and comfort with the extra risk for the potential higher return.
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Actionable takeawayUndefined risk trades can offer higher potential returns but come with higher risk compared to defined risk strategies.
Q&A
What is the probability of profit for the June 250 puts trade?
The probability of profit for the June 250 puts trade is 88%, based on the current market conditions and the trade setup.
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Actionable takeawayThe trade has a high probability of profit due to the current market conditions.
Q&A
Is 6,000 the at-the-money option when spot is at 6,000 and futures are at 6,100?
The speaker clarifies that the at-the-money option depends on the underlying asset. If the option is based on the spot price, 6,000 is at-the-money. If it's based on the futures price, 6,100 is at-the-money. The key is to match the underlying asset of the option with the relevant price.
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Actionable takeawayTraders should ensure that the underlying asset of an option matches the relevant price (spot or futures) to determine at-the-money status.
Q&A
What are the ideal numbers for portfolio theta?
The ideal range for portfolio theta is 0.1 to 0.3 percent of net lick, depending on account size. This range is considered more accurate than the 0.5% threshold often cited, as it balances gamma risk and theta gains. A 0.2% range is highlighted as a sweet spot for most accounts, with 0.1% being acceptable in certain scenarios. Higher theta levels, such as 0.5%, are deemed unsustainable and risky due to excessive gamma exposure.
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Actionable takeawayThe ideal theta range for a portfolio is 0.1 to 0.3 percent of net lick, with 0.2% being a sweet spot for most accounts.
Q&A
What are your thoughts on the idea of IV being bigger than realized volatility, but fat tail events happen more often than they should statistically? Do you guys ever hedge?
Implied volatility is always priced higher than realized volatility because it reflects the market's expectation of future price movements, which includes a margin for uncertainty and potential fat tail events. Fat tail events occur more frequently than statistical models predict, which is why traders often sell options at a premium to fair value. However, these events can lead to significant losses if not properly hedged. While hedging is important, it is not a major part of the strategy for many traders.
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Actionable takeawayTraders should be aware of the difference between implied and realized volatility and consider hedging strategies to mitigate the risk of fat tail events.
Q&A
Should I wait for these to expire?
If you're in the front month of September, you might look to go out to October.
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Actionable takeawayConsider rolling the position to a later expiration if still bullish.
Q&A
Why don't you place stops when doing a zero DTE iron condor?
Placing stops with iron condors can increase the chances of the trade being a losing trade due to the risk of being filled at unfavorable prices. Instead, using stop limits with a buffer is recommended to ensure better execution prices.
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Actionable takeawayUse stop limits with a buffer instead of stops for iron condors to manage risk more effectively.
Q&A
Do you have a metric for days to trade or not trade zero DTE options?
The speaker explains that zero DTE options are not affected by overnight volatility, so the focus should be on intraday volatility. They emphasize that overnight volatility is the main driver of large market moves, which is not relevant for zero DTE options.
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Actionable takeawayTraders should focus on intraday volatility when dealing with zero DTE options, as overnight volatility has minimal impact.
Q&A
Can you use the option market to capitalize on risk arbitrage spreads?
The speaker advises against trading such plays, stating that they are high-risk and not suitable for retail traders. The market indicates risk, and the options are not tradeable.
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Actionable takeawayAvoid risk arbitrage plays due to high risk and market uncertainty.
Q&A
Do you tend to favor simpler options strategies with few legs compared to the more intricate ones?
The speaker acknowledges that transaction costs have decreased significantly over time, making them less of a concern. However, the speaker prefers simpler strategies due to their lower complexity and risk profile. The speaker emphasizes that the choice of strategy should be based on individual comfort and risk tolerance, suggesting that simpler strategies may be more suitable for those who are not comfortable with complex spreads.
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Actionable takeawaySimpler options strategies may be more suitable for individuals who are not comfortable with complex spreads, as they offer lower transaction costs and reduced complexity.
Q&A
What is the fundamental difference between a naked put and a put ratio spread?
A naked put is a straightforward strategy where you sell a put option, while a put ratio spread involves buying one put and selling another at a lower strike price. The put ratio spread is similar to a naked put but includes a synthetic short position, providing a cushion against market movements.
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Actionable takeawayThe put ratio spread offers a cushion compared to a naked put, making it suitable for traders seeking a balance between risk and reward.
Q&A
Please share your thoughts on theta decay over the weekend. How much of the weekend decay is typically priced in during the week, particularly on Friday versus how much actually occurs at the Monday open? And is Friday to Monday morning decay different when there's a major uncertainty event that could happen over the weekend such as negotiations involving the straight of four moves which we have seen I don't know 10 times already 10 times 10 but sure here the fa
Theta decay over the weekend is unpredictable and varies depending on market conditions. It is not possible to predict exactly when the decay will occur, but it is known that it will happen by expiration. Liquidity providers may adjust volatility to account for potential news or events over the weekend. The decay can occur on Friday, stay bid, or come out on Monday, depending on market sentiment and events. There is no exact guide for when to sell premium, and it is an art rather than a science.
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Actionable takeawayTheta decay over the weekend is unpredictable and influenced by market conditions and potential news events. It is best to approach it with an understanding that it is an art, not a science, and that the decay will occur by expiration, but the timing is uncertain.
Q&A
What's your filtering process for selecting stocks and options to trade?
The filtering process is simple and involves selecting stocks that are lower and bullish on the market, using options with a delta of 15 to 30, and focusing on monthly options with at least 30 days to expiration.
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Actionable takeawayKeep it simple by focusing on stocks that are lower and bullish on the market, using options with a delta of 15 to 30, and focusing on monthly options with at least 30 days to expiration.
Q&A
What's your favorite trade from the dog pound uh today?
The speaker lists several trades, including an Apple put spread (46%), Intel strangle (28%), Google broken wing butterfly, and a BU short put. The speaker also expresses a dislike for trading B.
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Actionable takeawayThe speaker recommends specific options strategies but also expresses a personal dislike for certain trades.
Q&A
What's the theoretical optimal trades in stocks with really heavy call skew?
The optimal trade is a wide strangle, where the same distance is covered on the call side as the put side, allowing for twice the money on the call side.
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Actionable takeawayA wide strangle is recommended for stocks with heavy call skew to maximize potential returns while managing risk.
Q&A
Do I need to worry about the dividend event in 3 days for my short call position in Dell?
No, you do not need to worry about the dividend event in 3 days for your short call position in Dell. The stock needs to be over 500 for you to have dividend risk. Since the stock is currently at 436, you are not at risk of dividend exposure.
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Actionable takeawayDividend risk for short call positions is only relevant if the stock price exceeds the strike price. In this case, the stock is below the strike price, so dividend risk is not a concern.
Q&A
Should I keep my Tesla iron condor closer to expiration or manage it differently?
The speaker advises that since the trade is close to expiration, it's better to either widen the strike range or move the trade to a later expiration. The speaker also suggests selling out-of-the-money calls in August to collect premium and potentially profit from any upward movement in the stock.
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Actionable takeawayConsider adjusting the strike range or moving the trade to a later expiration to manage risk and potential profit.
Q&A
What is the Dell trade strategy?
The Dell trade strategy involves selling higher strike calls (650 or 700) and buying lower strike puts (300). The speaker suggests adjusting the trade based on the call skew in the market, which is described as 'ridiculous.' The idea is to capitalize on the skew by selling calls and buying puts, which can provide a profit if the stock remains within a certain range.
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Actionable takeawayThe strategy involves using a short call spread with higher strike calls and lower strike puts to capitalize on market skew.
Q&A
Do you prefer monthly expirations over weeklies? And if yes, is that due to the volume?
The speaker prefers monthly expirations over weeklies due to volume and the complexity of managing multiple weekly options. The methodology also dictates not holding options beyond 21 days, which aligns with the preference for monthly expirations.
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Actionable takeawayMonthly expirations are preferred due to higher volume and the difficulty of managing weekly options.
Q&A
Could you go over the mechanics of your bond trade?
The speaker explains that they are selling puts on ZB (30-year Treasury bonds) with an August expiration, targeting a strike price of 110. The trade is considered a high probability trade with a break-even point at 109. The trader believes that the market is unlikely to reach the break-even level due to the current economic environment. The trade is designed to collect a premium while limiting downside risk. The trader also mentions similar strategies for ZN (10-year Treasury notes), selling puts at a strike price of 108.5 with a break-even point at 108.
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Actionable takeawayThe trader is selling puts on bonds with a high probability of success, collecting a premium while limiting downside risk.
Q&A
How often do long wings need to be readjusted when selling SPX zero-day options?
The speaker explains that long wings need to be readjusted frequently, especially on days with significant SPX movements, such as the 90-point increase mentioned. They suggest that adjustments are necessary to maintain the strategy's effectiveness.
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Actionable takeawayLong wings should be adjusted frequently based on SPX fluctuations to maintain the strategy's effectiveness.
Q&A
How to grow tax sheltered accounts in Canada as aggressively as possible within the limitations?
The speaker suggests using LEAPS, long options, long stock, long crypto, and covered calls. However, they note that the downside risk during market declines can be significant. They also mention the availability of ETFs that track the downside, but the regulatory environment in Canada is restrictive, limiting the range of permissible strategies.
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Actionable takeawayUse long options and covered calls to grow tax sheltered accounts in Canada, while being mindful of the regulatory restrictions and potential downside risk.
Q&A
What is the optimal hedging strategy for a delta and Vega neutral options portfolio?
The optimal hedging strategy for a delta and Vega neutral options portfolio is to keep trade size in line and avoid over-adjusting positions. It is not recommended to use futures to offset deltas or to make large adjustments. The focus should be on monitoring trade size and managing risk through position control.
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Actionable takeawayMaintain trade size and avoid over-adjusting positions to manage risk effectively.
Q&A
Is it possible to live off of options trading?
The speaker believes it is possible to live off of options trading, particularly by selling options. They express a desire to transition to full-time trading and provide for their family through this method. However, they acknowledge the risks and uncertainties involved in such a transition.
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Actionable takeawayThe speaker suggests that options trading can be a viable income source, but it requires careful planning and risk management.
Q&A
Are you saying the VIX is part of the Black Scholes equation?
Yes, volatility is a key component of the Black Scholes equation. It is considered the most significant input when it comes to pricing assets, and it is notoriously difficult to calculate accurately.
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Actionable takeawayUnderstanding volatility is crucial for accurate pricing in options and derivatives.
Q&A
How do you think about adding short call verticals to a portfolio? What delta range would you typically set the short strike at?
The speaker suggests using a delta range around 30ish for the short strike and recommends a width of 20 to $30 for a $300 stock. They also mention that the strategy is suitable for a bullish portfolio.
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Actionable takeawayConsider using short call verticals with a delta range around 30ish for the short strike and a width of 20 to $30 for a $300 stock in a bullish portfolio.
Q&A
What is the reason for the change in the cost of SPX calendar trades?
The cost increase is due to the nature of calendar spreads in European-style options, where early exercise is not allowed, and the risk associated with these trades is tied to the premium paid for the calendar spread.
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Actionable takeawayThe cost of SPX calendar trades has increased due to the structure of European-style options, which do not allow early exercise, thereby affecting the risk and cost of these trades.
Q&A
What do you think about UNH stock right now?
The speaker suggests a two-sided trade with no directional bias in UNH, possibly involving strangles or iron condors, and notes that markets are wide and not easily tradable.
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Actionable takeawayConsider a two-sided trade with no directional bias in UNH, possibly involving strangles or iron condors, while being aware of wide markets and limited tradability.
Q&A
How does your beta weighted delta move?
The speaker explains that beta weighted delta changes when you have short options and the gamma causes the delta to change. If you only have stock, your delta never changes.
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Actionable takeawayBeta weighted delta is a useful metric for assessing risk in options trading, but it changes when you have short options due to gamma.
Q&A
Did you sell puts in the end?
The speaker did not sell puts yet, as they were rolling their other position. This indicates a strategic decision to adjust the trade rather than immediately executing the put sale.
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Actionable takeawayTraders should consider rolling positions when adjusting strategies, rather than immediately executing trades.
Q&A
Do you think about the strategy of using the premium from wheeling to do short-dated stuff?
The trader acknowledges that the strategy of using the premium from wheeling to do short-dated stuff is effective, with a 14% return last year. However, the trader notes that the 45-day SPX options caused issues in April, but the overall approach remains effective.
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Actionable takeawayThe strategy of using the premium from wheeling to do short-dated options can be effective, but it is important to monitor the impact of longer-dated options on the overall strategy.
Q&A
What are your thoughts on trading only futures options?
Trading only futures options is viable, but it limits the trader's exposure to a narrower set of instruments. The speaker suggests that while it's not inherently flawed, it restricts the trader's ability to explore other options strategies. The key takeaway is that traders should remain open to expanding their strategies if they feel comfortable and their current approach is profitable.
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Actionable takeawayTraders should consider expanding their strategies if they feel comfortable and their current approach is profitable.
Q&A
Do you adjust your zero days, example, rolling up puts for a credit as the calls get tested?
Yes, the speaker advises adjusting zero days by rolling up puts or down calls as needed. The speaker emphasizes that adjusting positions is crucial to manage risk and volatility, and not adjusting can lead to significant losses.
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Actionable takeawayAdjusting positions in options trading is essential to manage risk and volatility. The speaker recommends rolling up puts or down calls as needed to mitigate the risk of large swings in the account.
Q&A
When I'm looking at the IV rank, how recently is that updated? Is that based on yesterday's data?
The IV rank is updated in real time, reflecting the latest changes in options prices. It is not based on yesterday's data but is instead tick for tick as the market moves. The IV rank is normalized at the close to reflect the maximum volatility observed during the day.
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Actionable takeawayTraders should monitor the IV rank in real time to gauge current market volatility and adjust their strategies accordingly.
Q&A
Should you avoid trading options of a stock if you don't have the buying power to hold 100 shares?
No, the ability to hold 100 shares has nothing to do with trading options. You can trade options with smaller capital by using spreads.
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Actionable takeawayTrading options doesn't require holding large quantities of the underlying stock.
Q&A
Under what conditions would you buy options in the future?
The speaker mentions that buying options could be considered in certain conditions, such as when volatility is low and the trader has a specific directional hunch. However, the speaker emphasizes that this is not a preferred strategy and is only considered under rare conditions.
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Actionable takeawayBuy options only in specific conditions with a clear directional hunch and low volatility.
Q&A
Why would you do the naked put over a $10 wide short put spread at the same strike but 7565 for a 183 max profit?
The speaker explains that the naked put offers higher potential returns and allows for more flexibility in managing risk through adjustments. However, it also exposes the trader to greater risk if the stock moves against them. The speaker acknowledges that the $10 wide put spread is a safer option with a lower risk profile, but the naked put is preferred for the potential reward and the ability to adjust the position.
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Actionable takeawayThe speaker suggests that traders should consider the trade-off between potential returns and risk when choosing between naked puts and spreads. The naked put offers higher returns but requires more active management and carries greater risk.
Q&A
What is the expected move for the July 70 puts on Robin Hood?
The expected move for the July 70 puts on Robin Hood is $13.
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Actionable takeawayTraders should consider the expected move when evaluating the potential profitability of the trade.
Q&A
How does a calendar spread work, and how can one make money from it?
A calendar spread involves buying and selling options with different expiration dates. The speaker explains that the strategy relies on the difference in time decay between the short and long expiration dates. The trader aims to profit from the difference in the rate at which the options decay, with the long expiration providing more time for the underlying asset to move in a favorable direction.
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Actionable takeawayA calendar spread can be profitable if the underlying asset's price movement aligns with the time decay difference between the short and long expiration dates.
Q&A
How do you make money on a calendar spread?
A calendar spread involves selling a shorter-term option and buying a longer-term option with the same strike price. Profits are made if the underlying asset trades near the strike price, allowing the short-term option to expire worthless while the long-term option retains value.
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Actionable takeawayProfits are made if the underlying asset trades near the strike price, allowing the short-term option to expire worthless while the long-term option retains value.
Q&A
How can one relate the concept of betting on a horse to win versus place to trading?
The speaker suggests that in horse racing, betting on a horse to place (finish second or better) can yield higher payouts than betting on the favorite to win, due to the size of the pool. In trading, this can be analogous to identifying mispriced assets or opportunities where one can profit even if the underlying asset moves against the position, such as through options strategies.
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Actionable takeawayIdentify mispriced assets or opportunities where one can profit even if the underlying asset moves against the position, such as through options strategies.
Q&A
What do you do with a long meta sep butterfly that you nailed?
Sell the 550 525 profit on that on that long put spread and be left with a regular put spread.
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Actionable takeawaySell the 550 525 profit on that on that long put spread and be left with a regular put spread.
Q&A
What are your thoughts on selling an out of the money December 2028 covered call for buying power relief?
The speaker is against selling an out of the money December 2028 covered call for buying power relief, stating that it doesn't provide any relief and is not a good idea. They suggest selling a put instead.
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Actionable takeawayThe speaker advises against selling an out of the money December 2028 covered call for buying power relief, suggesting that it is not a good idea and that selling a put might be a better option.
Q&A
What would be a high probability profit high pop strategy?
The high probability profit high pop strategy involves managing zero-day SPX options early in the day, within a half hour of the opening, and managing the trade within two hours of the opening. This increases the probability of profit to between 80 and 90%.
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Actionable takeawayManage zero-day SPX options early in the day to increase the probability of profit.
Q&A
What is the comfort level with using strangles on commodities like gold and crude oil?
The speaker notes that the volume is often low and the bid-ask spread is wide, which can make the strategy uncomfortable. However, the speaker suggests that the strategy is more viable on highly liquid markets like SPX, where spreads are tighter. The speaker also emphasizes the importance of trading the active month and avoiding markets with zero volume.
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Actionable takeawayStrangles on commodities like gold and crude oil may be less effective due to low volume and wide spreads. It is recommended to use such strategies on more liquid markets like SPX.
Q&A
What's the easiest, fastest, and best way to find options to sell?
The speaker suggests using platforms like tasty, where you can filter by high option volume, implied volatility rank, and liquidity. These filters help identify high-probability premium selling opportunities quickly. The process is described as more straightforward than traditional methods, with the potential for AI-driven simplification in the future.
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Actionable takeawayUse platforms like tasty with filters for high option volume, implied volatility rank, and liquidity to identify premium selling opportunities efficiently.
Q&A
What is the difference between a one by one and a one by two ratio spread?
A one by one ratio spread involves buying one option and selling one option, while a one by two ratio spread involves buying one option and selling two options. The one by two spread is considered more favorable as it provides a higher probability of success.
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Actionable takeawayA one by two ratio spread is generally preferred over a one by one spread due to its higher probability of success.
Q&A
Is there a consistent like 45 BTE strategy you guys could recommend that I could repeat?
The speaker recommends a short put spread strategy with defined risk, suggesting it as a way to lean a little bit long. They also mention the importance of being selective due to low volatility and suggest keeping contracts small.
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Actionable takeawayConsider a short put spread strategy with defined risk, especially in a low volatility environment.
Q&A
Would it make sense to buy a straddle if selling premium doesn't make sense?
No, it never makes sense to buy the straddle. Don't you know, I mean, if you're ever going to buy a straddle, then buy it for earnings because it is a binary play if that's really what you want. But, no, we don't flip the cards over. This isn't like, 'Hey, if I don't want to sell it, then should I buy it?' That's not the same thing. Just because I don't want to sell it does not mean I should buy it.
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Actionable takeawayBuying a straddle is not a viable alternative to selling premium if the latter is not profitable. It is only recommended for earnings events as a binary play.
Q&A
How do you calculate the probability of profit on a call spread?
The probability of profit on a call spread is calculated by dividing the credit received by the width of the strikes. For example, on a $5 wide spread, collecting $2 results in a 60% probability of profit, while collecting $1 results in an 80% probability. This method is an exact science and relies on straightforward math.
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Actionable takeawayThe probability of profit on a call spread is a straightforward calculation that provides traders with clear risk-reward parameters.
Q&A
Does purchasing a debit call spread have a negative probability of profit?
The probability of profit in a debit call spread depends on the strike prices chosen. In-the-money call spreads have a higher probability of profit, while out-of-the-money call spreads have a lower probability. The speaker explains that buying an in-the-money call spread, such as Netflix's 106s and 109s, provides a statistically high probability of profit, whereas an out-of-the-money spread would result in a negative probability of profit.
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Actionable takeawayThe probability of profit in a debit call spread is influenced by the strike prices selected. In-the-money spreads generally offer a higher probability of profit, while out-of-the-money spreads may have a lower probability.
Q&A
What's the best way to use limit orders to avoid getting filled at a terrible price on the opening?
The speaker suggests using limit orders based on premarket trading data. They recommend adjusting pricing based on where the stock is trading premarket and using strike prices to interpolate an estimated opening price. They also advise waiting a few minutes after the opening to allow for better price discovery.
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Actionable takeawayUse premarket data to adjust limit orders and wait a few minutes after the opening for better price discovery.
Q&A
How much of a role do Greeks play in your everyday trading?
Greeks play a moderate role in everyday trading. The speaker emphasizes that while they are important for monitoring risk and decay, they should not be overemphasized. The focus is on selecting the right strike based on delta and monitoring delta and theta on every position. Beta-weighted delta is used to optimize for decay and risk.
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Actionable takeawayUse Greeks like delta and theta as tools for monitoring risk and decay, but avoid overthinking their importance. Focus on selecting the right strike based on delta and monitor delta and theta on every position.
Q&A
Is there any sense in selling one put and two calls so that the strangle is premium neutral, although not delta neutral?
Maria, the answer is that this is called put skew, and it reflects the market's adjustment for downside risk. However, the speaker advises against using skewed strangles unless one is bearish. A one-to-one strangle is more capital efficient and has historically performed better.
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Actionable takeawayAvoid skewed strangles unless bearish; prefer one-to-one strangles for capital efficiency.
Q&A
What about you? Good for you. Yeah. I bought IonQ. Actually, I bought it the other day when it was in the low 30s and scalped it and then I sold puts in there. So, I'm short puts yesterday
The speaker mentions buying IonQ at a low price and scalping it, then selling puts to hedge the position. They are short puts in IonQ, indicating a bearish outlook on the stock.
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Actionable takeawayThe speaker is using a short put strategy on IonQ, which involves selling puts to collect premiums while being prepared to buy the stock at a predetermined price if the put is exercised.
Q&A
Is there a particular width for vertical spreads that produces the best return on investment?
The sweet spot for width is approximately 30% of the width of the strikes, but for the best ROI, wider strikes are preferable. This is supported by extensive research.
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Actionable takeawayFor the best ROI, wider strikes are preferable, even though the sweet spot is around 30% of the strike width.
Q&A
What is the logic behind buying call spreads in the KOSPI index?
The logic is to capitalize on a potential market bounce after a significant drop. By buying call spreads with varying durations, traders can benefit from the recovery while limiting risk. The speaker suggests focusing on short and long-term options to capture different market scenarios.
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Actionable takeawayBuy call spreads with varying durations to capture potential market recovery after a significant drop.
Q&A
What is the strike price for the July 10 call on SOXS?
The strike price for the July 10 call on SOXS is around $640.
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Actionable takeawayThe strike price for the July 10 call on SOXS is approximately $640.
Q&A
What is the expected move for Marvell (MRVL)?
The speaker estimates the expected move for Marvell (MRVL) to be $36.
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Actionable takeawayThe expected move for Marvell (MRVL) is $36.
Q&A
Strategically how do I best take advantage of getting my best uh
If the call is in the money and the stock is above the strike, the profit is already realized. If the trader wants to keep the stock, they can do nothing and the position will expire. If they want to continue the position, they can buy back the call and sell another one.
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Actionable takeawayIf the call is in the money and the stock is above the strike, the profit is already realized. If the trader wants to keep the stock, they can do nothing and the position will expire.
Q&A
Why do you sell premium and play the high probability game?
The speaker explains that selling premiums and focusing on high probability trades is a strategy to develop a culture of more wins than losses for new traders, even though it doesn't guarantee profitability.
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Actionable takeawayFocus on high probability trades to build a positive trading culture with more wins than losses.
Q&A
Why not try buying options occasionally?
The speaker suggests buying options occasionally to mix things up, but emphasizes that it should be out-of-the-money options, not deep in-the-money ones. They compare buying options to buying insurance, suggesting it's a form of protection rather than a direct investment.
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Actionable takeawayBuying out-of-the-money options can be a strategy for diversification, similar to insurance, but should be approached with caution and understanding of the risks involved.
Q&A
Out of the two options below, which one do you prefer? 75% chance to win $4,000, 25% chance is uh zero, or 100% chance of gaining $2,000.
The rational investor would choose the second option (100% chance of gaining $2,000) because the expected return on that is $3,000.
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Actionable takeawayA rational investor should consider expected return when choosing between options with different probabilities of success.
Q&A
Can I buy a single stock future? This person asks, and sell a covered call against it.
You can buy a single stock future or sell a single stock future and sell a call or a put against it, but not at the CME. You'd have to do that on the option exchange. So, basically, you're putting up the capital. So, even though it is technically a covered call, you're putting up the capital on two different places. So it's really expensive to trade. You're not getting any capital relief.
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Actionable takeawayBuying a single stock future and selling a covered call is possible but involves high capital exposure and is not cost-effective due to the need for separate capital allocation on different exchanges.
Q&A
What is the difference between buying a single stock future and selling a covered call?
Buying a single stock future and selling a covered call are different strategies with different capital requirements and risk profiles. The former requires putting up capital for both positions, while the latter can be synthetically replicated by selling a put with the same strike price.
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Actionable takeawaySynthetic positions can be used to replicate the risk and reward profile of other strategies.
Q&A
What were the series of events that let you realize the grid was up and you thought about making a platform?
The speaker and Tomaso were market makers in the late 90s during the dotcom boom. They noticed that while individual stocks were trading heavily, indexes were not. This led to the idea of building a platform called Thinker Swim to support options trading, which eventually evolved into a product by early 2020.
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Actionable takeawayThe realization that individual stocks were more active than indexes during the dotcom boom led to the development of a platform focused on options trading.
Q&A
Is there any significant benefit to rolling a perpetual S&P put selling strategy to the next month with 21 DTE versus holding it till expiration?
Yes, there is a significant benefit to rolling to the next month with 21 DTE in a perpetual S&P put selling strategy. This allows for continued exposure to the market while maintaining a reasonable time to expiration, which can help manage risk and optimize returns.
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Actionable takeawayRolling a perpetual S&P put selling strategy to the next month with 21 DTE can be beneficial for managing risk and optimizing returns.
Q&A
Does it make a difference or is there an advantage to how you pair the strangles, various strikes when you roll?
Pairing strangles based on price alignment is advantageous. The speaker suggests pairing options like a $5 call with a $5 put rather than mismatched strikes. This approach helps minimize roll risk and maintains balance in the position. Adjustments are necessary based on the underlying's movement and the trader's strategy.
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Actionable takeawayPair options based on price alignment to minimize roll risk and maintain balance in the position.
Q&A
What strategies do you use when trading zero day options strategies?
The speaker suggests selling premium through calls or puts, with a focus on small positions due to the lack of time to adjust. The strategy emphasizes making a decision based on the expected market movement for the day, with the trader typically acting as a seller rather than a buyer.
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Actionable takeawayZero DTE options trading involves selling premium either through calls or puts, with a focus on small positions due to the lack of time to adjust. The strategy emphasizes making a decision based on the expected market movement for the day, with the trader typically acting as a seller rather than a buyer.
Q&A
Do you sell five or 10 contracts of the same date or do you like to split them into weekly single contracts like couple, you know, like do you do you ladder them out?
The speaker prefers to stay mechanical with 40-day expirations and avoids laddering out contracts, as it complicates management. They mention using monthly expirations for consistency and simplicity.
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Actionable takeawayConsistency in expiration dates and avoiding complex strategies like laddering can simplify portfolio management.
Q&A
Does the collar really work?
The collar strategy is synthetically a long vertical call, and it can be used with a specific underlying asset like GM. The cost of implementing a collar can vary depending on the delta and time to expiration.
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Actionable takeawayThe collar strategy is a synthetic long vertical call, and its implementation cost depends on the underlying asset and parameters like delta and time to expiration.
Q&A
What is the risk of early assignment in the case of the naked put sold on SpaceX?
The risk of early assignment is zero at the current time. The speaker explains that there is no risk of assignment now, but if the stock price drops below the strike price, the risk of assignment increases.
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Actionable takeawayEarly assignment risk is a factor to consider when selling naked puts, especially if the stock price drops significantly.
Q&A
What is the risk of early assignment in this case?
The risk of early assignment is zero if the stock does not reach a specific price level before expiration. The speaker explains that for a short position in options, the risk of assignment is only relevant if the stock price drops significantly below the strike price. For example, if the stock is short 130-140 calls with an expiration in July, the risk of assignment is zero unless the stock price falls below 125 by the end of July.
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Actionable takeawayThe risk of early assignment is zero unless the stock price drops significantly below the strike price before expiration.
Q&A
What is the expected move for Microsoft?
The expected move for Microsoft is down to 345, with a potential upside of $42.
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Actionable takeawayThe expected move for Microsoft is down to 345, with a potential upside of $42.
Q&A
What is your opinion about selling a weekly iron butterfly this Friday's with that expected move?
The speaker suggests that selling an iron butterfly is a low-risk, high-reward strategy if the stock remains within the expected range. However, the speaker personally prefers selling strangles over iron butterflies due to better payout potential.
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Actionable takeawayConsider selling an iron butterfly during earnings periods with low expected price movement for low-risk, high-reward potential.
Q&A
What do you guys think with a small account? It's only about $10,000. Would you do Netflix credit spread into earnings?
A small account with $10,000 could consider a Netflix credit spread into earnings. The strategy involves buying a credit spread, which allows for collecting premium. The risk is that the price may move beyond the expected range, invalidating the trade. The speaker suggests that the trade could tie up around $7,000, depending on the strike prices chosen.
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Actionable takeawayA small account can consider a credit spread strategy for Netflix before earnings, but the risk of significant price movement should be carefully managed.
Q&A
Can options flow shape short-term price action around earnings, macroeconomic news, or fundamentals?
Options flow does not significantly shape short-term price action, despite common belief. Market makers often take in premiums without causing major price movements, as they have broader risk profiles and other positions. Large orders may cause minor price changes, but these typically revert to the mean quickly.
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Actionable takeawayOptions flow has limited impact on short-term price movements, and large orders may only cause minor, temporary changes.
Q&A
What was the outcome of the bond put trade?
The bond put was sold at 121 and bought back at 115, resulting in a profit. The speaker acknowledges the success of the trade despite initial nervousness.
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Actionable takeawaySuccessful execution of a bond put trade requires patience and timing, as demonstrated by the trade's outcome.
Q&A
When using the 50% take profit rule, how do you handle strangles?
The speaker explains that you should not close one wing of a strangle at a time. Instead, the strangle should be treated as a spread and closed as a spread. The speaker suggests waiting for 50% or other percentages like 25%, 30%, 35%, etc., but emphasizes that the trade should be managed as a spread.
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Actionable takeawayStrangles should be managed as spreads, not closed one wing at a time.
Q&A
How do we trade Bloom Energy best?
The speaker suggests that Bloom Energy is not a suitable stock for trading due to the untradable options and the fact that the stock has already rallied significantly. The best approach is to sell puts on a down move or buy the stock on a down move, but the options are not tradable, making it difficult to execute a strategy effectively.
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Actionable takeawayAvoid trading Bloom Energy due to untradable options and the stock's recent performance.
Q&A
What is the expected move for the SPX trade?
The expected move for the SPX trade is $330, which is the EM (expected move) mentioned in the transcript.
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Actionable takeawayThe expected move is a key factor in determining the potential profitability of the trade.
Q&A
Who invented the term diagonal?
The term diagonal was invented by Nikki Batista, according to the speaker. However, the speaker clarifies that they and TP are the ones who popularized the term, and they do not give TP credit for inventing it.
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Actionable takeawayThe term diagonal was invented by Nikki Batista, but the speaker and TP are the ones who popularized it.
Q&A
Should I sell a covered call on my Microsoft position at the money or out of the money?
The speaker suggests selling a covered call at the money if the trader is bullish and wants to keep the stock. If the trader is less bullish but still wants to hold the stock, selling a covered call out of the money is recommended. The reasoning is that at-the-money calls provide more premium, while out-of-the-money calls offer more room for the stock to move upward.
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Actionable takeawayFor a Microsoft position already held, selling a covered call at the money is preferable if the trader is bullish and wants to keep the stock. If the trader is less bullish but still wants to hold the stock, selling a covered call out of the money is recommended.
Q&A
Would a Jade Lizard be a good trade with Palunteer up 16% already today?
No, the speaker does not like jade lizards after the move happens. They prefer high volatility.
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Actionable takeawayJade lizards are not recommended after a significant move, especially when volatility is low.
Q&A
What determines whether you go with shorter dated or longer dated option for earnings trades?
The decision to use shorter or longer-dated options for earnings trades is based on the timing of the trade relative to earnings. Post-earnings trades typically use longer-dated options to avoid holding positions during volatile periods.
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Actionable takeawayPost-earnings trades should use longer-dated options to avoid volatility.
Q&A
What's your suggestions? You know, mid7 figures. I just right now I just got it up in a bunch of box spreads because I'm kind of paralyzed what I want to do with it because I feel this
The speaker suggests that box spreads are an intelligent trade, collecting a couple of points, but questions the return on SPX boxes, noting that the return is 36, which is lower than the 475 on a CD. The speaker also implies that the trade was likely made two months ago.
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Actionable takeawayThe speaker questions the return on SPX box spreads and suggests that the trade might have been made at a lower rate, implying that the current return is not optimal compared to alternatives like CDs.
Q&A
Why would you use the wheel strategy when volatility is getting pumped up?
The wheel strategy is used to gain experience and take advantage of undervalued stocks. Even with increased volatility, the strategy can be effective if the trader is willing to manage the risks associated with short puts and calls.
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Actionable takeawayThe wheel strategy can be used to generate income through premium collection while holding a long position in stocks, even in a high-volatility environment.
Q&A
At what point does an iron condor become a synthetic strangle?
An iron condor becomes a synthetic strangle when the strikes are wide enough that the trade is primarily for outlier protection and capital efficiency. The speaker suggests that if the strikes are more than 15 or 20 points apart, it is considered a synthetic strangle from the start. The exact point is subjective, but the speaker notes that a 25 delta trade is typically a synthetic strangle.
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Actionable takeawayThe width of the strikes determines whether an iron condor is considered a synthetic strangle. A wide spread with a focus on outlier protection indicates a synthetic strangle.
Q&A
Is it possible and cash efficient to buy VVIX shares or other instruments to hedge against a major downturn in the US markets?
The speaker states that buying VVIX shares is not cash efficient and that VVIX is not a tradable instrument. They suggest alternatives such as selling premium in major indices like SPY, which have an inverse correlation with volatility. The speaker also advises against paying record prices for volatility, emphasizing that such strategies have rarely worked out historically.
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Actionable takeawayAvoid buying VVIX or similar instruments at record prices; consider selling premium in major indices as a more efficient hedge.
Q&A
When is the best time to take profits from a strangles trade?
The best time to take profits from a strangles trade is when the trader feels it is a good number, rather than waiting for specific expiration dates or volatility levels. The trader should consider rolling the position if volatility remains high, but should not overthink the trade and should move on to the next trade if a profit is achieved.
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Actionable takeawayTraders should take profits when they feel the trade is performing well, rather than waiting for specific market conditions.
Q&A
Should I let my short straddle expire or roll it?
If the market remains within a range, letting the straddle expire is a viable option. However, if the market moves significantly, rolling the position to a higher strike (e.g., 100) can help hedge against assignment and profit from time decay.
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Actionable takeawayRoll the position to a higher strike if the market moves significantly to hedge against assignment.
Q&A
Why would someone want to exercise an out-of-the-money call early if it's not in the money?
The speaker explains that it is not typical to exercise an out-of-the-money call early for dividend purposes. The email was a general alert to all holders of options on Clorox with an upcoming dividend, regardless of whether the options were in or out of the money. The speaker clarifies that early exercise of out-of-the-money options is not a common practice, and the email was sent as a precautionary measure.
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Actionable takeawayEarly exercise of out-of-the-money options for dividend purposes is not a standard practice, and such emails are typically sent as a general alert to all holders of options on a stock with an upcoming dividend.
Q&A
Does selling option premium before the weekend offer any kind of an edge?
The speaker discusses the idea that selling option premium before the weekend may offer an edge due to the lack of market activity over the weekend. However, the speaker also notes that the market can be unpredictable, and the effectiveness of such a strategy depends on various factors, including market conditions and the trader's ability to anticipate movements.
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Actionable takeawaySelling option premium before the weekend may provide an edge, but it is not guaranteed and depends on market conditions and the trader's ability to anticipate movements.
Q&A
Does selling option premium before the weekend offer any kind of an edge?
Selling option premium before the weekend does not offer a reliable edge. The outcome is random and influenced by market gaps, which are unpredictable. While it may seem like a strategy, it is not guaranteed to yield consistent results.
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Actionable takeawayAvoid assuming that selling premium before the weekend is a guaranteed strategy. It is not a reliable edge due to the unpredictable nature of market gaps.
Q&A
How should options traders manage their positions in a low volatility environment?
Options traders should consider the type of trade (defined vs. undefined risk) when managing positions in low volatility environments. Defined risk trades like iron condors allow for more flexibility, while undefined risk trades should be closely monitored and closed within a 21-day timeframe to avoid reaching maximum loss.
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Actionable takeawayUse the 21-day rule for undefined risk trades and adjust strategies based on the trade type in low volatility environments.
Q&A
What is the expected move butterfly strategy?
The expected move butterfly is a trading strategy that involves buying and selling options at different strike prices to profit from a predicted range of price movement. It is typically used in short-term trading with options that have a short time to expiration (0 DTE or weekly). The strategy is based on the probability of the market moving within a specific range, with the odds of success proportional to the price paid.
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Actionable takeawayThe expected move butterfly is a low-risk, high-reward strategy that requires a clear directional bias and a well-defined price range.
Q&A
Do you have anything in Nvidia waiting?
The speaker does not have a position in Nvidia but has a position in MU, which is considered fine. The speaker is also long Netflix and short some puts on various strike prices.
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Actionable takeawayThe speaker is managing multiple positions across different assets, including long and short positions in equities and options.
Q&A
What is the best way to manage an iron condor?
The best way to manage an iron condor is to not touch it, as even if one side goes down, it can be rolled down or up. The speaker suggests rolling down the vertical on either side if needed, but generally, it's best to leave it untouched. This approach is based on the idea that iron condors are delta neutral and do not move much, so reducing the delta by half is a common practice.
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Actionable takeawayAvoid actively managing an iron condor unless necessary, as it's generally best to leave it untouched. If adjustments are needed, rolling down or up the vertical can be done.
Q&A
Is it worth selling premium into that, or should I just keep waiting for a clean setup without an event risk attached?
The speaker suggests that if you're going through their checklist and don't have a directional bias, it's better to wait until after earnings. However, if you're looking to take advantage of the volatility spike before earnings, buying the back month and selling the front month can be a viable strategy. The speaker also recommends avoiding stocks with earnings before the trade.
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Actionable takeawayTraders should consider waiting for earnings to pass if they lack a directional bias, but can capitalize on volatility by selling the front month and buying the back month if they are willing to take on event risk.
Q&A
Did either of you guys successfully get your kids into trading options or was it an attempt that you guys gave up on?
The speaker mentions that one of his two kids actively participates in markets, with a focus on options trading. The other child is more interested in equities and has a bullish stance on certain stocks. The speaker emphasizes the importance of engagement and learning through experience.
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Actionable takeawayThe speaker's approach to introducing children to trading involves hands-on experience and learning from real market interactions, rather than formal instruction.
Q&A
What is the recommended strategy for trading crude oil given its current market conditions?
The speaker recommends short strangles or iron condors in crude oil, given the high implied volatility and the market's range-bound nature. The strategy involves selling strangles at 70 and 150, capitalizing on the price range between 80 and 110.
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Actionable takeawayShort strangles or iron condors in crude oil, targeting the range between 80 and 110.
Q&A
For SPX iron condors, what do you think about choosing wing width 50 versus 100 versus 150 points? Capital efficiency versus probability trade-off?
The speaker discusses the trade-off between capital efficiency and probability in SPX iron condors. Wider spreads (e.g., 150 points) offer higher potential returns but require more capital and increase the risk of adverse price movements. Narrower spreads (e.g., 50 or 100 points) are more capital-efficient and reduce the risk of large losses, though they may offer lower returns. The speaker suggests that 50 points is sufficient for most traders, with 100 points being a maximum, and 150 points being too risky due to the capital required and the potential for significant losses.
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Actionable takeawayFor SPX iron condors, narrower spreads (e.g., 50 or 100 points) are recommended for capital efficiency and lower risk, while wider spreads (e.g., 150 points) are not recommended due to the increased capital requirement and risk of significant losses.
Q&A
What factors drive premium to increase or decrease other than IV?
The speaker explains that premium changes are driven by val (volatility), which is a key factor in options pricing. When val increases, premium expands, and when val decreases, premium contracts. The speaker also notes that the direction of val is influenced by market participants' expectations of future events, with market makers adjusting their bids and offers accordingly.
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Actionable takeawayUnderstanding the relationship between val and premium is crucial for options trading, as it helps predict how premiums will move based on changes in volatility.
Q&A
What is a gamma value you consider high, low, or optimum per trade?
The speaker states that as a retail customer, they cannot provide a specific answer to the question of what constitutes a high, low, or optimum gamma value per trade. They explain that gamma risk is built into the model for futures and is part of the buying power equation for listed assets, but they do not provide specific thresholds.
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Actionable takeawayGamma values are a complex metric that depends on the specific trade and market conditions, and there is no universal threshold for what constitutes a high, low, or optimum gamma value.
Q&A
Do you primarily sell naked options on futures like your approach with equity options? What delta do you typically target?
The speaker primarily sells naked options on futures, targeting a delta range of 16 to 25, with an ideal target of 22. This range is chosen for maximizing premium while minimizing risk of price breaches, and the mechanics are consistent across different instruments.
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Actionable takeawayTargeting a delta of 22 for naked options on futures is optimal for maximizing premium while minimizing risk of price breaches.
Q&A
Have you ever thought about buying SPX at the money options right before or during MOC?
The speaker confirms that they have considered this strategy in the past, but notes that it is not commonly used today. They also mention that it is a high-risk strategy that requires a deep understanding of market dynamics.
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Actionable takeawayThe speaker suggests that buying SPX at the money options before or during MOC could be a viable strategy, but it is not without its risks.
Q&A
Can you do something similar if somebody wants to trade how SPX is going to close and you don't want to trade it's too expensive to trade the SPX?
The speaker suggests using SPY (SPDR S&P 500 ETF Trust) instead of SPX (S&P 500 Index) for trading, as SPY is cash-settled and easier to trade. The speaker highlights the difference between cash-settled and stock-settled options, noting that SPY avoids assignment risk and is more straightforward for traders.
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Actionable takeawayUse SPY instead of SPX for trading the S&P 500 due to its cash-settled nature and reduced assignment risk.
Q&A
What is the speaker's opinion on selling naked puts versus naked calls?
The speaker prefers selling naked puts over naked calls in the current market environment, citing the high IVR and the skew in the options market. They note that naked calls are less favorable due to the potential for significant upside movement.
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Actionable takeawayTraders should consider the skew in the options market and the potential for upside movement when deciding between naked puts and naked calls.
Q&A
What would be the best approach to manage an Apple iron condor expiring July 24th?
The speaker suggests rolling the call spread up and out to August, adjusting the strike prices to 320-330, and rolling the put spread to maintain a small credit. The reasoning is that the current price is slightly below the strike price, and rolling the position to a later expiration could provide more time for the trade to work out.
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Actionable takeawayRoll the call spread to a higher strike price and adjust the put spread to maintain a small credit.
Q&A
When Tom says trade small and trade often, how many contracts per trade does he normally buy?
The number of contracts per trade varies depending on the trader's preference and risk tolerance. The average trade size in the industry is around three to four contracts for options and slightly over one contract for futures. The smallest trade size can be as low as one lot, while some traders may trade up to 10 or more lots.
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Actionable takeawayTrade size should be based on individual risk tolerance and platform settings, with the smallest default size on the platform being a practical benchmark for 'small' trades.
Q&A
When rolling out in time, do you roll out with the same strike or move the strike out of the money?
When rolling out in time to defend a naked put, you move the strike out of the money. This reduces risk by about 30% and provides additional duration and wiggle room. The exact number of strikes moved depends on the strike width (e.g., five-point wide or one-point wide).
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Actionable takeawayRolling out in time with a moved strike provides risk reduction and additional flexibility.
Q&A
Do you look at deltas right away when evaluating a trade?
The speaker explains that the approach to evaluating deltas depends on the type of trade. For options, they typically look at deltas around 22-30, while for futures, deltas are not a primary focus. The key is maintaining consistency in the chosen strategy.
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Actionable takeawayConsistency in delta range selection is crucial for effective options trading.
Q&A
When IV is low and I want to buy defined risk spreads, does it make more sense to buy tighter debit spreads such as $1 or $2 wide spreads and increase the number of contracts or to buy wider spreads such as $5 or $10 wide spreads with fewer contracts?
The speaker does not provide a definitive answer but suggests that the decision depends on the trader's risk tolerance and market conditions. Tighter spreads may offer more frequent opportunities due to their lower cost, while wider spreads may offer higher potential rewards but with greater risk.
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Actionable takeawayThe decision to use tighter or wider spreads when IV is low depends on the trader's risk tolerance and market conditions. Tighter spreads may offer more frequent opportunities, while wider spreads may offer higher potential rewards but with greater risk.
Q&A
How can you convince someone who only trades long calls like the lottery to switch to selling credit spreads?
The answer suggests analyzing the person's returns. If they are making money, there's no need to convince them. If they are not, it's likely they are buying out-of-the-money options hoping for a large move, which is unlikely to be profitable. The analogy of insurance is used to explain the difference between buying and selling options, emphasizing that selling options can be more profitable than buying them.
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Actionable takeawayUse the insurance analogy to explain the difference between buying and selling options, and analyze the person's returns to determine if they are profitable.
Q&A
What would make you switch from a premium seller to a call buyer?
The speaker states that there is no market condition that would make them switch from a premium seller to a call buyer. They mention that reducing position size is a possibility, but it's not a switch in strategy. They also suggest that a massive market downturn could lead to a shift, but this is considered unlikely.
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Actionable takeawayThere is no clear market condition that would prompt a switch from premium selling to call buying, according to the speaker.
Q&A
Can't you make this simple? If you're long calls in Tesla, and Tesla gets taken over by SpaceX, you're going to sell your calls and make a lot of money.
The speaker suggests that if Tesla is acquired by SpaceX, long call options on Tesla would be profitable if the strike price is below the acquisition price. However, the outcome depends on the strike price and the actual deal price. If the deal fails, the options may expire worthless.
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Actionable takeawayLong call options on Tesla could be profitable if the acquisition price is above the strike price, but there is a risk of the deal failing.
Q&A
What's the price of the call versus the put that you're getting here?
The call is 40-50% more expensive than the put, indicating a significant call skew.
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Actionable takeawayThe call skew suggests a bullish sentiment or anticipated volatility, which can be leveraged in strangle strategies.
Q&A
What is wheel trading?
Wheel trading involves selling a put to acquire a stock and then selling calls against it. This strategy is used to generate income from both the put and call options, with the goal of profiting from the stock's price movement.
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Actionable takeawayWheel trading is a strategy that combines put and call options to generate income from a stock's price movement.
Q&A
What is the speaker's opinion on selling front month strangles in ZB or ZN?
The speaker states that they do not love selling front month strangles in ZB or ZN because they have not paid off in the past, although they acknowledge that this may change with the current Fed announcement. The speaker suggests that if nothing is expected to happen, selling strangles is a viable option.
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Actionable takeawayThe speaker suggests that selling strangles in ZB or ZN may be a viable option if nothing is expected to happen, but notes that it has not been profitable in the past.