Trade idea
1 oz risk management
The speaker advises selling one contract of the 1 oz gold to reduce risk, as the price has dropped significantly from 4834 to 4502. The 1 oz gold contract is described as a dollar tick, indicating minimal price movement. The speaker suggests selling one contract to mitigate losses while keeping the remaining contracts for potential future gains.
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Strategyrisk management
Assetcommodity
Time horizonimmediate
Entry / triggerholding three contracts of 1 oz gold at a price of 4834, now at 4502
Target / exitreduce risk by selling one contract
Invalidation / stopno hedge for the 1 oz gold contract
SpeakerScott
Risks- loss of potential gains from the remaining contracts
- no hedge for the 1 oz gold contract
Insight
Defined Risk Strategies for Non-Monitoring Traders
Defined risk strategies are recommended for traders who cannot monitor the market throughout the day. These strategies help manage risk by setting clear limits on potential losses, which is crucial when market monitoring is not possible. The rationale is that without the ability to monitor, traditional stop-loss orders can lead to disasters, and defined risk strategies provide a structured approach to risk management. The practical implication is that traders should focus on strategies with clear risk parameters and adjust their position sizes accordingly.
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Applicable when- trading without continuous market monitoring
Limitations- Defined risk strategies may not be suitable for all market conditions or trader preferences.
Insight
Risk Management in High Volatility Environments
In high volatility environments, the risk of market movements is lower compared to low volatility periods. The speaker emphasizes that statistically, traders have the least amount of risk when volatility is highest, as the VIX typically does not continue to rise indefinitely. This insight suggests that traders should adjust their position sizes and risk management strategies when volatility is high, such as trading smaller positions or defining risk parameters more strictly.
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Applicable when- high volatility
- market corrections
- unprecedented market conditions
Limitations- The statistical observation may not hold in extreme or unforeseen market events.
- The advice assumes a rational market response to volatility, which may not always be the case.
Insight
Capital Allocation and Risk Management
The speaker emphasizes the importance of allocating a specific percentage of capital to trading activities, typically between 35% to 50% for larger accounts and up to 70% for smaller accounts. This allocation is influenced by market conditions, such as the VIX level, and the speaker suggests that maintaining a portion of capital dry (not in use) is crucial for risk management. The key takeaway is to avoid over-leveraging and to ensure that the strategy can be executed even during drawdowns.
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Applicable when- Market volatility
- Trading strategy execution
Limitations- The strategy may not be suitable for all market conditions
- Requires discipline in adhering to the allocated percentage
Insight
Managing Risk on Volatile Days
On days with extreme volatility, such as three standard deviation moves, traders should reduce position size and consider rolling out in time to reduce delta exposure. Underhedging or underadjusting positions can also help mitigate the risk of being whipsawed. The key is to adjust strategies based on market conditions rather than relying on rigid delta-neutral adjustments.
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Applicable when- high_volatility_days
- extreme_market_moves
Limitations- Does not apply to zero DTE strategies
- Requires trader discretion and experience
Insight
Avoiding Whipsaw Traps with Mental Stops
The speaker emphasizes the importance of using mental stops rather than hard stops to avoid being whipsawed in volatile markets. They suggest that a 2% rule can be applied if a trader is following a strategy similar to Mr. Sheridan, but they personally do not use this rule. The key takeaway is to avoid stubbornness and to adjust positions in response to high volatility, such as widening mental stops and reducing position size.
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Applicable when- High volatility
- Crazy market moves
- Use of mental stops
Limitations- The 2% rule may not be suitable for all trading strategies
- Mental stops require discipline and may not be effective for all traders
Insight
Importance of Individual Position Management
The speaker emphasizes that individual position management is crucial for overall trading success. Each position should be evaluated separately, and traders must be aware of their individual deltas and how they impact the overall portfolio. This approach helps in managing risk and making informed decisions.
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Applicable when- Trading with options
- Managing a diversified portfolio
Limitations- Requires constant monitoring and adjustment
- Not suitable for all trading styles or risk tolerances
Insight
Risk Reward Framework
The speaker emphasizes the importance of evaluating risk and reward in all decisions, whether in business or personal life. This framework involves assessing the potential reward against the level of risk involved, with the speaker preferring a balance where the reward justifies the risk. The approach is probabilistic and confident, with a focus on learning and experience to navigate uncertainty.
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Applicable when- business decisions
- personal investments
- entrepreneurship
Limitations- Requires a clear understanding of potential outcomes
- May not account for unforeseen events or market changes
Insight
Risk Management in Small-Bite Trading
The speaker emphasizes the importance of managing risk by limiting position size and using defined risk trades, such as credit spreads. They suggest risking no more than $80 per trade and spreading positions across different asset classes to diversify risk. This approach ensures that losses are controlled and profits are collected systematically.
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Applicable when- small-cap trading
- defined risk strategies
Limitations- Requires discipline in adhering to risk limits
- May not be suitable for high-volatility markets
Insight
Risk Management in Emerging Technologies
The speaker emphasizes the importance of cautious investment in emerging technologies like AI and space exploration, highlighting the high risk involved. They suggest that while there may be significant upside, investors should avoid overcommitting resources to such ventures. The rationale is that these fields are highly speculative and may not deliver expected returns due to technological, regulatory, or market uncertainties. Practical implication is to diversify investments and avoid putting all eggs in one basket, especially in unproven sectors.
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Applicable when- Highly speculative sectors
- Emerging technologies
Limitations- Not applicable to all investment scenarios
- Requires individual risk tolerance assessment
Insight
Avoiding Futures Trading to Prevent Larger Losses
Trading futures to balance delta can lead to larger losses due to the complexity and risk involved. Adjusting options is a better approach as it allows for more controlled risk management. Futures trading can create a situation where it's difficult to exit, leading to significant losses.
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Applicable when- Trading futures
- Options trading
- Delta adjustment
Limitations- Requires experience with options
- Not suitable for all market conditions
Insight
Understanding Net Lick vs. Buying Power
The discussion clarifies that all risk-related calculations are based on a percentage of net lick, not buying power. Buying power is described as the 'back of the envelope risk' and is used to determine potential risk exposure, not as a fixed risk amount. This distinction is crucial for understanding how risk is managed in trading.
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Applicable when- trading with margin
- calculating risk percentages
Limitations- This applies to specific platforms and trading strategies
- Does not account for market volatility or unexpected events
Insight
Trade Small and Manage Risk
The speaker emphasizes the importance of trading small to manage risk effectively. This approach helps avoid significant losses in case of adverse market movements. The rationale is that smaller positions reduce the potential impact of a trade going against the trader, especially in volatile environments. This strategy is particularly relevant when dealing with instruments like futures or options where leverage can amplify both gains and losses.
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Applicable when- high_volatility
- leverage_usage
Limitations- May not be suitable for traders with higher risk tolerance or larger capital bases
- Requires discipline to maintain small position sizes consistently
Insight
The Impact of Large Losses on Trading Performance
Large losses can significantly impact a trader's overall performance, often wiping out gains from multiple winning trades. This is particularly true when trading short premium strategies, as losses can accelerate rapidly when the market moves against the position. The speaker emphasizes that while winning trades are expected, the challenge lies in managing and mitigating the impact of unexpected large losses.
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Applicable when- Short premium strategies
- Market volatility
Limitations- The impact of large losses may vary depending on the trader's risk tolerance and capital allocation strategy
Insight
Risk Management Through Buying Power
The speaker emphasizes that buying power is a critical factor in risk management for active traders. It serves as a measure of risk, ensuring that risk remains consistent across multiple positions. For passive investors, buying power is less relevant, as their risk is not measured through this metric. This insight highlights the importance of aligning risk management strategies with trading approaches, whether active or passive.
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Applicable when- active_trading
- diversified_positions
Limitations- Not applicable for passive long-term investors
- Does not address concentrated positions directly
Insight
Entrepreneurship as an Undefined Risk Trade
Entrepreneurship is likened to an undefined risk trade due to its lack of clear boundaries and potential for both high reward and high risk. In contrast, working for a large company is compared to a defined risk trade, offering more security and predictable outcomes. The analogy suggests that traders can use this framework to evaluate their own risk profiles and trade strategies.
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Applicable when- trading strategies
- career choices
- risk assessment
Limitations- The analogy is not a direct substitute for financial analysis
- Individual circumstances may vary significantly
- Long-term outcomes are inherently uncertain and not guaranteed by the analogy itself
Insight
Managing Underwater Positions
When a position is underwater, it's important to consider whether to hold or roll forward. The speaker suggests that if the position is underwater and the trader is not up money, they should roll forward if implied volatility is high. This allows the trader to extend the duration of the position and potentially benefit from volatility. However, if the trader is up money and the position is underwater, they should consider closing it out, especially if volatility is lower. The key is to address underwater positions before they become a significant issue.
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Applicable when- positions underwater
- implied volatility
- volatility regimes
Limitations- subjectivity in decision-making
- depends on market conditions
- requires monitoring and adjustment
Insight
Risk Management and Wealth Accumulation
The speaker emphasizes that as traders accumulate wealth, they should adjust their risk exposure, reducing the percentage of their net worth at risk. This is based on the idea that with more capital, the need to risk a large portion of net worth diminishes. The rationale is that wealth accumulation allows for more strategic and less aggressive risk-taking, which is a practical implication for long-term trading success.
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Applicable when- accumulated_wealth
- long_term_trading
Limitations- The approach assumes a level of financial stability and experience that may not be applicable to all traders.
Insight
Risk Comfort and Trading Behavior
The speaker emphasizes that individuals who are uncomfortable with risk may struggle in trading environments, as demonstrated by the anecdote about the golfer who quit playing for money. The key insight is that risk tolerance significantly influences trading behavior and outcomes. The mechanism is that when individuals are exposed to higher risk scenarios, such as trading for money, they may become overwhelmed or lose focus, leading to suboptimal decisions. This applies to traders who are not accustomed to taking on risk, as they may not be prepared for the psychological and emotional challenges that come with it. Limitations include the fact that some individuals may have higher risk tolerance or different coping mechanisms, which could allow them to handle such situations better.
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Applicable when- trading for money
- new traders
- high-risk environments
Limitations- Individual differences in risk tolerance
- varied coping mechanisms
- contextual factors in trading environments
Insight
Expected Move and Stop-Loss Strategy
The speaker emphasizes using the expected move, calculated as one standard deviation, as a key reference point for setting stop-loss levels. This approach ensures traders maintain consistency in their risk management by exiting trades at the expected move if the market does not move as anticipated. The strategy is particularly relevant in high volatility environments, where expected moves are larger, and in lower volatility periods, where they are smaller. The rationale is that this method provides a clear, objective benchmark for when to cut losses, avoiding emotional decisions.
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Applicable when- high_volatility
- low_volatility
- trading_with_expected_moves
Limitations- Requires accurate calculation of expected moves
- Does not account for unexpected market events or news
Insight
Risk Management in Volatile Markets
The speaker emphasizes the importance of adjusting delta positions to protect against downside risk in volatile markets. This approach involves tweaking delta to ensure net exposure is slightly short, which can help mitigate losses during a downturn. The rationale is that by managing exposure dynamically, traders can better navigate unpredictable market movements.
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Applicable when- volatile markets
- downside protection
Limitations- Requires active monitoring and adjustment
- May not be suitable for all market conditions
Insight
Adjusting Positions Based on Capital Commitment
When a trade goes against you, the decision to adjust or close should be based on the amount of additional capital required. If the capital needed is minimal, it's reasonable to adjust and defend the position. However, if the capital required is significant, it's better to close the position and move on. This approach helps manage risk and avoid overexposure.
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Applicable when- trading with limited capital
- positions that require significant capital to adjust
Limitations- This strategy assumes the trader has the judgment to assess the required capital accurately.
- It may not apply in highly volatile or fast-moving markets.
Insight
Importance of Trade Size and Discipline
Maintaining appropriate trade size and discipline is crucial for long-term success in trading. The speaker emphasizes that losing discipline often leads to poor trading decisions, especially during losing streaks. Keeping trade size in check helps prevent overexposure and emotional decision-making.
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Applicable when- Consistent trading strategy
- Emotional control in trading
Limitations- Requires self-discipline
- May be challenging during winning streaks
Insight
Understanding the Risks of Managing Others' Money
Managing others' money involves significant risks, including loss of objectivity, asymmetric risk, emotional burden, and legal liability. These risks are often overlooked, even by experienced individuals. The speaker shares a personal story where they managed a hedge fund as a favor, only to lose their own money due to unforeseen terms in the fine print. This highlights the importance of thoroughly understanding the legal and financial implications before engaging in such activities.
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Applicable when- Managing others' money
- Hedge fund management
- Financial advisory
Limitations- The story is anecdotal and may not represent typical scenarios
- The outcome depends on specific legal and financial contexts
Insight
Use of Put Spreads for Risk Management
The speaker suggests using put spreads as a strategy to manage risk when trading indices like the S&P. This approach allows traders to hedge against potential downturns while maintaining a defined risk profile. The rationale is to avoid the high risk associated with naked puts, especially with limited capital, and to focus on managing positions through spreads.
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Applicable when- Trading with limited capital
- Trading indices like S&P
Limitations- Requires understanding of spread strategies
- Not suitable for all market conditions
Insight
Risk Management Through Delta Adjustment
The speaker emphasizes the importance of reducing long delta exposure by adjusting positions, such as selling out-of-the-money calls or reducing long positions. This approach helps mitigate downside risk while maintaining some upside potential. The rationale is that most traders have a natural long bias, so reducing delta exposure can help balance risk and reward.
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Applicable when- trading with a long bias
- market uncertainty
Limitations- Requires market analysis to determine appropriate delta adjustments
- May not be suitable for all market regimes
Insight
Consultants and Liability
The transcript highlights that consultants are often hired to transfer liability away from executives. This is a common practice in business, where consultants are used to avoid personal responsibility for decisions. The speaker emphasizes that this is the primary reason for hiring consultants, and it's a recurring theme in the discussion.
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Applicable when- Business decisions
- Consulting engagements
Limitations- This insight is based on anecdotal evidence and may not apply universally to all consulting scenarios.
Insight
Hedging Strategies and Risk Management
Buying VIX calls as a hedge for iron condors is not recommended due to the high cost of VIX premiums and the difficulty in timing the market. Instead, skewing iron condors with a small amount of negative delta provides better protection at a lower cost. This approach maintains defined risk while avoiding the inefficiency of managing multiple positions.
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Applicable when- Iron condor strategies
- Market volatility
- Hedging
Limitations- Requires understanding of delta and position skewing
- Not suitable for all market regimes
- May not fully protect against extreme market moves
Insight
Risk Management Through Position Reduction
Reducing the size of a losing position is a quick and impactful risk management strategy. It provides mental relief and allows for clearer thinking, enabling traders to reassess their strategy without being emotionally tied to a larger position. This approach is particularly useful when a trader is uncomfortable with the current position, as it reduces exposure while maintaining the potential for profit.
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Applicable when- uncomfortable with existing position
- losing trade
- high risk exposure
Limitations- Does not eliminate risk entirely
- May not be suitable for all market conditions
Insight
Risk Management and Position Sizing
The speaker emphasizes the importance of managing risk by considering the time decay of options and the potential for large losses if the trade is wrong. The discussion highlights the need to balance the cost of options with the time frame of the trade, suggesting that longer-dated options carry higher costs but offer more time for the trade to work out. The speaker also underscores the importance of having a clear exit strategy and being prepared to cut losses, as demonstrated by their experience with Micron stock.
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Applicable when- options trading
- long-term trades
- position sizing
Limitations- The advice is based on personal experience and may not apply universally to all market conditions or traders.
Insight
Reducing Position Size in a Losing Short Position
When facing a losing short position in a market that is moving sharply upwards, the best course of action is to reduce the position size. This approach helps to lock in losses and reduce delta, providing a sense of control and peace of mind. It is recommended as the first step before any other action, such as rolling out in time or selling against the position.
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Applicable when- sharp upward market movement
- losing short position
Limitations- This strategy assumes the trader is willing to accept a reduced position size and is not looking to cover the position immediately.
Insight
Risk Management in Trading
The speaker emphasizes the importance of managing risk by focusing on strategies that involve minimal risk, such as counter spreads, where the risk is proportional to the potential reward. This approach is recommended for beginners to learn the fundamentals of trading without exposing themselves to significant financial loss.
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Applicable when- beginner traders
- low-risk strategies
Limitations- Not applicable to high-risk strategies
- Requires understanding of market dynamics
Insight
Control What You Can
The speaker emphasizes the importance of focusing on controllable factors in trading and investing, rather than worrying about uncontrollable systemic risks. They suggest that successful individuals should concentrate on decisions they can influence.
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Limitations- Systemic risks are not entirely avoidable, but they should not be a primary concern for individual traders or investors.
Insight
Risk Management with Iron Condors
Using stop orders with iron condors can increase the chances of the trade being a losing trade due to the increased risk of being filled at unfavorable prices. Instead, using stop limits with a buffer (e.g., 10-40 cents over the stop price) is recommended to ensure better execution prices. Additionally, reducing trade size is suggested as an effective way to manage risk, especially for larger contracts like SPX.
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Applicable when- Iron condor strategies
- Options trading
Limitations- Stop orders may still result in unfavorable fills
- Reducing size may limit potential profits
Insight
Hedging vs. Reducing Position Size
Reducing trade size is considered a more effective hedging strategy compared to adding capital through options or other instruments. The speaker prefers reducing size as it frees up capital and avoids the risks associated with additional capital requirements. While improving basis through hedging is acceptable, the speaker is opposed to adding capital to positions.
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Applicable when- trading positions
- hedging strategies
Limitations- The speaker's preference may not align with all traders' strategies
- Reducing size may not be suitable for all market conditions or risk tolerances
Insight
Outlier Risk Management
Outlier risk is unquantifiable and cannot be managed through traditional risk mitigation techniques like stop orders. It is likened to an unexpected event, such as another driver's mistake, that cannot be controlled by the individual. The key takeaway is that outlier risk requires a different approach, focusing on size management and preparedness rather than quantification.
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Applicable when- trading naked shorts
- options trading
Limitations- Outlier risk is not quantifiable, making it difficult to model or predict accurately.
Insight
Managing Outlier Risk Through Position Sizing
Outlier risk refers to the risk of unexpected market shocks that can lead to significant losses. The key to managing this risk is through proper position sizing. By controlling the size of trades, traders can mitigate the impact of such shocks. This approach is emphasized as critical for long-term success in trading, as it allows traders to withstand unexpected events without being wiped out. The concept is supported by historical examples of market failures, such as those involving Long-Term Capital Management and Victor Niederhoffer, which highlight the importance of size control over model accuracy.
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Applicable when- trading with high leverage
- trading in volatile markets
- using complex models
Limitations- Position sizing alone cannot eliminate all risks
- It requires discipline and adherence to a trading plan
Insight
Stress Testing and Outlier Risk
Stress testing should be conducted to one or two standard deviations to provide a realistic assessment of risk. However, outlier risks beyond these thresholds are highly subjective and difficult to predict. Even if stress tests are performed, they may not account for extreme market movements, as seen in cases like GameStop or Zoom. Managing position size is crucial to mitigate the impact of such outliers.
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Applicable when- stress_testing
- outlier_risk
- position_sizing
Limitations- Outlier events are rare and unpredictable, making stress tests insufficient for extreme scenarios.
- Mean reversion is not guaranteed and may not fully recover the original price level.
Insight
Risk-taking as a core principle
The speaker emphasizes that taking as much risk as possible is the most valuable piece of advice for individuals and businesses. This is framed as a fundamental principle for success, suggesting that risk-taking is essential for growth and achievement. The rationale is that avoiding risk leads to stagnation, and the practical implication is that individuals should embrace risk rather than being conservative.
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Applicable when- entrepreneurship
- business strategy
Limitations- Risk-taking may not be suitable for all individuals or situations, particularly those with limited resources or high personal risk tolerance thresholds.
Insight
Collar Strategy for Portfolios with Correlated Assets
A collar strategy is an efficient method for managing risk in portfolios of highly correlated assets, such as a basket of stocks or a portfolio correlated with the NASDAQ. The strategy involves selling call spreads above the market and buying put spreads below the market to limit downside risk while retaining upside potential. This approach is particularly useful when the long call spreads are near their maximum value, as it allows for protection without sacrificing significant upside opportunity. The strategy is verticalized and cashless, meaning no cash is taken out of the portfolio, and it exposes the trader to limited upside liability outside the normal trading range.
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Applicable when- portfolio of correlated assets
- long call spreads near max value
Limitations- Requires accurate assessment of expected market movement
- Limited upside potential beyond the collar range
Insight
Risk Management in Low Volatility Environments
In low volatility environments, it is advisable to reduce the amount of capital allocated to trading. The speaker suggests reducing the capital allocation from 50-70% to 40-50% or even lower, emphasizing the need to maintain liquidity for opportunities when volatility increases. The rationale is that significant market moves and risks often occur when volatility is low, and being prepared with dry powder allows traders to capitalize on sudden changes.
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Applicable when- low volatility
- market uncertainty
Limitations- Requires accurate assessment of market conditions and personal risk tolerance
- Does not account for individual trading strategies or account sizes
Insight
Risk Management in Trading
The speaker emphasizes that taking on too much risk during low opportunity periods can lead to significant losses. It is crucial to balance risk and return, and to stay active in the market while adjusting position sizes when necessary. The discussion highlights the importance of not letting fear dictate trading decisions and maintaining a presence in the market.
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Applicable when- low opportunity periods
- market participation
Limitations- Uncertainty about the effectiveness of specific strategies
- Need for individual risk tolerance assessment
Insight
Realistic Expectations for Defined Risk Trades
The speaker emphasizes that expecting to double one's money with defined risk trades is unrealistic. Instead, a more achievable goal is a 20% return on a $250,000 account, which can be achieved through defined risk strategies without constant monitoring. This approach requires setting realistic expectations and understanding that significant returns come with substantial risk.
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Applicable when- Defined risk trades
- Long-term investment goals
Limitations- Requires substantial capital
- High risk for doubling money
Insight
Transition from Defined Risk to Undefined Risk Trades
The speaker discusses the transition from defined risk trades to undefined risk trades, emphasizing the psychological and practical challenges involved. They suggest starting with lower-priced stocks and using a small percentage of account capital to test the waters. The key takeaway is that undefined risk trades offer a higher probability of profit, but they require careful management to avoid overexposure and loss of diversification.
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Applicable when- small_account_size
- transition_from_defined_risk
Limitations- requires careful management to avoid overexposure
- not suitable for all traders due to increased risk
Insight
Risk Management and Position Sizing
The speaker emphasizes the importance of managing risk through position sizing, suggesting that traders should allocate a specific percentage of their capital to each trade based on their account size. For accounts over $25,000, a 3-7% allocation is recommended, while accounts under $25,000 should use 5-10%. This approach helps mitigate risk and ensures that no single trade can significantly impact the trader's overall capital.
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Applicable when- trading with defined risk
- position sizing strategies
Limitations- Requires a sufficient account size to implement effectively
- Does not account for market volatility or unexpected events
Insight
Hedging Long Positions with Options
To hedge long positions against potential downside, one can sell upside calls or buy downside puts. This approach provides protection without necessarily selling the underlying holdings. The strategy involves selecting round numbers for the strike prices and aligning the position size with the portfolio value. It is important to note that this method introduces complexity and may not be ideal for all investors due to its messy nature and tax implications.
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Applicable when- long positions
- downside protection
- portfolio hedging
Limitations- tax implications
- complexity of execution
- potential for reduced returns due to hedging costs
Insight
Never Assume Success is Permanent
The speaker emphasizes that even when a business becomes profitable, it's crucial to remain cautious and not assume success is permanent. The idea is that success in business, like in trading, is often a temporary state, and one should always be prepared for potential setbacks. This mindset is rooted in the belief that the market is unpredictable and that complacency can lead to failure.
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Applicable when- Entrepreneurship
- Business Operations
- Trading
Limitations- This insight is based on personal experience and may not apply universally to all business or trading scenarios.
Insight
Importance of Greeks in Trading
Managing Greeks is crucial in a runaway market, as it helps traders understand and mitigate risk. The speaker emphasizes the importance of using a platform that recognizes the value of Greeks, noting that they were once unknown but are now popularized. This insight highlights the practical application of Greeks in risk management and the evolution of trading platforms to incorporate these tools.
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Applicable when- runaway market
- complex derivatives trading
Limitations- Not all traders may use all Greeks daily
- Requires understanding of advanced trading concepts
Insight
Importance of Beta Weighted Delta and Theta in Risk Management
The speaker emphasizes that beta weighted delta and theta are essential for overall risk management in options trading. These metrics provide a simplified way to assess the risk of a portfolio without needing to delve into more complex Greeks like Vega or Gamma. The speaker suggests that retail traders should focus on these metrics to understand their risk exposure relative to their buying power requirements, which are set by exchanges and regulators.
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Applicable when- retail investors
- options trading
- portfolio management
Limitations- The speaker acknowledges that more advanced traders might need to consider other Greeks like Gamma, but for most retail traders, focusing on beta weighted delta and theta is sufficient.
Insight
Beta Weighted Deltas Simplify Position Management
Using beta weighted deltas simplifies position management by eliminating the need to compare different assets or risk factors. This approach allows traders to focus on overall risk without getting bogged down by individual asset-specific details. The method is effective for managing risk and identifying optimal risk levels, as it pre-prices various changes in underlying assets.
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Applicable when- trading with multiple assets
- position management
Limitations- It may not be perfect for all scenarios
- Requires understanding of beta weighting concepts
Insight
Adjust Position Size Based on Volatility
When volatility increases, traders should reduce their position size to manage risk effectively. This approach allows traders to maintain the same level of risk exposure while potentially earning more due to the increased volatility. The rationale is that higher volatility can lead to larger price swings, which can result in higher potential profits or losses. However, it's important to adjust position sizes to ensure that the risk remains within acceptable limits.
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Applicable when- increased volatility
- higher expected price moves
Limitations- Requires accurate risk assessment and understanding of market conditions
- May not be suitable for all trading strategies or risk tolerances
Insight
Defending a Bad Trade in a Runaway Market
Defending a bad trade in a runaway market is challenging. When a trade goes against you, reducing your delta is a key strategy. This can be achieved by adjusting positions, such as selling puts or moving them up, or rolling out in time to reduce delta by about 25%. These actions help manage risk and recenter the trade.
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Limitations- Requires active management and adjustment
- Effectiveness depends on market behavior and timing
Insight
Adjusting Delta in a Runaway Market
When a trade is going against you in a runaway market, it is crucial to reduce your delta. Adjusting your delta involves recentering the trade, rolling out in time, or rolling the position. Reducing delta by about 25% with each adjustment helps manage risk effectively. This approach is supported by extensive research and is considered one of the best practices for managing positions in volatile markets.
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Applicable when- runaway market
- volatile market
- bad trade
Limitations- Requires understanding of delta and position management
- May not be suitable for all market conditions
Insight
Risk Management and Position Sizing
The speaker emphasizes the importance of reducing position or unit size to manage risk, particularly in correlation risk and diversification. This is a secondary concern that should be addressed after the primary focus on deploying capital. The practical implication is that traders should prioritize risk management strategies to avoid repeating past mistakes.
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Applicable when- trading strategies
- portfolio management
Limitations- Requires active monitoring and adjustment
- Not a substitute for comprehensive risk management frameworks
Insight
Risk Management and Allocation Based on Age and Financial Situation
The speaker emphasizes that the percentage of liquid net worth allocated to active trading accounts depends on age, financial situation, and future outlook. Younger individuals with lower net worth may allocate a higher percentage (e.g., 20-30%) to trading, while older individuals with higher net worth may allocate a smaller percentage (e.g., 25%). The speaker also notes that their own allocation is a small percentage of their net worth, but their children may have a higher allocation. This approach is based on the idea that younger traders have more time to recover from potential losses and can afford to take on more risk.
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Applicable when- Young traders
- Older traders
- Varied net worth
Limitations- Does not account for individual risk tolerance or market conditions
- Assumes a general approach without specific market analysis
Insight
Risk Management and Portfolio Balance
The speaker emphasizes the importance of balancing a portfolio by reducing overexposure to equities and incorporating bonds. This approach is based on the belief that the equity market carries a higher risk premium compared to fixed-income markets. The speaker acknowledges that their portfolio has been heavily weighted towards equities for decades, leading to an imbalance that may need correction. The practical implication is that investors should consider diversifying their portfolios to mitigate risk, especially in volatile market conditions.
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Applicable when- High equity market volatility
- Long-term portfolio imbalance
Limitations- The speaker's personal experience may not apply universally
- Market conditions can change rapidly, affecting portfolio balance strategies
Insight
Rule of Thumb for Delta Exposure
The speaker suggests a rule of thumb for delta exposure based on notional equivalent. For $100,000, a reasonable delta range is 200 deltas per every 100,000, or 20 deltas per every 10,000. This is considered a balanced approach, with the speaker noting that going beyond this range (e.g., 800 deltas for $100,000) is their absolute maximum. The rationale is to provide context and avoid over-leveraging, given the leverage provided by options and futures.
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Applicable when- Trading with leverage
- Options and futures trading
Limitations- The rule is based on the speaker's personal experience and may not apply universally
- Does not account for market volatility or individual risk tolerance
Insight
Leverage and Risk of Ruin
Available leverage can impact delta and liquidity, but it does not reduce the risk of ruin. In fact, higher leverage increases the risk of ruin. A reasonable amount of leverage is typically 2-4 times net worth, with 10-20 times being excessive. For example, a $100,000 account with one e-mini future (3.5 times leverage) is acceptable, but four e-minis (14 times leverage) is too high.
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Applicable when- trading with leverage
- delta trading
- position sizing
Limitations- Leverage thresholds may vary based on individual risk tolerance and market conditions
- The example uses e-mini futures, which may not apply to all instruments
Insight
Position Sizing and Risk Management
The discussion highlights the importance of appropriate position sizing relative to account size. A $100,000 account with a 14x leverage is deemed too high, suggesting that risk management should prioritize capital preservation over aggressive leverage. The example of using 20 deltas on a $100,000 account illustrates the need to balance exposure with risk tolerance.
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Applicable when- trading with leverage
- position sizing
Limitations- The example is specific to a delta trade and does not generalize to all trading strategies or instruments.
Insight
Small Trade Size Minimizes Risk
Maintaining a small trade size is recommended to minimize risk and avoid significant impact on the trader's portfolio. This approach ensures that even if a trade goes against the expected outcome, the financial consequences are limited.
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Applicable when- trading strategies
- portfolio management
Limitations- Does not address other risk factors such as market volatility or liquidity issues
Insight
Trade Small to Manage Risk
Trading small allows for greater flexibility and reduces the risk of significant losses. When traders increase their position size, they often expose themselves to more risk, which can lead to trouble. The key is to maintain a manageable size regardless of the account size, as this provides a 'wiggle room' in case of adverse market movements.
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Applicable when- trading with limited capital
- trading in volatile markets
Limitations- Does not account for market conditions that may require larger positions for profit potential
Insight
Expected Move and Stop Loss Strategy
Understanding the expected move of a stock is crucial for setting appropriate stop-loss points. The speaker emphasizes that the expected move varies significantly between stocks, such as Micron ($30 expected move) and Apple (five expected move). Scalping strategies should take a percentage of the expected move as a target, and stop-loss points should be mentally set to avoid overexposure. This approach helps traders manage risk effectively in volatile environments.
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Applicable when- Scalping
- Day Trading
- High Volatility Stocks
Limitations- Requires accurate expected move estimation
- Not suitable for all trading styles
- Mental discipline is essential for execution
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
Who would listen to a guy that sells puts naked?
The speaker suggests that someone who sells puts naked without any other strategy would likely be buying their own island due to the risks involved.
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Actionable takeawaySelling naked puts without a strategy is risky and can lead to significant losses.
Q&A
Why did the speaker not roll down calls earlier?
The speaker regrets not rolling down calls earlier, as it would have saved them a significant amount of money.
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Actionable takeawayThe speaker suggests that rolling down calls could have been a more profitable strategy.
Q&A
What is the recommended action for covered calls if the stock is not performing well?
The speaker suggests rolling the covered calls to the next month or using alternative strategies like selling puts and buying calls to manage risk and maintain exposure.
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Actionable takeawayAdjust covered call positions by rolling them or using alternative strategies if the stock is underperforming.
Q&A
Is it difficult to be a contrarian trader if you have to be all-in with your trading?
The speaker argues that it is difficult for smaller traders to be contrarian because they cannot afford extended drawdowns. However, they also suggest that it is possible if the trader can manage risk effectively and trade smaller positions relative to their account size.
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Actionable takeawaySmaller traders may find it challenging to be contrarian due to the risk of extended drawdowns, but it is possible with proper risk management and position sizing.
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
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
Are there any strategies that work better than others when you can't monitor the market throughout the day?
Defined risk strategies are recommended for traders who cannot monitor the market throughout the day. These strategies help manage risk by setting clear limits on potential losses, which is crucial when market monitoring is not possible. The rationale is that without the ability to monitor, traditional stop-loss orders can lead to disasters, and defined risk strategies provide a structured approach to risk management.
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Actionable takeawayTraders should focus on defined risk strategies when they cannot monitor the market throughout the day.
Q&A
Is product indifference more valuable to reduce correlation risk?
The speaker suggests that diversification is more valuable for reducing correlation risk, as it helps mitigate the risk of being overly correlated across investments. Product indifference, while related, is a broader concept that can apply to various strategies like duration, volatility, or underlying products, and is not directly focused on correlation risk.
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Actionable takeawayDiversification is a more direct method for reducing correlation risk, while product indifference offers broader strategic flexibility.
Q&A
Does your trading strategy change in these market conditions? If so, how?
The speaker states that their trading strategy does not change in these market conditions. However, they suggest adjusting position sizes and risk management practices when volatility is high, as the market has already priced in the potential for volatility. This approach helps mitigate risk while maintaining exposure to potential market movements.
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Actionable takeawayAdjust position sizes and risk parameters in high volatility environments to account for increased market risk.
Q&A
How many years out of the last 10 have you beaten 4x risk-free rates with only trading?
The speaker acknowledges the difficulty of beating 4x risk-free rates, especially with the low rates in recent years. They estimate that the answer is a majority of the time, but they do not provide specific figures. The speaker also notes that they do not track or report actual returns due to the variability in risk-taking and the focus on transparency in trading strategies.
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Actionable takeawayThe speaker's approach to trading emphasizes transparency and risk management over specific return figures, suggesting that the focus is on consistent performance rather than absolute returns.
Q&A
It's not more risky? Can you explain?
The risk is not inherently higher in one strategy over another when considering the expected move and time decay. The risk is tied to the expected move and the time decay, which is similar across strategies. The focus should be on personal comfort and the expected move.
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Actionable takeawayThe risk associated with different trading strategies, such as using one-day, one-week, or one-month options, is essentially the same when considering the expected move and the decay of the options.
Q&A
What is the recommended approach for a young investor starting to trade?
The speaker recommends starting with small amounts of money, experimenting with different strategies, and learning through hands-on experience. They suggest trying various assets, including stocks, crypto, and event-based contracts, while keeping risk low. The key is to gain experience and understanding before committing to long-term investments.
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Actionable takeawayYoung investors should start with small amounts of money, experiment with different strategies, and learn through hands-on experience.
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 recommended percentage of capital to allocate for trading?
The recommended percentage of capital to allocate for trading varies depending on the account size and market conditions. Larger accounts typically use around 40%, while smaller accounts can use up to 70%. The speaker suggests that the percentage should be adjusted based on the VIX level and market volatility.
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Actionable takeawayAdjust the percentage of capital allocated for trading based on account size and market conditions.
Q&A
How do you scale your trading when you're trading small?
To scale, traders should increase their buying power by widening strikes or using larger Delta options. This allows for incremental increases in position size without increasing unit risk. The key is to prove the concept by incrementally increasing contracts and staying consistent with buying power.
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Actionable takeawayScaling involves increasing buying power through strategic adjustments in position size and risk management.
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
How do you avoid getting whipsawed on days with extreme market moves?
On days with extreme market moves, traders should reduce position size, roll out in time to reduce delta exposure, and consider underhedging or underadjusting positions. Mental stops and a 2% rule can also be used to manage risk.
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Actionable takeawayReduce position size and adjust hedging strategies on volatile days to avoid being whipsawed.
Q&A
What is the 2% rule in trading?
The 2% rule is a risk management strategy where a trader exits a position if they lose more than 2% of their available capital. The speaker suggests that this rule could be applied if following a strategy similar to Mr. Sheridan, but they personally do not use it.
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Actionable takeawayThe 2% rule is a way to limit losses in trading, but its effectiveness depends on the trader's strategy and market conditions.
Q&A
What do you think about leveraged ETFs?
Leveraged ETFs are not capital efficient and should be used as short-term trading vehicles, ideally held for no more than 24 to 48 hours. They are a substitute for futures products and work well for intraday trading. However, holding them longer than this period exposes traders to significant disadvantages due to compounding and decay effects. Futures are recommended for traders with access to them due to their higher capital efficiency.
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Actionable takeawayAvoid holding leveraged ETFs for more than 24-48 hours due to their inefficiency and decay. Use futures instead if available.
Q&A
What is the issue with scaling selectively in trading?
Scaling selectively can lead to significant losses because it disrupts the consistency of the trading strategy. If some trades are scaled and others are not, the overall performance can be negatively impacted.
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Actionable takeawayAvoid selective scaling; apply scaling uniformly across all trades.
Q&A
Does short premium trading have an edge in crypto or is the frequent tail risk being correctly priced?
The speaker acknowledges that short premium trading in crypto may have an edge due to the high volatility and upside skew of crypto assets. However, the downside tail risk is considered to be priced correctly, while the upside risk remains uncertain. The speaker suggests that selling downside puts could be a profitable trade due to the current market conditions and the high premium associated with such instruments.
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Actionable takeawaySelling downside puts in crypto ETFs could be a profitable trade due to the current market conditions and the high premium associated with such instruments.
Q&A
Is doing an earnings trade after the announcement still a valid choice?
Yes, it is a valid choice. However, traders should reassess their assumptions after a big move. The speaker suggests that trading post-earnings can be more advantageous as it reduces directional risk.
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Actionable takeawayTraders should consider reassessing their strategies after significant market moves, even if they missed an earnings trade.
Q&A
What's the best way to scale up trading to collect more premium?
The best way to scale up trading to collect more premium is to first widen the wings of the trade, then increase the lot size. This approach allows traders to prove the concept of their strategy before increasing exposure, ensuring that the strategy is validated before scaling up.
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Actionable takeawayScale up trading by widening wings first, then increasing lot size after validating the strategy.
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 is the risk-reward framework?
The risk-reward framework is a method of evaluating decisions by comparing the potential reward against the level of risk involved. The speaker uses this framework to make business and personal decisions, emphasizing that the reward must justify the risk.
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Actionable takeawayAssess potential rewards against risk in all decisions to ensure they are justified.
Q&A
When do you actually pull the plug on a losing trade?
The speaker discusses the difficulty of deciding when to exit a losing trade, using examples like bad investments in private equity and individual trades. They emphasize the importance of recognizing when to cut losses and not holding onto losing positions indefinitely.
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Actionable takeawayRecognize when to cut losses and avoid holding onto losing positions for too long.
Q&A
What is considered a good percentage return on a month of trading?
A good percentage return on a month of trading is generally considered to be between 1.5% to 3%, with some suggesting up to 5% for smaller accounts. The target can vary based on account size, with larger accounts aiming for lower percentages and smaller accounts potentially aiming for higher returns.
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Actionable takeawaySet realistic monthly return targets based on account size and risk tolerance.
Q&A
Does the fear index increase with more volatility and more risk?
Yes, the fear index increases with more volatility and more risk. However, it does not necessarily scare away buyers until a prolonged bear market occurs.
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Actionable takeawayThe fear index is a useful indicator of market sentiment, but it should not be used in isolation to predict market behavior.
Q&A
How should traders adapt their approach to risk in today's markets?
The speaker suggests that traders should be aware of the impact of new products on trading behavior, which may lead to shorter-term strategies. They emphasize the importance of adapting to market conditions and being prepared for potential volatility.
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Actionable takeawayTraders should consider the influence of new financial products on market behavior and adjust their strategies accordingly, focusing on shorter-term opportunities and being prepared for increased volatility.
Q&A
How should traders adapt their approach to risk in today's markets?
Traders should reduce position sizes due to increased volatility and potential for larger moves. The speaker emphasizes that the risk of a single trade has increased significantly, with moves now ranging from $20 to $50 instead of smaller amounts. This necessitates a more conservative approach, cutting positions down and letting trades run longer to manage risk effectively. The market's behavior is described as rotating flow, where traders chase what's currently hot, which requires adjusting strategies to align with these dynamics.
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Actionable takeawayReduce position sizes and adjust strategies to account for increased volatility and rotating market dynamics.
Q&A
As a trader, should we compare our performance with the S&P?
The speaker advises against comparing performance to the S&P, as it is not a suitable benchmark for measuring trading success. Instead, they suggest focusing on consistent performance and adapting strategies based on market conditions. The speaker emphasizes that the S&P is a broad market index and that individual trading strategies should be evaluated independently.
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Actionable takeawayAvoid benchmarking against broad indices like the S&P; focus on individual strategy performance and adaptability.
Q&A
How do you know when a falling knife and when an explosion?
The speaker disagrees with the idea of stepping in front of a falling knife, preferring to avoid such risks. They suggest that stepping in front of an explosion is more dangerous, indicating a preference for avoiding high-risk situations.
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Actionable takeawayAvoid high-risk situations and prioritize safety in trading decisions.
Q&A
Is playing it safe with defined risk trades becoming too expensive?
The speaker suggests that defined risk trades are not going away, but they have become more expensive in today's volatile environment. If an account can afford it, there is a reason to try defined risk trades, especially compared to undefined risk strategies like naked calls or puts.
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Actionable takeawayDefined risk trades may be more expensive in high volatility environments, but they remain a viable strategy if the account can afford the risk.
Q&A
Why do traders prefer defined risk strategies?
Traders prefer defined risk strategies because they provide a clear boundary for potential losses, which is especially important in volatile markets. The speaker emphasizes that even with larger accounts, traders are often uncomfortable with undefined risk.
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Actionable takeawayDefined risk strategies are preferred by traders who seek comfort in having a clear risk boundary, even if they have larger accounts.
Q&A
How has your risk tolerance changed from when you started trading to now? Was that a good change or a bad one?
The speaker's risk tolerance has significantly decreased over time. In the early days, they were risking everything daily as a market maker, but now they have a much lower risk profile as a retail trader. They acknowledge that this change was necessary and beneficial for long-term sustainability.
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Actionable takeawayRisk tolerance should evolve as traders gain experience, moving from high-risk, high-reward strategies to more conservative approaches for long-term success.
Q&A
Is it a disadvantage or a blessing in disguise to not check on trades often because of work?
The speaker suggests that if P&Ls are showing success, it's a blessing in disguise as it prevents over-adjusting. If P&Ls are struggling, occasional checks on a phone might be necessary.
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Actionable takeawayAvoid over-adjusting by trusting your P&Ls if they are performing well, even if you can't monitor trades constantly.
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 there ever a time to take a symbol off your screen or put it in the penalty box?
Yes, if you find that you're pushing on a string, meaning that regardless of what trades you make, you're just spinning your wheels, not making or losing any money, it might be time to put this symbol in the penalty box for some short period of time.
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Actionable takeawayIf a symbol isn't yielding results and you're not making progress, consider temporarily removing it from your screen to avoid distractions and focus on more promising opportunities.
Q&A
What's the problem?
The problem was that customers had long positions in Google (GOOGL) with a straddle that expired worthless, resulting in a significant loss for the firm.
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Actionable takeawayLong straddles can expire worthless if the underlying stock doesn't move significantly, highlighting the importance of proper risk management and position sizing.
Q&A
How do retail traders deal with what they see in the news?
The speaker suggests that retail traders should focus on the market's current state rather than speculate on future events. They emphasize the importance of trading based on what is in front of them, rather than trying to predict or react to news that may not directly impact the market.
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Actionable takeawayRetail traders should avoid overreacting to news and instead focus on the current market conditions and their own trading strategy.
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 difference between buying power and net lick in trading?
Buying power is a percentage of net lick, which is used to determine risk exposure. Buying power is not a fixed risk amount but rather a tool to understand potential risk.
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Actionable takeawayAlways consider risk as a percentage of net lick, not buying power.
Q&A
How much should I be risking per trade at that account?
For an account size of $170,000, the speaker suggests risking no more than $10,000 on undefined risk trades and between $1,000 to $1,700 on defined risk trades. The risk percentage is around 5% of the account size.
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Actionable takeawayRisk management should be based on account size, with defined risk trades having lower risk percentages and undefined risk trades having higher risk percentages.
Q&A
What are your thoughts on SKHY?
SKHY is tradable, and the speaker has traded it a couple of times. The speaker mentions that it's very tradable and that the market there was tradable. The speaker also mentions that the implied volatility is high, but it's not a concern as long as the trader is comfortable with the risk.
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Actionable takeawaySKHY is considered tradable with high implied volatility, but the trader should be comfortable with the risk.
Q&A
Is there a hidden risk in private credit markets?
The speaker suggests that while there is a lack of transparency in private credit markets, it doesn't necessarily mean there's a hidden risk. They mention that these markets are usually tied to interest rates and have flexible variable rates, and they are on the books of the companies involved. However, they also express concern about the private derivatives market being more risky.
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Actionable takeawayThe lack of transparency in private credit markets may not necessarily indicate hidden risks, but the speaker expresses concern about the private derivatives market being more risky.
Q&A
Are you long crude oil or USO?
Tom is long Delta, not technically long CL. He is short puts and short calls, with calls further out of the money than puts.
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Actionable takeawayTom's position involves short puts and short calls with different strike prices.
Q&A
Does a poor man covered put call double diagonal outperform a naked straddle from a return on capital perspective over time?
The speaker states they have no idea and suggests that while it's possible, the naked straddle has significantly more risk. The poor man's double diagonal is considered less risky but may not outperform due to potential blow-ups.
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Actionable takeawayThe poor man's double diagonal is less risky than a naked straddle, but its performance depends on market volatility and the occurrence of blow-ups.
Q&A
Is the win rate actually a meaningless statistic without knowing the size of the average win and loss sitting next to it?
The win rate is not a meaningless statistic. It is important because building a process and methodology to know how to win is valuable. Some people just don't know how to win, and this leads to hoping for outlier moves or lottery tickets instead of focusing on consistent winning strategies.
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Actionable takeawayWin rate is important as it reflects the ability to consistently win, which is crucial for long-term success in trading.
Q&A
Have you ever been short an option and a three standard deviation move happens overnight?
The speaker acknowledges that this is a common scenario and that it can lead to significant losses.
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Actionable takeawayShorting options can lead to significant losses if a three standard deviation move occurs overnight.
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
What should traders do when the market moves against them despite doing everything correctly?
Traders should avoid adding to their positions and accept the reality of the market's movement. They should not dismiss the situation as ridiculous but instead address it by managing their risk and adapting to the current market conditions.
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Actionable takeawayAvoid adding to losing positions and accept market movements as part of the trading process.
Q&A
Should I feel good or terrified that I took more risk and made some money in the last 2 weeks?
It should make you feel good, but always be aware of what you're doing. It depends on what you did. Taking the risk, was the risk reasonable for the return that you got and what it might teach you is, you know, what? You're comfortable taking more risk. So, you know, you might have thought you just were stuck in a rut grinding and all of a sudden you go, 'Wow, I like this.' Now, if you think that it just happened and the stars aligned and seven things had to happen which are all unusual and they happen, you might want to pull that back a little bit. What I wouldn't do is keep pressing. I What I wouldn't do So, if you took some more risk, you're comfortable there, say, 'I'm okay keep some of that risk, taking a little bit off, maybe not going back to where you were, but hopefully you'll learn from it.' And I wouldn't be terrified. I'd just keep in the back of your mind, 'Oh, you know what? I'm going to average, you know, um $1,000 or $2,000 or $5,000 or $10,000 a week.' It just doesn't work like that. So, what happened to you here is actually more common and especially most investors, they make a lot of their money, and most investors and most traders make a lot of their money in in
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Actionable takeawayTaking more risk can lead to higher returns if the opportunity is correctly identified, but it's important to assess the risk-reward ratio and ensure it's reasonable.
Q&A
If I have a position that recovered fully from a sell-off and it's back to break even, do you close it and move on?
It depends on how quickly it happened and how much time you have left. If the position was against you and it comes back, you might leave it if you still believe in your original thesis. If it was a quick recovery, you might close it and move on.
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Actionable takeawayEvaluate the time frame and your original thesis before deciding to close a position that has recovered from a sell-off.
Q&A
What is the risk of the trade?
The risk is the market makers on, and the chance of making 50% of the trade is close to 88%.
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Actionable takeawayThe trade has a high probability of success with a 88% chance of making 50%.
Q&A
What is wash trading?
Wash trading is the practice of creating artificial volume by placing trades that cancel each other out, often to inflate the appearance of market activity. It can be incentivized by exchanges to attract market makers and create liquidity.
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Actionable takeawayWash trading is a form of market manipulation that can distort genuine market activity and is often incentivized by exchanges to attract liquidity providers.
Q&A
Should they be happy or should they be scared?
They should be happy for trying and learning from the experience.
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Actionable takeawayIt's important to applaud and learn from experiences, even if they involve taking more risk.
Q&A
How do you set profit and loss targets for scalps?
Profit and loss targets are set based on the day's range, with profit targets at 25% of the range and loss targets higher than profit targets. The speaker prefers a range of 30-90 points for the S&P, with profit targets at 10-15 points and loss targets at 15-20 points.
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Actionable takeawayProfit targets should be set at 25% of the range, while loss targets should be higher to manage risk.
Q&A
Does selling puts on an inverse ETF offer a better risk-reward trade than selling calls on the underlying?
The speaker states that there is no difference between the two strategies, but he does not know the answer definitively. He also warns that traders may fall in love with the additional premium from selling puts on inverse ETFs, which could be a false sense of security.
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Actionable takeawayThe speaker suggests that there is no difference between the two strategies, but he does not know the answer definitively. He also warns that traders may fall in love with the additional premium from selling puts on inverse ETFs, which could be a false sense of security.
Q&A
What is technically the optimal way or optimum way to manage any trade?
The optimal way to manage any trade is to roll up or down the untested side if there is one, or add one if there isn't. Alternatively, rolling out in time reduces risk and adds duration, giving more time to be right. The key is to reduce delta risk without adding more capital.
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Actionable takeawayStay disciplined, understand your profit target, and adjust trades by rolling or adding to reduce delta risk without increasing capital exposure.
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
Do you think I'm missing out on not looking for volatility opportunities?
The speaker suggests that if the trader is making money with their current strategy, they should continue it. They also mention that trying a small portion of capital in a different approach could be beneficial, but caution against abandoning a winning strategy.
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Actionable takeawayContinue a winning strategy and consider small-scale experimentation with volatility opportunities without abandoning the current approach.
Q&A
What are you talking about?
I did a trade that it that's a week long. It'll be instant gratification. It's the baby.
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Actionable takeawayThe speaker is referring to a trade that takes a week and provides instant gratification.
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 there any research to show that taking an undefined risk job offers a better risk versus reward?
The speaker acknowledges the question as interesting but does not provide specific research or data. Instead, they use the analogy of entrepreneurship versus corporate employment to discuss the concept of defined and undefined risk trades.
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Actionable takeawayThe discussion suggests that the risk-reward balance in jobs can be analyzed using the framework of defined versus undefined risk, but no empirical research is cited.
Q&A
Do you ever worry about global macro events? Or does the efficient market theory simply outweigh potential trending macro risks?
The speaker believes that the efficient market theory outweighs macro risks, arguing that macro events are unpredictable and not always priced in. However, they acknowledge that macro events can have significant impacts, as seen in historical examples like liberation day. The speaker suggests that focusing on market prices and price movements is more practical for traders than trying to predict macro events.
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Actionable takeawayFocus on market prices and price movements rather than macroeconomic events for trading decisions.
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
Do you ever leave resting futures orders in overnight? Are they only to close or would you ever leave a new buy or sell to open order in after hours?
The speaker explains that resting futures orders are typically used to close positions while sleeping. They do not place new buy or sell orders to open during overnight hours due to the uncertainty of market movements. However, they may place resting bids or offers to close positions if they are long or short.
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Actionable takeawayTraders should avoid placing new orders to open during overnight hours due to the unpredictable nature of market movements and instead focus on closing existing positions.
Q&A
Would you still trade with as much risk if you were using 70 to 80% of your net worth?
The speaker acknowledges that when younger, they took more risk without fully understanding the implications. They suggest that with more experience and accumulated wealth, they would approach such risks differently, emphasizing the importance of age and experience in risk management.
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Actionable takeawayAs traders age and accumulate wealth, they should adjust their risk exposure to reflect their current financial situation and experience level.
Q&A
In your experience, what's the most common reason why disciplined, dedicated, smart people often fail to become successful traders?
The most common reason is that these individuals may lack the necessary mindset or adaptability for trading. The speaker notes that even highly intelligent people, including those with advanced degrees, have failed in trading due to factors like lack of discipline, dedication, or an unsuitable attitude toward risk and money. The example of a golf match illustrates how personal attitudes toward money and risk can significantly impact performance.
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Actionable takeawayDiscipline, dedication, and a suitable mindset are crucial for success in trading, even for highly intelligent individuals.
Q&A
Did you get everything you wanted here?
The speaker humorously asks if the audience got everything they wanted, implying that the trades discussed are profitable but require effort and execution.
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Actionable takeawayThe speaker suggests that successful trading requires effort and execution, and that the audience should be prepared to work for their profits.
Q&A
How do you know when to take a loss and cut bait?
The answer emphasizes that there is no standard answer to this question and it is highly subjective. However, it suggests having a game plan with predefined guardrails, such as profit targets and loss limits, based on the trade's nature (scalping vs. longer-term positions). It also mentions the importance of consistency in managing losses and not letting losses exceed gains.
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Actionable takeawayTraders should establish clear rules for managing losses and profits, including predefined stop-loss levels and profit targets, based on the trade's characteristics.
Q&A
What percentage of bad trades can turn around?
The speaker states that 100% of his trades after he covers them turn around, but he acknowledges that the national norm is likely around 50%. He also mentions that about 80% of all trades will be losers at some point, but 50% of those losing trades can turn around if the trader stays in the trade.
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Actionable takeawayTraders should consider the possibility that a significant portion of losing trades can turn around, but this should not be relied upon as a strategy for holding onto losing positions indefinitely.
Q&A
Do you use stop limits to adjust or close a trade?
The speaker states that they do not use stop limits regularly, except in extreme situations where they cannot monitor the trade, such as when sleeping. They also mention that they rarely adjust defined risk trades.
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Actionable takeawayAvoid using stop limits unless necessary, as they can lead to unnecessary losses due to market volatility.
Q&A
Do you adjust defined risk trades?
The speaker states that they rarely adjust defined risk trades, with 90%+ of the time they do not. They mention that adjustments are more common for undefined risk trades. The speaker also notes that adjustments are typically made for synthetic strangles or iron condors under specific conditions.
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Actionable takeawayDefined risk trades are generally not adjusted, with exceptions for specific strategies like synthetic strangles or iron condors under certain conditions.
Q&A
How do I know whether to adjust and defend or close to take a loss?
The decision to adjust or close a losing trade should be based on the amount of additional capital required. If the capital needed is minimal, adjust and defend. If it's significant, close the position.
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Actionable takeawayAssess the capital required for adjustment. If it's minimal, adjust; if significant, close the trade.
Q&A
How will AI impact my trading? Will it help or hurt my results?
AI will help traders by enabling better risk management, defining risk parameters, and providing real-time insights into market movements and volatility. It can also monitor positions 24/7 and alert traders to relevant events, enhancing their ability to make informed decisions.
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Actionable takeawayAI can enhance trading by providing real-time data and risk management tools, which can help traders make more informed decisions.
Q&A
Does success today depend less on obtaining information and more on interpreting it, managing risk, and maintaining discipline?
Yes, the speaker asserts that success in trading today is more about interpreting information, managing risk, and maintaining discipline rather than simply obtaining information. This is due to the increased availability of information and the need for disciplined risk management in volatile markets.
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Actionable takeawayFocus on interpreting market data, managing risk, and maintaining discipline rather than relying solely on information acquisition.
Q&A
What are the keys to opening a new position?
The keys to opening a new position include controlling liquidity, implied volatility, strategy, and subjective assumptions about price direction. The speaker emphasizes focusing on controllable factors rather than external events.
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Actionable takeawayTraders should focus on controllable factors like liquidity, volatility, and strategy when entering new positions.
Q&A
Is it wrong to make a trade if you believe in something?
The speaker states that it is not wrong to make a trade based on belief, but emphasizes the importance of not having fixed expectations. The speaker acknowledges that belief can influence trading decisions but stresses the need for flexibility and adaptability in the face of market changes.
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Actionable takeawayTraders should base their decisions on belief but remain flexible and avoid fixed expectations.
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 are your favorite Tom trades of the week?
Tom's favorite trades of the week include Apple short strangle 43%, hood short put spread 20%, SMH short iron condor 9 19%, and coin short put 18%.
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Actionable takeawayTom's favorite trades of the week include Apple short strangle, hood short put spread, SMH short iron condor, and coin short put.
Q&A
Instead of rolling a losing trade, if I think the underlying will continue down, I close for a loss 21 DTE and wait for a move up and opening a delayed roll. What do you think?
The speaker suggests that covering the trade covers all the risk and that there is nothing else to think about. However, the speaker also suggests that rolling the trade out and either up or down can reduce some of the risk of the trade.
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Actionable takeawayCovering a losing trade covers all the risk, but rolling the trade out can reduce some of the risk.
Q&A
Why do you want to do it?
You can be wrong and still make money.
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Actionable takeawayBeing wrong doesn't necessarily mean losing money in shorting options.
Q&A
What are the key risks of managing others' money?
The key risks include loss of objectivity, asymmetric risk (blame without reward), emotional burden, legal liability, and potential loss of relationships. These risks are often underestimated, even by experienced individuals.
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Actionable takeawayThoroughly understand the legal and financial implications before managing others' money.
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 is your recommendation for managing risk in a low volatility environment?
The recommendation is to wait for high IVR (Implied Volatility Ratio) to sell premium or buy spreads. This approach is believed to increase the chances of success by taking advantage of the market's volatility characteristics.
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Actionable takeawayWait for high IVR to sell premium or buy spreads in low volatility environments to increase the chances of success.
Q&A
Why do people hire consultants?
People hire consultants primarily to transfer liability away from themselves, especially executives, to avoid personal responsibility for decisions. This is a recurring theme in the discussion.
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Actionable takeawayHiring consultants is often a strategic move to mitigate personal liability rather than for expertise.
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
What is the best way to exit a successful trade?
The best way to exit a successful trade is to take profits and exit the trade when the opportunity has been realized, rather than chasing further gains. This approach prevents overexposure and potential losses from market reversals.
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Actionable takeawayTake profits and exit the trade when the opportunity has been realized.
Q&A
What is the weight you guys put on backtesting compared to stress testing your account?
The speaker prefers stress testing over backtesting, as backtesting is seen as looking back and not providing a full picture. Stress testing is used to evaluate account size limits and position sizes, pushing them to near-zero levels. The speaker also mentions using smaller position sizes and selling closer to the money for shorter-term trades.
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Actionable takeawayStress testing is emphasized over backtesting for evaluating trading strategies, with a focus on position sizing and risk management.
Q&A
Can buying VIX calls help hedge against a market correction or crash?
Buying VIX calls is not recommended as a hedge for iron condors due to the high cost of VIX premiums and the difficulty in timing the market. Instead, skewing the iron condor with a small amount of negative delta provides better protection at a lower cost.
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Actionable takeawaySkewing iron condors with negative delta is a more effective and cost-efficient hedge than buying VIX calls.
Q&A
How do you think about position sizing differently on a $50 stock versus a $500 stock when you're selling puts?
The speaker explains that position sizing should be based on buying power and the price of the underlying. For higher-priced stocks, smaller position sizes are used to avoid overexposure, while lower-priced stocks allow for larger positions. The key is to ensure that the trade fits within the trader's overall capital allocation and risk management framework.
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Actionable takeawayPosition sizing should be adjusted based on the underlying stock's price and the trader's buying power to ensure proper risk management.
Q&A
If you're uncomfortable with an existing position, should you close it?
The speaker suggests closing a trade if the IVR has dropped significantly, if the underlying assumption has changed, or if the position is too capital-intensive or deemed too risky. Reducing the size of the position is recommended as a quick and impactful move to provide mental relief and clarity.
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Actionable takeawayClose a trade if the IVR drops significantly, the underlying assumption changes, or the position is too risky. Reducing the size of the position is a quick way to manage risk and provide mental relief.
Q&A
Why do you adjust trades on the Tasty platform?
The Tasty platform allows for quick adjustments without thinking, which is essential for managing risk and making rapid trades. The platform was built specifically for this purpose, changing the way the industry works.
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Actionable takeawayUse a platform that supports quick adjustments to manage risk effectively.
Q&A
Is the market ignoring risk?
The market may be ignoring traditionally considered risks, such as geopolitical or macroeconomic factors. This could indicate a period of irrationality where markets remain irrational longer than expected. However, there is also a possibility that the market is reacting to stronger underlying factors that are not yet fully realized.
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Actionable takeawayThe market may be ignoring traditional risks, but this could be due to irrationality or stronger underlying factors.
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
What would be the worst thing to be fed to?
The worst thing to be fed to is piranhas, as they would rip you apart. Sharks and lions are also mentioned as dangerous, but piranhas are considered the worst due to their ability to tear apart prey.
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Actionable takeawayAvoid situations where you are exposed to high-risk scenarios, such as being 'fed to piranhas' metaphorically, which represents being in a high-risk trading environment.
Q&A
What is a buffer fund or buffer ETF fund?
A buffer fund or buffer ETF fund is a strategy where you buy a stock or an index and then sell a call and buy a put for a net credit, providing limited downside risk and limited upside.
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Actionable takeawayThis strategy involves selling a call and buying a put to create a synthetic short position, which limits both downside and upside potential.
Q&A
What advice can you give for those who have not traded markets with massive continued draw downs or pullbacks?
Maintain position size in check, avoid selling puts into red markets, and sell puts when the market is grossly oversold. Avoid selling puts in overvalued stocks like SpaceX or Nvidia.
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Actionable takeawayKeep position sizes small and avoid selling puts in overvalued stocks during market downturns.
Q&A
What's the best way to defend a bad short position when the market's at record highs?
The speaker suggests selling puts on bonds as a defensive strategy when the market is at record highs. This allows for potential profit if the market declines while providing downside protection.
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Actionable takeawayConsider selling puts on bonds as a defensive measure during periods of high market volatility.
Q&A
What is the best way to defend a bad short position when the market is at record highs?
The speaker suggests pulling back and waiting for the market to correct. They emphasize the importance of cutting back on the position and not holding onto it if the market is moving against the short position.
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Actionable takeawayWhen a short position is performing poorly, it is advisable to reduce the position size and wait for a potential market correction to avoid further losses.
Q&A
What does it mean to pull back in a position?
Pulling back in a position means reducing the size of the position to mitigate risk, especially in a losing short position when the market is moving sharply upwards. This action helps to lock in losses and reduce delta, providing a sense of control and peace of mind.
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Actionable takeawayReduce position size in a losing short position to mitigate risk and lock in losses.
Q&A
How do you manage concentration risk when you have a stake in a single company?
Managing concentration risk involves diversification, hedging, and strategic adjustments. The speaker mentions that in certain situations, such as after a deal, there may be restrictions on trading or hedging, which can limit the ability to diversify. However, they emphasize the importance of being aware of concentration risk and taking steps to mitigate it when possible.
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Actionable takeawayDiversification and hedging are key strategies for managing concentration risk, but they may be limited by specific restrictions or circumstances.
Q&A
What do you think about the idea of waiting till a true recession cycle like a 2008 kind of disaster to invest in Bitcoin?
The speaker acknowledges the idea but warns that waiting for such an event could be too late. They suggest that if a recession does not occur, the opportunity might be missed. The speaker also notes that predicting such events is difficult and that one should be prepared for different scenarios.
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Actionable takeawayAvoid waiting for a specific event to invest; consider market conditions and be prepared for different outcomes.
Q&A
Is writing calls against a large position risky?
The speaker suggests that writing calls against a large position is not risky to the market, but it could be risky for the counterparty. They emphasize that the market is not typically involved in such large trades.
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Actionable takeawayWriting calls against a large position may not be risky to the market, but it could be risky for the counterparty.
Q&A
Have you ever used market indicators such as trend T R I N or P call puts in the call ratio, things like that, for entry or exits or risk on, risk off, that kind of thing?
The speaker mentions there are 8,000 advanced decline, unchanged stocks indicators and that they don't look at them for an opening trade. They also mention not looking at tren or any of those things in 30 years.
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Actionable takeawayThe speaker does not use market indicators like trend T R I N or P call puts for entry or exits, and has not used them in 30 years.
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 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
What is the importance of accepting market irrationality?
Accepting market irrationality is crucial for a trader's survival. It allows traders to make decisions despite unpredictable market behavior, which is a key aspect of long-term success in trading.
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Actionable takeawayTraders must accept that markets can behave irrationally and adapt their strategies accordingly.
Q&A
Does the amount of national debt matter to traders?
The speaker states that national debt does not directly affect trading decisions and is not part of any equations traders use. They suggest focusing on controllable factors rather than worrying about uncontrollable ones like national debt.
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Actionable takeawayNational debt is not a direct factor in trading decisions and should not be a primary concern for traders.
Q&A
If you hit your targets for the year, do you ever put your money into ASCOV or something and just leave for the rest of the year or you keep on pushing every day?
The speaker has never left the market and keeps all strategies consistent. They do not reduce strategies but keep them consistent.
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Actionable takeawayMaintain consistent strategies and avoid reducing them unless necessary.
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
Is trade size the only true way to manage outlier risk?
Trade size is considered the primary method to manage outlier risk, especially for naked shorts. However, for options traders, using spreads can cap outlier risk. Outlier risk is unquantifiable and cannot be managed through stop orders or other traditional methods.
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Actionable takeawayOutlier risk is best managed through trade size and strategic use of options spreads, as it is unquantifiable and cannot be controlled through stop orders.
Q&A
What is outlier risk?
Outlier risk refers to the risk of unexpected market shocks that can lead to significant losses. It is the risk of events that are statistically unlikely but can have a large impact on trading outcomes.
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Actionable takeawayOutlier risk is a critical consideration in trading, and managing it requires a focus on position sizing rather than relying solely on predictive models.
Q&A
Can you stress test for outlier risk?
Stress testing for outlier risk is possible using historical events like the October 1987 crash, 9/11, or Japan's market crash. While it's not perfect, it provides insight into how positions might perform in extreme situations. AI tools can also be used to simulate and test various scenarios, making the process more efficient.
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Actionable takeawayStress testing using historical events and AI tools can help traders understand and manage outlier risk in their strategies.
Q&A
What is the purpose of a collar strategy for a portfolio of correlated assets?
A collar strategy is used to limit downside risk while retaining upside potential for a portfolio of highly correlated assets. It involves selling call spreads above the market and buying put spreads below the market to create a protective barrier.
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Actionable takeawayThe collar strategy is a method to protect against downside risk while maintaining upside potential in a portfolio of correlated assets.
Q&A
How will I know when to pivot versus when to persist in my new business?
The speaker suggests that every new business requires a pivot, and it's important to be prepared to pivot rather than having a contingency plan. They emphasize that pivoting is a natural part of business development and that it's easier to pivot in business compared to personal relationships due to less emotional involvement.
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Actionable takeawayPivoting is a necessary part of business development, and it's important to be prepared to pivot rather than having a contingency plan.
Q&A
How will I know when to pivot?
The speaker states that if you don't know when to pivot, you're out of business. Pivoting is a continuous process of learning and adapting based on what works and what doesn't. It's not a contingency plan but an ongoing adjustment to stay relevant and competitive.
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Actionable takeawayPivoting is essential for business success, and the ability to recognize when to pivot is critical. It requires continuous learning and adaptation to market conditions.
Q&A
How much capital should be kept on the sidelines when volumes are light and volatility is at the lower end of its range?
The speaker suggests reducing the capital allocation from 50-70% to 40-50% or even lower, emphasizing the need to maintain liquidity for opportunities when volatility increases. The rationale is that significant market moves and risks often occur when volatility is low, and being prepared with dry powder allows traders to capitalize on sudden changes.
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Actionable takeawayReduce capital allocation to the sidelines in low volatility environments to maintain liquidity for potential opportunities.
Q&A
When do you start reducing size and taking a loss on a position that's gotten out of hand?
Traders should start reducing size or taking a loss when a position becomes uncomfortable and emotionally disturbing. The key is to avoid adding to the position and make adjustments to reduce risk, such as rolling out in time or reducing size. If the position is causing significant emotional distress or financial harm, immediate action is necessary.
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Actionable takeawayReduce position size or take a loss when a trade becomes emotionally uncomfortable or financially harmful.
Q&A
Is a 7 to 10% monthly return on a $30,000 account a realistic goal?
A 7 to 10% monthly return on a $30,000 account is considered unrealistic and excessively risky. Achieving 1.5 to 3% monthly is a more realistic and achievable goal, allowing for a broader range of strategies and reducing the need for high-risk positions.
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Actionable takeawaySet realistic return goals for small accounts to avoid excessive risk and ensure sustainable trading practices.
Q&A
In a scenario where the untested side has already hit 50 to 70% of its max profit, is it better to just close it for the profit and not roll it or is the roll still preferred for the credit benefit to the overall position?
It is not better to just close it. It is better to adjust the untested side so it continues to take risk off the tested side. You never leg out of that trade. You need that untested side to hedge the risk on the tested side.
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Actionable takeawayAdjust the untested side to hedge risk on the tested side rather than closing it out.
Q&A
What do you mean by take profit at 50%?
Taking profits at 50% refers to capturing half of the expected move based on implied volatility, not the forecasted move from charts. This is a strategy used by premium sellers and positions with defined expiration cycles, aiming for a high probability of success.
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Actionable takeawayUse implied volatility to calculate the expected move and take profits at 50% of that move for premium sellers and positions with defined expiration cycles.
Q&A
Is it possible to make $5,000 a week with defined risk trades without constant monitoring?
The speaker acknowledges that it is possible to achieve a 20% return on a $250,000 account with defined risk trades, but doubling one's money is not realistic. The speaker suggests that the goal should be adjusted to a more achievable return, and that the strategy should involve selling premium (e.g., shorting options) rather than directional trades with profit caps.
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Actionable takeawayAdjust expectations to a 20% return on a $250,000 account using defined risk strategies.
Q&A
Can you explain the situation where a trader gets charged interest after selling puts and being assigned?
The trader in the question sold puts and was assigned, which required covering the position. The trader used a cash substitute (like SGOV or T-bills) to cover the margin, but interest was charged the next day. The speaker explains that this is due to the T+1 settlement rule, where the sale doesn't occur until the next day, and interest starts accruing the following day. The trader could have closed the position to avoid the interest charge.
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Actionable takeawayAvoid using cash substitutes to cover margin requirements if you're selling options, as it can lead to interest charges due to settlement delays.
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
How would you go about moving from defined risk rates to undefined risk trades in a small account?
The speaker suggests starting with lower-priced stocks and using a small percentage of account capital to test the waters. They emphasize the importance of careful management to avoid overexposure and loss of diversification. They also mention that undefined risk trades offer a higher probability of profit but require careful execution.
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Actionable takeawayStart with lower-priced stocks and use a small percentage of account capital to test undefined risk trades, ensuring careful management to avoid overexposure and loss of diversification.
Q&A
Do you guys find all your own trades or do you have some other source?
The speaker and their colleagues find their own trades. They do not rely on external sources but may consider trade ideas from others. They acknowledge that they sometimes take different approaches to the same trade ideas and that they listen to ideas from emails or other traders, but they do not necessarily follow them.
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Actionable takeawayTraders should find their own trades and consider ideas from others but not necessarily follow them.
Q&A
How would you hedge the potential downside of a long portfolio?
To hedge the potential downside of a long portfolio, one can sell upside calls or buy downside puts. This approach provides protection without necessarily selling the underlying holdings. The strategy involves selecting round numbers for the strike prices and aligning the position size with the portfolio value.
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Actionable takeawayUse options strategies like selling upside calls or buying downside puts to hedge long positions.
Q&A
What is the current state of the VIX index?
The VIX index has increased by 10%, indicating heightened market volatility and uncertainty. The speaker acknowledges this as a significant development and notes that it is a key factor in their trading decisions.
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Actionable takeawayThe VIX index is a critical indicator of market sentiment and risk, and its increase suggests a need for caution in trading strategies.
Q&A
Would you buy a company that has seen its stock price increase dramatically in a short period?
The answer is no. While some traders may chase momentum, the price increase may not be supported by fundamental value. The risk of a rapid reversal is high, and traders should implement strict stop-loss strategies to manage potential losses.
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Actionable takeawayAvoid buying stocks that have experienced rapid price increases without fundamental support. Use strict stop-loss strategies to manage risk.
Q&A
Do people do things like strangles every five minutes or ten minutes?
Yes, some traders use strategies like strangles frequently, such as every five or ten minutes. However, this is considered a high-risk approach and is not the same as other strategies that use time to their benefit.
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Actionable takeawayFrequent trading strategies like strangles can be high-risk and require careful consideration.
Q&A
Is it better to place the same trade across all margin accounts and size them based on net or diversify trades across them?
Diversification is recommended. The speaker suggests that if the trade goes well, all accounts will benefit, but if it goes bad, the pressure of managing multiple accounts can be overwhelming. The answer emphasizes that the same trade should be executed based on size, with appropriate sizing for each account.
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Actionable takeawayDiversify trades across accounts and size them appropriately based on net worth to manage risk and reduce pressure.
Q&A
What if you bought it close to the all-time highs?
The speaker suggests that buying close to all-time highs could be risky, as it depends on the company's performance and market conditions. They mention that if a company is acquired, it might be seen as a success, but if it fails, it could be a failure for shareholders.
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Actionable takeawayBuying stocks near all-time highs carries significant risk, as the company's future performance and market conditions will determine the outcome.
Q&A
Do Greeks really matter?
The speaker states that Greeks are highly recommended to be managed in a runaway market, emphasizing their importance in risk management. They note that platforms like thinkorswim have popularized the use of Greeks, indicating their growing significance in trading.
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Actionable takeawayGreeks are important for managing risk in volatile markets, and their use has become more widespread with the development of advanced trading platforms.
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
What is the significance of beta weighted deltas in trading?
Beta weighted deltas simplify position management by allowing traders to assess overall risk without comparing individual assets. This method pre-prices changes in underlying assets and is used by high-frequency firms for effective risk management.
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Actionable takeawayBeta weighted deltas are a useful tool for simplifying risk assessment across multiple assets.
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
Most traders are taught never let a winning trade turn into a losing trade.
The speaker argues that this rule would have kicked out nearly every generational winner too early. They suggest that taking profits early is a better strategy, as letting a winning trade continue can lead to losses. The speaker also mentions that most trades have a 50/50 chance of being a winner or a loser, making the rule less effective.
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Actionable takeawayTaking profits early is a better strategy than trying to let a winning trade continue, as it can prevent losses.
Q&A
any questions with that, uh email Tom at lostdog.com. He'll send it to me so I can answer to you.
email Tom at lostdog.com for questions
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Actionable takeawaycontact Tom for questions
Q&A
How do you defend a bad trade in a runaway market?
To defend a bad trade in a runaway market, reduce your delta by adjusting positions, such as selling puts or moving them up, or rolling out in time to reduce delta by about 25%. These actions help manage risk and recenter the trade.
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Actionable takeawayReduce delta through adjustments like selling puts or rolling out in time to manage risk in a runaway market.
Q&A
What should you do if you have a bad position in a runaway market?
Reduce your delta by 25% with each adjustment. This involves recentering the trade, rolling out in time, or rolling the position. Additionally, reduce your position size to mitigate further losses.
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Actionable takeawayAdjust delta and reduce position size to manage risk in a runaway market.
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
How do you go about trading during earnings?
Trading during earnings requires directional trades, and the speaker avoids them unless there's a stock they want to own. They usually sell premium to stay engaged.
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Actionable takeawayDirectional trading is necessary when trading during earnings
Q&A
What was the reason for selling a put spread?
The speaker sold a put spread due to the Nasdaq's upward movement and the belief that the market would not move significantly downward.
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Actionable takeawayThe speaker sold a put spread based on the Nasdaq's upward movement and the belief that the market would not move significantly downward.
Q&A
Any advice for a rookie PS I hate my day job.
The speaker advises that making 1.5% daily gains through day trading is unrealistic for a retail trader, especially with a small account. They suggest starting with long positions and emphasize learning about risk and decision-making through trading, noting it can be a life-changing experience.
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Actionable takeawayDay trading for significant daily gains is not realistic for most retail traders. Starting with long positions and focusing on learning about risk and decision-making is recommended.
Q&A
Is it okay to step outside your comfort zone when investing?
Yes, stepping outside your comfort zone is encouraged for growth, but it should be done with proper preparation and resources. It is important to use available support systems to ensure a positive outcome.
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Actionable takeawayInvesting in unfamiliar areas like crypto, options, or futures can be beneficial but requires careful planning and the use of available resources.
Q&A
What do you think about investing in illiquid, non-traditional investments like venture funds, private equity, or non-public stocks?
The speaker suggests that while these investments can be considered, they should be a small percentage of one's net worth due to their illiquidity and risk. They emphasize the importance of being cautious and not overexposing oneself to these types of investments.
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Actionable takeawayInvest in illiquid, non-traditional assets only if they constitute a small portion of your net worth and you are prepared for the risks involved.
Q&A
What are the rules of engagement when investing outside of your comfort zone?
The speaker outlines several rules of engagement for investing outside of one's comfort zone. These include keeping capital commitments small, believing in the concept and the people behind it, and not investing on a pitch alone. The speaker also emphasizes the importance of having faith in the person pitching the investment.
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Actionable takeawayInvestors should keep their capital commitments small, believe in the concept and the people behind it, and not invest on a pitch alone.
Q&A
Is standard deviation the basis for everything to do with trading?
Standard deviation is not the basis for everything in trading, but it is a fundamental metric used for mechanical measurements and optimization. It helps determine expected market moves and buying power, with one standard deviation representing the expected move and two standard deviations used for buying power calculations.
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Actionable takeawayStandard deviation is a key metric for understanding market volatility and risk, but it should be used in conjunction with other tools and strategies.
Q&A
How much of your liquid net worth should be in active trading accounts?
The speaker states that the percentage of liquid net worth allocated to active trading accounts depends on age, financial situation, and future outlook. Younger individuals with lower net worth may allocate a higher percentage (e.g., 20-30%), while older individuals with higher net worth may allocate a smaller percentage (e.g., 25%). The speaker also notes that their own allocation is a small percentage of their net worth, but their children may have a higher allocation.
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Actionable takeawayThe percentage of liquid net worth allocated to active trading accounts should be based on age, financial situation, and future outlook.
Q&A
Which is more important, the entry price or the exit price when making a trade?
The entry price is more important because it is under the trader's control. The exit price, while important, is not as controllable and depends on market conditions. The speaker emphasizes that traders should focus on controlling what they can, which is the entry decision.
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Actionable takeawayTraders should prioritize controlling the entry price as it is within their control, while the exit price should be managed based on predefined objectives or stop-loss strategies.
Q&A
Are investors too focused on returns?
The speaker suggests that investors are overly focused on returns, which can lead to aggressive strategies with high risk. They emphasize the importance of balancing risk and opportunity cost.
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Actionable takeawayInvestors should consider the risks of being overly aggressive versus the opportunity cost of being too conservative.
Q&A
When you diversify with positions in different products like commodities, futures, metals, currency trades, what about that?
Diversification across different products is recommended to manage risk. It's important not to be all in on a single asset or strategy, as this increases unnecessary risk. Having a mix of long equities, short premium, and other instruments can help spread risk. The key is to maintain reasonable trade sizes relative to your account size.
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Actionable takeawayDiversify across different products and maintain reasonable trade sizes to manage risk effectively.
Q&A
Is relying on these ETFs for our primary income a reasonable strategy or is there more risk to the principle than the yield suggests?
It's a sound market strategy if the market cooperates, but there are risks such as market movement, fees, and the use of margin. It's not guaranteed and may not be suitable for all account sizes.
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Actionable takeawayConsider the risks of market movement and fees, and avoid using margin if possible.
Q&A
Is it better to keep the unused capital in something secure like treasuries or should I passively invest in something like SPY or QQQ for historically higher returns?
The speaker suggests keeping unused capital in secure assets like treasuries or equivalents (BIL/ESG) rather than passively investing in SPY or QQQ, especially at all-time highs. They mention that while SPY and QQQ may offer higher returns, the current market conditions and risks make them less advisable at this time.
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Actionable takeawayAvoid passive investing in SPY or QQQ at current market highs; prefer secure assets like treasuries for unused capital.
Q&A
Do I close it or hold it to 21 days?
Close it quickly to secure profit
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Actionable takeawayClose the position quickly to secure profit
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
What is the practical question regarding risk?
The practical question is less about whether to sell everything and more about how much risk you're willing to take if you're a passive long.
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Actionable takeawayThe practical question is about risk tolerance in a passive long position.
Q&A
When SpaceX was trading at like in the 170 range, I I sold some puts. Okay. you know, at 155
The speaker sold puts at 155 when SpaceX was trading at 170, but the stock dropped significantly, leading to losses. The speaker had to roll the puts out and eventually recovered some of the losses.
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Actionable takeawayWhen selling puts, it's important to consider the expected move and not get too close to the money.
Q&A
Do you think the future of trading platforms lies less in predicting markets and more in helping traders objectively verify they have a repeatable probabilistic edge before increasing risk?
The speaker believes the future of active trading will involve mechanical edges based on historical data, reducing mechanical mistakes, but traders will still need to be right about market movements.
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Actionable takeawayThe speaker suggests that future trading platforms will focus on mechanical strategies and historical data to reduce errors, but traders will still need to make correct market predictions.
Q&A
Why did you change from buying naked calls and puts to selling premium?
The trader changed strategies due to the limitations of a small account size and the need for defined risk. Selling premium through spreads and iron condors allows for better risk management and profitability.
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Actionable takeawayTraders with small accounts should consider strategies with defined risk, such as spreads and iron condors, to manage risk and improve profitability.
Q&A
What do you need to trade Southwest for?
The speaker is questioning the rationale for trading Southwest, suggesting that the company's performance might not be a reliable indicator for trading decisions.
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Actionable takeawayThe speaker is questioning the rationale for trading Southwest, suggesting that the company's performance might not be a reliable indicator for trading decisions.
Q&A
Are earnings trades more risky or less risky when volatility drops?
Earnings trades are less risky when volatility drops because the expected move is smaller. However, they can be more risky if there is a market shock, as the risk is not adequately priced into the options.
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Actionable takeawayEarnings trades in low volatility environments have lower expected moves but can be riskier if there is a market shock.
Q&A
What is the expected move for the stock discussed?
The expected move for the stock is $26, which is a significant move given the stock's current price of $5.
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Actionable takeawayThe expected move of $26 indicates a high potential for price movement, which can be leveraged in trading strategies.
Q&A
What are some of the most common mistakes to avoid when building a portfolio?
The speaker highlights the importance of consistent position sizing, diversification across multiple underlyings, and avoiding high correlation among holdings. They emphasize the need to allocate capital across different sectors and avoid overexposure to correlated assets, which can lead to significant losses during market downturns.
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Actionable takeawayAvoid overcorrelation in portfolio holdings and maintain consistent position sizing to manage risk effectively.
Q&A
Would you do a credit spread or a debit spread?
The speaker prefers a credit spread in this case, as it is a risk-one-to-make-one trade. The trade is considered a pure 50/50 shot with a 29-tick spread, risking $450 to make $550.
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Actionable takeawayThe speaker prefers a credit spread when the expected move is high and the trade is a risk-one-to-make-one.
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
How much of a role do Greeks play in your everyday trading?
Greeks play a moderate role, but the speaker emphasizes that buying power reduction (BPR) is more important for managing risk. BPR helps keep gamma, theta, and other Greeks in check, and it is used as a back-of-the-envelope method to quantify risk on a trade.
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Actionable takeawayFocus on buying power reduction as a key risk management tool alongside traditional Greeks.
Q&A
Is there a rule of thumb for delta to net lick?
The speaker provides a rule of thumb for delta exposure based on notional equivalent. For $100,000, a reasonable delta range is 200 deltas per every 100,000, or 20 deltas per every 10,000. The speaker notes that going beyond this range (e.g., 800 deltas for $100,000) is their absolute maximum.
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Actionable takeawayUse notional equivalent to determine delta exposure, with a recommended range of 200 deltas per $100,000 and 20 deltas per $10,000.
Q&A
Does available leverage impact delta to net liquidity or does it just reduce the risk of ruin?
Available leverage impacts delta and liquidity but does not reduce the risk of ruin. Higher leverage increases the risk of ruin. A reasonable amount of leverage is typically 2-4 times net worth, with 10-20 times being excessive.
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Actionable takeawayUse leverage responsibly, keeping it within 2-4 times net worth to manage risk effectively.
Q&A
What is the recommended leverage for a $100,000 account?
The speaker suggests that 14x leverage is too high for a $100,000 account, implying that lower leverage is more appropriate for risk management.
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Actionable takeawayAvoid using excessive leverage on a $100,000 account to prevent significant capital loss.
Q&A
How do you handle when you have really good win streaks?
A lot better than we handle really bad losing streaks. A lot lot better.
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Actionable takeawayHandling win streaks is better than handling losing streaks.
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
What is the impact of loss aversion on trading behavior?
Loss aversion leads to holding onto losing positions in hopes of breaking even and selling winning positions too quickly, which can result in increased risk-taking and poor trading outcomes.
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Actionable takeawayTraders should be aware of loss aversion and its impact on decision-making to avoid common pitfalls.
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
What is meant by skew?
Skew points out the velocity, the expected velocity of the stock's movement. It represents how the market interprets velocity of risk. Call skew indicates expected upside velocity, while put skew indicates expected downside velocity.
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Actionable takeawaySkew is a measure of market expectations about the velocity of stock movement, indicating whether the market anticipates upward or downward movement.
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
What is one of the most important mechanics to successful trading that nobody ever talks about?
The most important mechanic to successful trading that is often overlooked is trade size. The speaker emphasizes that maintaining control over trade size is essential for risk management and overall trading performance.
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Actionable takeawayTrade size is a critical factor in successful trading that should be carefully managed.
Q&A
What is the main takeaway from the discussion on trade size?
The main takeaway is that maintaining a consistent trade size is crucial for successful trading. It helps manage risk and ensures that no single trade has disproportionate impact on the overall portfolio.
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Actionable takeawayStick to a consistent trade size to manage risk effectively.
Q&A
Does the speaker think the S&P 500's drop is surprising?
The speaker acknowledges that the S&P 500's drop is somewhat surprising, as it was up the previous night.
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Actionable takeawayThe speaker is surprised by the S&P 500's drop, indicating that it is an unexpected development.
Q&A
What can I do in SpaceX to mitigate some of that long delta but still put on a semibullish trade?
Buy the 125 call and sell two of the September 145s.
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Actionable takeawayUse a call diagonal spread to mitigate long delta while maintaining a bullish stance.
Q&A
What's the difference between a very far out of money short strangle and a closer to the money iron condor?
The short strangle has fewer contracts and a higher probability of profit, while the iron condor has more contracts and a lower probability of profit.
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Actionable takeawayThe short strangle is preferred for its higher probability of profit and fewer contracts.
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
What do you tell someone who is concerned about their covered call strategy?
The key is to recognize when the strategy is working too well. If your stocks are getting called away frequently, it's a sign that you should consider adjusting your strategy. Close the trade and take profits, then sell an out-of-the-money put to reduce capital requirements and maintain some long delta. This improves the probability of profit from around 60-65% to 80%, while still keeping a small long delta and short premium.
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Actionable takeawayIf your covered call strategy is working too well and your stocks are getting called away, consider adjusting your strategy by closing the trade and taking profits, then selling an out-of-the-money put to reduce capital requirements and maintain some long delta.
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 are the reasons for career stalls?
Career stalls are often due to risk avoidance, where individuals reject challenges out of fear of failure. The speaker also notes that the fear of success can be more significant than the fear of failure, leading to stagnation. Additionally, the fear of being penalized for incorrect actions or not receiving credit for success can deter individuals from taking risks.
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Actionable takeawayIndividuals should not avoid taking risks due to fear of failure or success. Instead, they should consider the relative risks and rewards of taking on new challenges.
Q&A
Can there be too much fear in the market?
The speaker acknowledges that while fear is a natural part of market dynamics, excessive fear can lead to poor decision-making. They emphasize that traders should not let fear dictate their actions and should instead focus on the market's actual movements rather than the headlines.
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Actionable takeawayTraders should avoid letting fear influence their decisions and instead focus on the market's actual behavior.
Q&A
What is the significance of keeping track of profits on a card?
Keeping track of profits on a card is a method to maintain awareness of one's trading position and performance. It helps traders stay disciplined and make informed decisions based on their current status in the market.
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Actionable takeawayTraders should maintain a clear record of their profits and losses to ensure they are making decisions based on accurate data.
Q&A
What is the appropriate size for a trade given a certain account size?
The speaker suggests that the trade size should be proportional to the account size, and that a trade that is too large for the account size can be risky. They also suggest that a portion of the account should be kept in dry powder for opportunities.
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Actionable takeawayTrade size should be proportional to the account size to avoid excessive risk.
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
What is the definition of being an unlucky investor?
An unlucky investor is someone who consistently loses money across multiple investments or strategies. It refers to a pattern of losses rather than isolated losses.
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Actionable takeawayAvoiding consistent losses requires diversification and small position sizing to mitigate the risk of being consistently unlucky.
Q&A
Will AI trading have a place, be competitive, and will it be easily available to small retail customers?
AI trading will be competitive and easily available to small retail customers, but its role as a trade engine is uncertain. The focus is on AI's value in portfolio optimization and risk management, which are more promising areas for implementation.
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Actionable takeawayAI will be accessible and competitive in areas like portfolio optimization and risk management, but its effectiveness as a trade engine is uncertain.
Q&A
What is the significance of the social contract in regulating behaviors like drunk driving and gun ownership?
The social contract refers to the implicit agreement among members of a society to regulate behaviors that pose risks to others. In the context of drunk driving and gun ownership, it means that while these actions may be legally permissible, they are socially discouraged due to the potential harm they can cause. The speaker notes that these contracts are established through societal consensus and are meant to protect the collective good.
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Actionable takeawayIndividuals should consider the broader societal implications of their actions, even when they are legally permissible.
Q&A
Do you reduce your position size because of a Fed meeting?
The speaker does not adjust position size due to a Fed meeting but prefers to gravitate towards bond products like TLT and CBZN during such events. They believe in leveraging increased volatility and directional plays rather than reducing exposure.
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Actionable takeawayMaintain position size during Fed meetings but consider directional plays in bonds due to increased volatility.
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
How to manage risk with futures options?
The speaker suggests reducing the amount of capital used by 30% when trading futures options. This approach helps manage risk by limiting the exposure and aligning with portfolio margin requirements. The speaker also recommends mixing futures options with other strategies and gradually scaling up as the trader becomes more comfortable with the additional leverage.
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Actionable takeawayReduce capital usage by 30% when trading futures options to manage risk effectively.
Q&A
Do people who create their own watch lists, scanners, indicators, and algorithms earn commission from users?
Individuals cannot earn commissions from users unless they are licensed. However, they can sell their tools or ideas on a licensing basis. Scanners are more likely to be marketed for a fee rather than on a commission basis.
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Actionable takeawayCreating trading tools can be monetized through licensing, but commission-based earnings require licensing and are not available to individuals.
Q&A
Are you intentional about always investing within a certain framework or do you allow yourself to try new approaches?
As one becomes more successful, they tend to take more risk and have more wiggle room. They also recognize that with more capital, they can take a longer time frame and look at investments over extended periods, rather than short-term immediacy.
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Actionable takeawaySuccessful investors may shift from short-term, risk-averse strategies to longer-term, more flexible approaches as they grow.
Q&A
Has buying the dip become a dangerous default setting for the market?
The speaker poses this question as part of a discussion on market strategies, suggesting that buying the dip may no longer be a disciplined strategy due to its long-term rewards. The question is left unanswered, indicating a need for further analysis.
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Actionable takeawayThe speaker questions whether buying the dip is a disciplined strategy or if it has been rewarded for so long that it is no longer questioned.
Q&A
At what point do you decide to slash go part-time or leave your job and be more involved in the market?
The speaker acknowledges that leaving a day job to be a full-time trader is a difficult decision and requires careful consideration. It is suggested that having a reserve of annual salaries can help mitigate the risk, but the decision should be based on personal financial stability and market conditions.
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Actionable takeawayConsider having a financial reserve before making the transition to full-time trading.
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
Is trading a disciplined probability game or just an informed guess?
Trading can be considered both a disciplined probability game and an informed guess. While it involves using mathematical tools to quantify risk and manage positions, it also requires making educated guesses based on market conditions and analysis. The key difference lies in the use of structured tools and disciplined approaches to manage risk and probability.
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Actionable takeawayTrading should be approached with a disciplined probability game mindset, using mathematical tools to measure and manage risk, rather than relying solely on intuition or guesswork.
Q&A
Is it riskier to trade futures options than stocks?
Trading futures options is not inherently riskier than trading stocks if using defined risk strategies and maintaining smaller position sizes. However, it is important to manage risk effectively and be aware of the nuances of futures options compared to listed options.
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Actionable takeawayUse defined risk strategies and maintain smaller position sizes when trading futures options to manage risk effectively.
Q&A
What is the speaker's position in the S&P and NASDAQ?
The speaker is short S&P futures and NASDAQ options, having covered 10% of their position in the NASDAQ options. They are also short crude oil and gold/silver premium.
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Actionable takeawayThe speaker is managing their positions by covering a portion of their short positions in response to market movements.
Q&A
Are there certain financial products including certain stocks that no matter what you just won't trade?
The speaker acknowledges that there are certain financial products and stocks that traders may avoid, but the specific examples are not provided. The discussion suggests that personal preferences and risk tolerance play a role in determining which products a trader will or will not engage with.
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Actionable takeawayTraders should consider their personal risk tolerance and preferences when deciding which financial products to trade.
Q&A
Is it okay or smart to work, partner or invest with friends and or family?
The speaker discusses the risks and benefits of working, partnering, or investing with friends and family. While lending money to friends is considered a complete disaster, investing or partnering with friends can be beneficial if the situation is right. The speaker shares a personal experience where they became partners with a friend, which worked well. The key is to ensure the right fit and to be clear about expectations.
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Actionable takeawayWorking, partnering, or investing with friends and family can be beneficial if the situation is right and expectations are clear. However, lending money to friends is generally discouraged due to the high risk of failure.
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
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
Does the Venezuela situation remind you of the limit up situation when Desert Storm was announced?
The speaker states that the Venezuela situation does not remind him of the limit up situation during Desert Storm. He explains that the expectations and outcomes were different: during Desert Storm, the market was expected to open down limit but instead opened up limit, whereas the current situation is not comparable. The speaker also notes that he had significantly more risk on in 1992 than he does today.
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Actionable takeawayThe speaker emphasizes the importance of understanding the context and differences between historical market events and current situations to avoid misjudging market behavior.
Q&A
What is the secret sauce, strategy, and allocations to survive the next crash?
The secret sauce to surviving the next crash is knowing when the market is about to crash. The strategy involves maintaining a diversified portfolio across different assets, strategies, and time frames, while keeping position sizes small. Allocation is crucial, and diversification helps mitigate risk.
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Actionable takeawayDiversification and small position sizing are key to surviving market crashes.
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.