Options Trading with HEDGE FUND Manager DAVID SUN
i'm David Jaffee i have a youtube channel youtube.com/beststockstrategy and a website beststockstrategy.com. hey David Sun here host of the trade busters podcast follow me on twitter at the Trade Buster i think most of my followers know me and uh just a quick thing um one of the guys on my Discord mike i think David he knew you from before right had done a couple interviews and uh he kind of connected us. i think he introduced you to my podcast and i think you just figured uh be cool to connect with someone like minded maybe just chat options you know things we agree on things we maybe don't just don't agree on just kind of add value to both our listeners is that kind of how how this all got started yeah definitely i um so this call will be around 45 minutes and our main objective is to add as much value as possible and just to give the viewers something to think about and to ponder so I think that really without further ado we should get started in order to maximize time yeah let's do it so the first topic is what are your thoughts regarding the value of persistent hedges versus something like selling further out of the money puts and trading small so i kind of see that as two different things hedging is you know you can talk about proactive or reactive you know proactive hedging which is i think what you come up in terms of persistent is kind of buying you know out of the money puts on the market call options on VIX whatever it is and i think there's a place for that it kind of depends on overall how large you're trading to begin with which you kind of alluded to what kind of strategies what are you protecting like do you are you doing just options do you have some kind of core portfolio do you have a buy and hold component where you don't have any kind of risk mitigation and so in those cases you might need some kind of persistent hedge to you know at least cut the draw down a bit right if things get really wild and i also have to think about what kind of hedging how about tail risk or you trying to just hedge like a five percent run-of-the-mill in a little blip small correction right because obviously if you're trying to hit something that's going to happen pretty frequently it's going to cost you a lot you might not get that much bang for the buck tail risk you know once in a decade 20 year you know 20 30 crashes that's kind of more extreme and usually i only look for persistent hedges to be based on tail events because if you're trying to just hedge every bump in the road right you're gonna kind of overspend a lot so see what kind of your thoughts on that are i kind of sometimes i go back and forth like on the one hand i think that trading spreads is really good because the spreads inherently protect you against the volatility expansion in my opinion that's the primary advantage you have both the capital efficiency benefit of trading a spread and then you also have the volatility expansion protection i do sometimes though when i speak to some of my friends who use strategies for like they'll buy two farther out of the money long put options in order to protect against tail risk my issue with that is that they're using back testing and then they're going based upon volatility expansion but it's really hard to predict volatility expansion based upon a decline in the s p so for example if you take something like i think it was uh monday february 5th 2019 where the s p was down around 100 so now it would be down let's say like 150 but at that time the vix spiked from i think like 15 to about like over 50 and then you had a situation even yesterday which was january 24th 2022 where at one point um the s p was down tremendously yet even so the vix i think got to a high of about like 39 so i think that obviously like having like always keeping it in the back of your mind that you can have a high win rate but that doesn't necessarily mean that you're going to be profitable long term but i'm not certain that having persistent hedges and always being concerned about something that has a low probability like a low probability event is the best way to trade i think that you can reduce drawdowns by either using spreads or going further out of the money or trying to use smaller amounts of capital especially during times when volatility is low like certain things like that those are my my thoughts regarding it yeah small amount of capital i think sizing is always the first line of defense and you know what you mentioned about the buying the two out of the money puts that's basically a back ratio and you're right you can't predict volatility and what's going to occur and so the first line of defense is having risk management either via size or having stops or some kind of adjustment though the back ratio approach and this kind of tail risk hedging is really for those kind of emergency where you don't think of it right so if you have uh if you wake up and you know there's a nuclear bomb or something markets down you know 20 obviously with circuit breakers that's pretty unlikely you know but some kind of unforeseen event and whether or not you need this kind of you know we call it level two um that's what i call it kind of like black swan risk really is up to just your base sizing right if you're trading cash secured or very low notional um very unlikely you're gonna blow up even with a pretty big event but as you you know with options is leverage right so as you want to increase your target return increase your sizing you want to push the limits of your account a little bit more under normal circumstances you can still control that like you said with buying power with what stops risk management but there comes to be a point where the sizing is if there was an uncontrollable event you'd risk a blow up and those are the times when you want that secondary factor kick in those are the times when that back ratio the volatility event is going to happen so it really depends on your approach and your kind of sizing to begin with and determining whether or not you need that second piece so it's not a one size fits all yeah i definitely agree it's uh it's valuable it's not there's no definitive answer here and we'll touch upon this later but at the same time i do think that it's definitely valuable to give up some of your returns in order to decrease the volatility of your returns because the stress component of seeing losses and also not being able to sleep at night or being concerned by constantly monitoring the futures market that is something that you have to take into account so if it costs you a little bit of money in order to mitigate that downside risk then i definitely think that it's advantageous even if it means that over the long term you're going to sacrifice a little bit of profit the second thing is i wanted your thoughts on on back testing and where you see it fits in in order to allow people to be consistently profitable and to optimize their trading strategy so with back testing the the biggest thing is it gives you context but it's not necessarily going to give you that holy grail strategy because there comes a fine line between testing to see kind of the characteristics and behavior of a strategy and where the back testing becomes the strategy as in you plug in 20 different inputs filters and aha this thing worked like a like a charm in this particular market you know and this you guys you're getting the curve fitting right and because you know back testing by definition is backwards looking right and we have no idea how something is going to look or if it's going to behave moving forward so generally the more inputs the more variables the more filters the kind of more fragile that entire result is and the less resilient it is going to be the kind of the future market behavior because we just don't know and so the main thing is what i like to do is more focus on you know if i understand kind of number one options and how to behave i have some inkling of how a certain strategy should behave in various market environments and i more use mark i use the back test to kind of confirm my hypothesis to say hey yes the the strategy generally did this when a certain you know kind of market happened rather than using the back test as the creation of the strategy right so i start from having a strategy i want to try and thinking about it and really reasoning out how it should work based on actual knowledge math right you know options math and greeks and everything and then using kind of the back test to backfill and just kind of build some conviction and get some context about okay it did in fact do what i kind of anticipated generally i think that was incredibly well said and i agree with you completely where back testing is really like in my opinion it's a tool in your toolkit in your toolbox but it shouldn't become your strategy and my personal feelings are that people from you know speaking to a lot of people and from experience i think that traders rely way too much on back testing where they think that because something has worked in the past then it has a high propensity to work in the future and i went to cornell and one of my favorite classes was taught by tom gilovich and he did a research study about like the hot hand theory where people if they hit like a few shots in a row then people allocated and misattributed and they thought that that person was hot and that they had a higher propensity of hitting their future shots i think that people need to recognize that as human beings we have a propensity to look for patterns and then try to attribute them and try to predict the future and oftentimes those patterns can be false and i do believe that traders if they want to be successful in the long term they are responsible for their decisions and they shouldn't completely rely upon the back testing back testing can be a tool but you also have to dig into the data and ask yourself when you have so many small occurrences you should ask yourself whether this is statistically valid or whether this is the mode or the median or whether you're looking at the mean because oftentimes we tend to disregard the mode which is the most repeated but if you have a situation like we've had over the past week where the nasdaq has dropped around 10 and the s p has dropped around 8 or 9 then you have to make sure that you try to mitigate that from happening and you have to make sure that that one the numbers are statistically valid and also which numbers you're looking at whether it's the median the mean or the mode so yeah back testing i'm all for it but just don't rely upon it too heavily and make sure that you implement and you use that data but it doesn't free you from the decision making process and it doesn't free you from taking ultimate responsibility and making your trades yeah and one other thing um i want to point out it's sort of an aspect of back testing that some people don't realize you know with uh tools like e-delta pro and off-the-shelf back testing software where they make it so easy to just crank out 100 tests change this parameter add that filter and one thing you have to remember is markets are changing over time right even literally the price of the s p is changing over time right for example and your account is changing over time and the reason that makes a difference is if we're talking about a one-year test maybe not so big of a deal but if you talk about like a multi-year test the thing that you have to realize with kind of these back test software is they typically do something simplistic like a fixed delta test or fix one contract test right so you have a fixed sizing that's arbitrary that can be completely different relative to your account size relative to the size of the market as time goes on so that's going to skew the result in practice and what i normally do is i do something called a longitudinal study where you take kind of that raw back test data now if you're going to create a back custom back test engine build it yourself you can address this but if you're going to use these kind of off-the-shelf softwares that have very simplistic testing they do give you like an output of the log but you want to kind of change up the sizing and make it true to life because you have to look at the size you know like maybe you're doing like a put selling strategy and the credit received right you need to make sure it makes sense right if you're gonna sell you know a hundred dollars the hundred dollars relative to your account is going to change so depending on the account size i'll kind of change it up so things i change things dynamically with respect to the account size with respect to the market so that actually makes it like the test reflects how you would actually trade through that time and not just some static one lot over and over again which might make no sense and in the context of things so just something to keep in mind just showing that back testing is nuanced you know it's not always about okay run a thousand tests until i get the best scenario and let's just go with that that's fine yeah i agree all right the next question for for question number three what are your thoughts regarding having trading rules vary based upon mix levels so i think conceptually this makes sense personally i don't do it and i'll say why not that is right or wrong but if you think about the last question on the back testing right and we talked about filters like people talk about okay i'm gonna do risk on if you know this moving you know average crosses over this this other moving average is like a risk off signal and you know vix or i think volatility levels those in in and of themselves can be sort of a risk on risk-off signal so it makes sense you know because we know volatility is mean reverting and volatility there's certain things at different levels it makes sense that you can kind of bucket it into these different regimes and you know if you do just a simple filter even volatility you can split a back test or any kind of strategy into like okay if i ran it in high-vis low-vicks you're gonna see different qualities and behaviors at least you'll think you will because people always want to see patterns um so it kind of makes sense and just because certain strategies the way they're built don't work well in low vicks or high vix so if you have the conviction to do that i think it can make sense right especially with something like volatility because we all do believe there are certain quality characteristics right depending on what market does i don't think you can reasonably predict if the market's going to go up or down but depending on where vix is at i think you can reasonably say is it going to go down or up right so that mean reverting behavior so because of that and i think there is sort of mathematical proof of that behavior we can you know presumably bucket your strategies into kind of high vic slow vix but personally i just still prefer simplistic things so i i tend to do strategies that you know i'm gonna run no matter what um for better or worse um but i understand and see kind of the value and the reasoning behind that my thoughts on this are this is one layer of subjectivity that and this is going back to nuance and this is why i i think that there should be some level of subjectivity in trading because it is actually quite easy to trade options during periods like right now when the vix is trading at about 30 or 35. the problem is that if you traded too large and if you traded during times when the vix is trading at around like 15 then there's a high probability that you're being forced to defend the majority of your positions that you put on during periods of low vix and that you don't necessarily have a lot of buying power in order to take advantage of the volatility expansion and you know that begs the question some of you might be thinking okay well the vix usually spends the majority of his time between 15 and 20. so am i advocating not trading at all when the vix
is between 15 and 20 the answer to that is no but what i am advocating is using significantly less buying power so for example you could potentially use like 20 20 of the of your account size when the vix is trading between 15 or 20 or perhaps you trade vertical credit spreads because during times when the vix is low then buying that insurance is actually really inexpensive if you buy that insurance now when the vix is trading at 30 35 then it's going to cost you significantly more than during times when the vix was trading at around 15 and you also need that insurance when the vix is at 15 because it will protect you against the volatility expansion the other thing that i like to do during times when the vix is trading low is i will go further out of the money to protect myself against volatility expansion and i will also increase the days to expiration because that would actually make the trade worthwhile when the vix is trading at 15 even using portfolio margin if i trade something farther out of the money then i'm not necessarily collecting enough premium to make that trade worthwhile unless i increase my dte to you know 60 to 90 days but um i definitely believe that it's worthwhile for at least traders to consider altering their strategy during times when the vix is low relative to when the vix is high makes sense the um the next question is whether you believe that traders should be comfortable with some level of subjectivity in their trading and whether this can potentially improve entries for a little bit of context on this um for example let's say you look at like the recent trading range of of a stock and then when you say that okay this stock like whether it be amazon or apple or you know even like the s p since i i believe you like to trade like like spx and spy if you would look at like the recent trading range and then by selling a put when the spy or an individual stock would be at the low end of this trading range then that could potentially reduce your risk and additionally because there's higher implied volatility in that specific underlying then it could potentially enable you to collect more premium as well what are your what are your thoughts so um i think partially it comes down to the personality of the individual trader because for me and you'll hear this a lot a lot of it comes down to conviction right if you have a strategy but you don't have the conviction or the confidence to execute it doesn't matter anyways and so for me and people follow my podcast and know my strategies are kind of based on the same type of mechanics where i enter 15 delta 90 tte do it every day now obviously that doesn't mean the trade is going to be the same all the time because as volatility goes up 15 delta is going to get further from the money for example so there is some kind of self-regulating aspect to the strategy just as a function of markets right so the decision for me is just to follow that strategy but discretion like i think i i do believe there's people if you have the skill or the knowledge or the experience i don't know maybe luck where you can time or have a better entry or whatever it is but for me like i think it helps me simplify things and not kind of second-guess myself when i follow a strategy that's kind of more mechanical there is a tiny bit of discretion um but i think part of this also comes down to i know some people it may 100 mechanical may not be suitable like people like to have that feel of being in control or at least have the illusion of control right because they feel like there's some engagement or if i oh i saw this pattern or i feel like because of this that this is a good entry and you can own if you can own that decision and have the conviction and still have you know be able to manage it and have the proper risk management like you maybe you feel better about that trade rather than just oh i feel like um you know for for a mechanical trader they might be like oh i feel like they're just blindly entering regardless of the market no i get that thought process right um so part of it comes down to again the personality of the trader now whether or not you can truly add edge or you know extract more profits being discretionary but probably you know there's been people that have done it or who have shown it now again is that luck is this there's outliers hard to say but i know that it's extraordinarily difficult and i don't know that i have the experience to do it consistently or feel like i do you know but using discretion so you know i kind of choose to just kind of be more mechanical at least mostly for your four-year zero dte i think you sell spx options like using portfolio margin on like monday wednesday and friday right right right so did you did you open a new contract yesterday and are you planning on selling zero gte tomorrow as well or do you have marketing for zero dt i mean the exact entry changes depending on the time of day and everything but yeah i mean we trade the same amount of trades every time and you know people talk about avoiding fomc days or when vix is a certain amount or if they think the market's going to be trending or whatever and no we just do as many trades as we can let the probabilities play out and so what they have and so i mean it's worked right and it's just something where you don't have to you know there's making a decision and it works in your favor great right nobody cares about that it's more like you make a decision and goes against you number one do you have the wherewithal to correct it as in pull the plug if you need to instead of get you know getting smashed if your trade's moving against you or and number two when you do have to take a loss like how do you handle that right there's a cost to everything right there's a there's a reaction action reaction and there's a there's a consequence to those decisions not just in your p l but in your in your psychology as well yeah i i agree i i also do think that if if it were me and instead of being like 90 to 100 um objective i would probably want to be like 65 70 objective um if it were me and i was running like a zero dte i probably wouldn't feel comfortable with it considering that if the spx opens up down tomorrow like like 50 points given that volatility is actually pretty high right now you're probably not going to see like a tremendous increase in in vix but if you're selling a put then you actually might see a relatively large loss in your put option that you put on previously and then additionally because the vix is high if you wait for you know one or two days of affirmation where the market shows you that it's stabilized a little bit then the vix still might be trading in like the high 20s or low 30s and i think that you'll still be able to collect premium you probably won't get stopped out or you might get stopped i mean who knows but i just think that it increases the probability without having to go through the stress of constantly monitoring the market during times when the market is irrational because i believe that the market is pretty much rational you know 85 90 percent of the time but it's at those extremes because the market aggregates so many different factors including human behavior and we do know that human behavior is not rational that's kind of like the study of psychology and i think that at the extremes both on the euphoria again and then also during on the fear end those are times where i kind of would prefer just to play defense and not be like overly aggressive because like i said before the vix can be trading at like 35 or 40 which means that you can still collect a significant amount of premium and then you can wait for one or two stabilization days and the vix is still going to be trading in like the high 20s low 30s if you look at 2020 uh you pretty much had elevated vix for the entire year and yes the vix didn't hit like you know it hit i think 84 in like march 2020 but it was still trading in like the 50s for like one or two months after that and you know you can collect a lot of money while also reducing the risk so yeah i guess i i believe that there should be like a little bit more subjectivity as opposed to just like like having it be completely objective yeah i mean it's a spectrum right like you mentioned 60 70 percent i'm probably more than like the 90 95 mechanical but you know again the step two personality temperament and kind of the strategy that you're running as well the the next question is what i've listened i think to about like 80 or 85 of your podcast and i was wondering uh what are your thoughts regarding like selling calls as like especially during times like like now because personally like um i'm stuck in like a paypal position and my strikes aren't that bad but part of the reason why they're not bad is because i've been able to collect a significant amount of premium by selling calls and then rolling down the put side so um like what are your thoughts about and even if um i know your thoughts on rolling and i think that's actually the next question but for selling calls especially if we endure like a protracted like grind down market what are your thoughts of selling calls and potentially combining that with selling something that's very far out of the money on the put side it's gonna depend on the strategy i think if you're doing something with rolling and kind of managing and following positions long term it it can make sense because you're collecting a larger pot of premium which gives you more room to work with you know the break evens and everything but you know followers on my podcast and kind of my training style no because we're using hard stops now granted when we use a hard stop we're going to enter again anyway so it's kind of like a roll it's just it's a little bit different and so specifically for the type of training that i do i just i haven't really found anything that works in terms of the calls because remember when you're selling options it's inherently a negatively skewed strategy meaning for a particular entry your losses are bigger than your wins so because you're you're selling your credit the premium is your defined profit right and but your loss is kind of undefined so you know when people talk about for example using selling cause as a hedge that doesn't make as much sense to me because you're you're giving yourself a little bit of hedging potential but still you have upside risk now so conceptually it just kind of goes counter to the rest of my strategies and again specifically because of kind of the hard stop mechanic that i tend to use and because long term right i'm trading longer duration 90 dte longer term market tends to trend up right now yes you mentioned selling cause in a bear market but it's like no i'm not big on technical analysis i don't i don't think i can call when is the bear market when it's a downtrend or whatever so i can't guess so from the experience from my testing from my own limited experience of trading calls it just has done me more harm than good um so it does it there's a lot of factors not saying that's necessarily always going to be wrong right it's we don't know until afterwards obviously whether or not it was right or wrong to do it now if you've been selling calls this lasts three weeks you are doing great right but who knows like if no i don't think the market's going to do like a v shape like last year this time but you know we know that there's kind of these huge you know bear market rallies and you know you can get your facebook selling calls too and because of the the sku involved like for the same delta same credit calls are generally closer to the money than puts our that's kind of a more of a structural aspect of why i think they're harder to work with um but you know and that's why that that's kind of the culmination of why i have my opinion on on calls it's just for me and the way i do it it's harder to keep harder to work with i think um i would say that selling puts encompasses about 75 or 80 percent of my strategy i definitely believe that there's a time and a place to play the like the the negative delta and the call side um you know during times when like if tesla goes up like 20 in two days which has happened i think like three times three or four times over like the past year or so i think it happened like january 7th and 8th of like of 2021 and it also happened like just like a few weeks ago um you know you can then sell like a really far out of the money fall and receive a decent amount of premium additionally even yesterday on january 24th um there was a situation where i was short like a 2100 put on amazon and i was considering simply rolling it forward by one month keeping the same strike and then selling like a 33.50 or 3300 call on amazon that expires next week because there is an earnings announcement and then using that premium from the call and from extending the duration of the put side to then actually buy like an eighteen hundred or nineteen hundred dollar put to provide additional insurance and also significantly increase the the buying power um you know in you know reduce the buying power reduction of that specific tree so when you were saying about i don't necessarily think that selling calls will be able to provide you with a significant hedge like perhaps it'll provide you with a small hedge if the market decreases like two to five percent but where i do think it has value is during periods of high volatility or when you think a stock is oversold you can actually collect a significant amount of premium and then you can use that premium on the call side to then buy an option as protection to significantly increase the buying power in your account and i also think that when you have a situation like last year where the market is up 30 i think it's fair to say and fair to predict that the market is not going to go up 30 percent this year just because statistically it's extremely unlikely to have it go up 30 percent you know two years in a row so i do think that at least considering selling calls during a year when i know that last year is independent of this year but just statistically i just don't necessarily see that the market is going to go up more in which case i think having the ability to sell calls and having that be a tool in your toolbox could potentially be a little bit beneficial but i definitely would 100 agree with you that it is very risky to sell calls especially during times after the market might be potentially oversold because during those times you're going to sell calls that are closer to the current market price of the stock and the market does have a tendency to go up extremely rapidly we saw that happen in the third or fourth weeks of march 2020 and a lot of people who stole calls they did end up getting their face ripped off so be very careful selling calls but i do think that if used correctly then it could be something that that adds some alpha while also it could reduce your risk yeah i mean when used correctly and that's the key phrase right and that actually kind of ties back to the back testing the trading with higher or low vix rules than with the discretion it always comes back to if you're going to do something that is quote unquote situational and because it's the right time you're adding discretion right so again if you can follow through and own the decision and apply the right risk management because you can't expect it to always work right so if it works great if it doesn't work you have to be able to to fix it or manage it properly and not just like oh man like like i said market shouldn't go up 30 you know three years in a row and it's going up i mean who knows right but like just in those situations and like okay it can't go down or sorry it can't go up so you know hold on to the calls and and then you know market's going up and you're getting blown up so you just have to with all decisions you gotta own up to it and be prepared to manage it when you need to the the next question is regarding rolling um your thoughts on like just if you can quickly recap like your thoughts on rolling for for my audience and then um i think actually when we when we spoke earlier we actually both kind of agree more than disagree on on rolling so if you can provide like a quick recap of like your thoughts about rolling positions yeah and just to define i mean rolling you can consider rolling up down out and and i think most of the time the when beginners think about rolling they talk about kind of generally a position is threatened and you roll out on time but same strike and obviously that's one of various permutations but that's kind of the one that tends to be gravitated towards for beginners because that's the so-called keeping the dream alive like same strike rolling out on time hopefully for credit but you're at the same strike so on that and it depends really on the type of strategy you're running and sizing sizing this is the most important aspect because when you roll same strike yes you buy yourself some time maybe but you're you're kind of in the same position in terms of the size of the trade the probabilities don't really change just because you you know you took one trade off and put on another so things can compound very quickly and i think if you don't know what you're doing what what beginner traders tend to happen is you know they only have enough buying power because it's a small account for like two or three or four trades and if they all get you know all them moved against them they roll all of them and sooner or later your entire buying power is used up right so that's not the right application rolling if you're talking about you know this kind of rolling word same strike it's probably mostly for advanced traders who have a very well capitalized a very large diversified portfolio of you know 30 40 positions and maybe one or two or three of them they can afford to kind of hold on to that risk the rest of them either taking winners or managing or closing out and so it's a lot harder than most people realize um and so that that's just this is for start i mean there's so many things to get into but that that's the important thing a lot of people don't realize i think my thoughts on rolling is i can't remember the last time i rolled to the same strike because in general if i'm rolling it's more for like defensive purposes and if i'm going to roll and extend duration i'm then going to use that premium and roll down the strike and i'm saying roll down because usually it's puts that end up getting challenged because i sell mostly puts but generally speaking if i let's say i roll forward in time and i collect like an incremental for example purposes like two dollars a premium in time value you can actually allocate that premium towards reducing your strike price by sometimes like five dollars so in effect you're actually reducing your strike by five dollars or five hundred dollars per contract yet it's only costing you two dollars which is the amount of premium that you would collect by rolling forward in time so i really think that traders are doing themselves a huge disservice by rolling forward using the same strike and i get it if you want to capture as much premium as possible but in my opinion rolling is something that is very stressful having challenged positions are also very stressful and your primary objective when you're selling options is that if you have a position that's challenged i believe that your primary objective should be to get rid of that position as quickly as possible and from listening to your podcast i actually do agree with you i don't necessarily think that closing out at a 3x credit receive is a bad strategy at all and i think that even though it will reduce your win rate and long term it may or may not increase or decrease your profitability i think that one of the primary advantages of closing out at 3x is that it reduces the amount of stress that you're going to incur and the amount of stress that you're going to endure and i think that many people they underestimate the amount of stress that they that the losses hurt about three or four times more than the gains feel good and as long as you can protect yourself and protect your emotional investment and reduce your stress i think that that alone might actually make it worthwhile to simply close out your trades at 3x credit received instead of going through the hassle of rolling yeah and another thing is this idea of win rate uh i think in the beginning people get fixated on that too much but what you want to focus on is the expectancy right actual p l right win rate itself is kind of meaningless and the idea of rolling meaning you you never lose i mean look i get it psychologically if you want to consider let's say you roll 10 times and you want to bucket that into one quarter trade and just say oh i had a 100 win rate i mean fine you know but really mechanically remember a trade of role is closing one and opening another like literally even on paper when you roll you close one so you you lost right so but it doesn't matter like whether or not you have 100 win rate 50 percent when we're at 60 win rate all that matters is is your account up or down right because when rate doesn't you know put money on it you know put money in your bank right expectancy is and so rolling or you know rolling out up or down the credit it's not something to be so fixated on it's more about the exposure like i said do you want to be out of the position if you don't like that trading any longer get out if you like the trade and you want to be exposed to the underline but you should adjust right rolling out rolling further rolling from into the money to out of the money you're adjusting the delta you're you're putting the position back from one that has no extrinsic very little theta to one that has more extrinsic you know and the idea that if you somehow rolled same strike that you didn't lose and if you've rolled out of the money you did lose i mean it doesn't really make any sense because once that position moves against you your account's going down your net look is going down you're already losing money right when you roll or you don't roll yes there's some cash movement in terms of like that debit or the credit but your account balance in that moment doesn't change there's no magic you don't auto all of a sudden get money back or your p l doesn't pop because you were able to roll and you got a credit right so look at it not so much as trying to manipulate the win rate for win rate's sake or thinking that you're not going to lose because you rolled because really you want to focus on the exposure the amount of risk you have on the table and what kind of risk do you want to have moving forward and on a day-to-day basis and that's you know rolling as a tool you know up or down in or out that's about managing managing your portfolio managing exposure managing your risk and it's not magic it's not going to all of a sudden make you win more or less yeah i i definitely agree with you and i think that for me personally one thing that i can improve upon is trying to take ego out of the equation because i do sometimes get too caught up in win rate and um yeah i definitely agree with you i do you know i i also agree with you regarding not adding more risk to a trade um sometimes i do that um oftentimes i don't like for example i will sell calls as opposed to like selling additional puts however i will say that i think overall rolling has been a net positive to my p l and the reason is that generally if a position that i sell put on is challenged for the most part it has a tendency to be oversold at that moment and because it's a large cap company with a strong brand it usually tends to bounce back and similar to what you were saying previously where you have to be comfortable or rather you have to be careful selling calls because sometimes when something is oversold it has a tendency or it may rip back up and rip your face off i think that the same logic applies to simply rolling forward and reducing your strike price and as long as you're not adding risk and as long as you still have a high conviction in that trade and you don't think that there are better opportunities for your capital then i do think that it's okay to reduce your strike price and add duration to simply give yourself more time but at the same time i do believe that for the most part even if it does increase your p l slightly i do think that the majority of traders should actually have a stop loss and close out the positions that get challenged and the primary reason for that is i think that rolling inherently is very stressful and i think that saving yourself and trading a little bit of money for a reduction of stress overall is a net positive so yeah those are my thoughts regarding regarding rolling one one thing keep in mind i think um so you know people talk about survivorship bias and the fact that you're sitting here and talking about it i assume that means you made it you survived you didn't blow up because it comes back to sizing right if your everyone has different risk tolerance like nobody wants to go through a 50 60 70 drawdown like maybe you did maybe you didn't but if you held on and you came back you can be like wow i made it right like it the pnl is there because it came back it worked but if you trade too big or you give up or something get a margin call you blow up like there's probably hundreds of people that did the same thing but traded too big and the outcome wasn't the same right so it's it's just every portfolio strategy there's that point where when you stress it enough it doesn't come back so the fact that you came back i mean either through luck or your size properly or whatever it is you can say that and you had that experience but there's a thousand people who it didn't work out right so it just comes up this sizing yeah just to play devil's advocate though you don't eliminate the tail risk from closing out at like 3x credit received like you still have that gap risk yes that's true overnight so so just to be clear like you know when the past few days where like the s p would would open down like 90 or something like that you're not you're not completely immune because just because you have a stop loss or a stop limit right one number that doesn't mean you're getting filled with that number and that's that's where it comes down to do you want to do you need that secondary backup that that's where that kind of blacks on hedge comes and that's why you know what's interesting there's so many pieces to take it you know to look at it it's not just like a it's not a simple decision right there's a lot of moving parts so number one how big are you trading number two what your mechanics are number three do you actually like you said no amount no strategy is gonna be completely immune from that black swan risk that's why if you're gonna trade in size either way rolling or no rolling if you trade in size you're gonna need something or you should have something in case there is that kind of account obliterating kind of event right like i said none of us are immune to that and that's why i do have a black swan hedge right even though i don't believe it's ever good nor do i ever want it to be needed right i don't want there to be a 20 gap or whatever um but just in case and so and again that's just one piece of the puzzle right and it's not and again coming back to regardless of what you're trading how you're trading rolling or stops and it just comes down to the size and whether or not it's appropriate to have because if you're trading cash secured no leverage you can roll however long you want it's never going to go to zero you know there is no black swan can happen and most likely you know maybe you have 50 drawdown just wait for it to come back but once you start training leverage the notional you know becomes 2x 3x it doesn't matter like you said right everyone's subject to the same thing yeah do we have time for one more question yeah sure okay what are your thoughts about using spx or spy versus individual equities that gets into the blacks one risk actually because what earnings and outlier events with underlying symbols yes there's more volatility and more juice in the options than rightly so because of the risk so if you're gonna run a you know again if you're if you're well capitalized and you're able to trade multiple underlyings and so that one outlier doesn't blow you up i think it's okay but generally for me it's just less of a headache to deal you know number one you don't have to worry about earnings when you avoid individual symbols you don't have the idiosyncratic risk and you can just focus on one product right and for example like you know the theta engine strategy that i trade right i'm just doing spy spx it's almost a kind of a pseudo-rolling strategy yes we have stops when we get out but when we get stopped out we just keep entering every day or whatever it is it's almost like a pseudo you know i'm always recycling the capital capitals always being put back and taken out so sometimes it's just like packaged differently right but it uses the same kind of concepts um but that's kind of by choice and i get like if somebody wants to and that comes down to the discretionary versus mechanical right if you if you like to quote unquote look for opportunities or oh this earnings is coming up or something happened here that iv spiked and you know kind of like with tastytrade and what tom always says about like sell any high ivr underlying and just be pro prognostic it's like i mean that's okay but realize that there is risk and the difficulty that comes with that territory and if you make that choice to engage in that you have to be ready to deal with the consequences so you know that's something to keep in mind yeah i i'm kind of in in the middle between you and tom i think that tom pretty much encouraging sell equities with high ivr and indiscriminately sell them and keep like 80 or 90 positions on i just would never be able to handle that and i think that because you do have correlation risk especially during periods of pullback i think that that would cause many people to either blow up their accounts or to just get so stressed out that they would eventually end up quitting so i'm kind of in the middle where i will only sell options and yes sometimes i do sell options on spx and sp but i primarily target large cap liquid underlines with strong brands like microsoft or amazon you know even something that has relatively low beta or that's slightly quote unquote recession proof like a dollar general or like a dltr but on my watch list i really only have like 10 or 15 securities and precisely for the same reason as you mentioned it just makes it easier and it kind of like standardizes it i'm not really a big fan of you know just scanning based upon ivr and then discriminately selling so i guess i'm probably closer to you in that respect and that line of thought than i am to to tom and um i guess um just this is the very last question regarding um what do you believe that many that many traders should be like long spy or qs instead of leaving uh cash available to withdraw instead of holding cash when using portfolio margin and then margining off of that long equity position what are your thoughts on that well i think you know obviously the answer from having heard the podcast and people who listen to my pockets and everything but obviously it depends on your timeline and your risk tolerance but you know if you believe the market goes up long term which i do then i think it makes sense to at least have some portion allocated and i think what you're alluding to with the portfolio margin this is the return stacking concept that i've mentioned now you don't have to have portfolio margin but it works a lot better on portfolio margin equity takes a lot less buying power you can have you know 100 000 and spy and it really only uses like 10 000 of buying power you have the rest of the buying power to sell options do whatever you want and this idea of combining passive returns and active returns i think makes sense again it's it's yes they're all correlated but it diversifies the need to do all the work yourself right if if we believe the market can do five six seven ten percent long-term passive why don't we go get that few percent i mean and you don't have to allocate fully even half allocated quarter allocated you you're letting the market do some of the work there's some benefits it's more tax efficient you know if you're not buying selling those gains are unrealized there's dividends i mean like i said there's if we believe the market adds value over time why not capture some of it with no work right that's that's kind of the idea i agree with you 100 and that is something that i was not doing in the past and i will actually start implementing that once i believe that the market is stabilized a little bit um because i think that that's an amazing way to um to get some like some passive returns while also juicing those returns by selling options the only caveat to that is because you are going to have some correlation risk by being long that equity or along that into that index then i would probably uh for at least well at least for myself i will actually trade a little bit less and reduce the number of contracts you know maybe by like 10 or 20 percent in total that way if the market corrects by 20 or 30 percent then i'm not experiencing like a quote unquote double whammy by taking losses on the long equity position and also having to defend the short option contracts i will add one last thing and um i don't know i didn't get into this on my podcast what i kind of did on the return stacking episode but this isn't so much about necessarily long spire long qqq it's just about the idea of stacking returns right if you're going to have a core portfolio and leverage that margin to trade options once you have that idea you can take it and run with it you don't have to do spy only right there's risk parity portfolios you can blend stocks and bonds tlt you know there's dual momentum strategies there's different things the idea is just having a core portfolio and being able to run options in parallel that's the big idea it's they don't have to be you don't have to be all equities or all options you can do both and combine them and you know people say there's nothing free in life that that actually is the only free money portfolio margin is the only free money it's free leverage now i'm not saying do huge leverage and do something risky in bloodborne account that's what i'm saying right when i'm talking about leverage i'm on the fact that you can marry these two strategies and that's just the way the margin works and you can essentially have two things running in parallel that can be very incorrect if you decide to do some kind of you know stable portfolio like like i said like a 60 40 or some kind of risk parity or something it is in fact possible to have that core be not so correlated to your option strategy so just something to think about just take that idea and run it with it i think that's kind of the powerful concept and the takeaway from all that so you're saying like allocate some portion to equity or an index but additionally to like tlt or something that's not correlated and then because you have essentially free leverage from using pm then that could juice your returns and also reduce your risk from just an option from a short option only portfolio yeah just the idea that you can put the options on top of that and that that was just one example because i'm not like i said i haven't looked into that myself i'm not that well versed but it just different ways of modeling portfolios and different cores that you know apparently have been shown to have very little correlation with the market and yet still have pretty strong returns and there's a whole world out there you can explore in that aspect um that you can find online all right i i really hope that you guys found this incredibly valuable i um i reached out to David because i felt like combining the heads of the two Davids the two david dragons would be able to be incredibly valuable for everyone and i'm gonna post this on on um you know on my social media and i'll post the link to David Sun's podcast and uh his facebook group as well and i highly encourage you guys to check him out his podcast is amazing and whether you agree with my with like what i encouraged you a little bit more subjectivity or David's more objectivity the primary purpose of this talk was just to give you something to think about and something to consider so irrespective of whether you agree with me or or him or both of us it's just something to think about we're just sharing knowledge so we hope that you found this valuable yeah and based on feedback you know maybe we'll we'll line up to do this again and with other questions sometime but uh thanks for reaching out and appreciating the time looking for talking again thank you guys so much take care
2022-02-07 04:26
