Tastytrade Rising Star David Sun Explains Options Trading Concepts
(upbeat music) - [Eric] Welcome back to the Stock Market Options Trading podcast. My name is Eric, and this is episode 20. And my guest today is David Sun, who has been featured on TastyTrade's Rising Star series about a year ago. And he's currently running his own hedge fund, using the option trading concepts he's learned from TastyTrade, and he was nice enough to share his approach to options Trading with me in our conversation that we're going to put on here today. Now, because of the length and the depth, really the depth of my conversation with David. I decided to split this into two episodes, because I don't want any of these concepts, or discussions to get lost on anybody.
'Cause we kind of talk about a few different things, and we get really deep on some of these. So, I'm gonna split it into two episodes. In today's episode, David's gonna give us an overview of the TastyTrade style options. And then we talk a little bit about being delta neutral and then get into a discussion about rolling, or fixing trades, and the concept of keeping the dream alive. I know everyone wants to talk about that. Now, if you haven't done so already be sure to subscribe to the podcast because in the next episode, Dave and I are gonna compare our approaches, to where we like to hang out on the option chain.
And he's gonna share one of his strategies. It's an SPY put selling strategy, and how he actually uses stops, which actually isn't quite a TastyTrade thing. It's just so much good information, I think you're gonna enjoy both episodes. But real quick, after listening to this episode, if you wanna learn more about David, or connect with him online, he has put up a webpage at thetradebusters.com. That's thetradebusters.com, where he shares some of his written essays about options, as well as some strategies and backtests.
So be sure to check that out when you get a chance. All right, enough for the intro, let's get into the show. All right, David Sun, welcome to the Stock Market Options Trading podcast. How are you today? - [David] I'm good, thank you for having me on.
- [Eric] Yeah, we had a couple of good conversations, and just for the listeners, in the previous episode, or one or two episodes back, I was talking to Ben from WingmanTracker and he's the one who hooked me up with you. 'Cause we were talking about some backtesting, and that's something we're gonna probably get into at some point. But, I wanna start with you and a little bit about your story. Some people may know who you are because you were a rising star on the TastyTrade Network at some point.
And so can you, every time I have someone on about options, because it's so obscure, and a lot of people who listen to this podcast are maybe not into options yet. Or they're still making that transition from stocks to options and doing both maybe. But, I always like to know how you got started with options because a lot of people just don't even know that they exist still.
So how did you get in with options? And maybe lead me up to the TastyTrade story about how you got on that show. - [David] Yeah, so I was in grad school at Princeton University back in '09, '08, '09. And for whatever reason, maybe because of all the news about the financial meltdown and stuff on CNBC, I decided I wanted to get engaged with the stock market.
And it was very, picking stocks, just watch Mad Money and whatever Jim Cramer says let's go, basic stuff. And I had a friend who was into options and he got me into it. He kind of taught me the basics of selling puts, covered calls. And what intrigued me was this idea of kind of rolling, you can do this position and get a credit. And if it moves against you, potentially you can roll for a credit and still collect more money.
Eventually you win because the stock recovers, or whatever. So this idea about, and it wasn't really even about the math back then. 'Cause I did not know a delta from a theta, I just knew, I would literally go on a chain and be like, hmm, I wanna collect 2% a month. What strike do I need to get 2% annualized, not even annualized, 2% a month, and I just assumed if I do this and I roll it, I can get X percent a year. And I got very lucky, well, you can almost say unlucky because honestly I think sometimes when you make money right away, you don't learn.
So, I obviously, the timeline, '09, it was right at the beginning of the bull market. So everything was working. I think I like doubled my account in like two years or something. It was something where you just, you just assumed this it.
- [Eric] I did it. - [David] So, and actually I was fortunate, I took a lot of my money out to buy my first house sometime around then. But then I turned around, I saw all these stocks I was selling puts on basically crash or something.
And like, I was like, geez, like if I hadn't gotten out when I did, I would've just lost a bunch of it. So there was a lot of luck there and that kind of disillusioned me a little bit. So I was kind of in and out of the market. I wasn't really participating that much, even though I had that kind of success.
And I had that knowledge of like how options work and rolling and all that. But after I got my first job, and I was, you know, my office mate, he was basically, he had some money being managed by some firm that he wasn't happy with their performance. And he knew I did options. So he just kind of looked around online, like ways to make money or what to invest.
So he actually was the one that found TastyTrade. This was around 2017 and he wasn't as involved but he knew there was something interesting 'cause they were talking about different jargony terms that he had heard me mention, but he didn't quite understand that. So he actually was trying to bug me to watch TastyTrade for like two or three weeks. And I wasn't really into it because of my past experience.
And now I was like, okay, fine, if you found something good, go for it. And even if they got this weird name, like what is TastyTrade? So I blew him off for like a while, until he was like, David, please just watch this episode. And it was one of those like calling Tom and Tony segments and somebody was asking about do I hold my position and get all the theta from the last minute? And they were talking about, no, you gotta roll it because of the gamma risk or whatever. And it was enough to be like, hey, I understand some of this, but there's seems to be some other concepts that I don't get that sound interesting. That's how it started.
- [Eric] Nice - [David] And as you know when you start with TastyTrade, you know, it just explodes. - [Eric] You get addicted. - [David] So that's how I got started with TastyTrade and got engaged and all that and started watching their content.
- [Eric] So I wanna add you didn't say this, but you have an electrical engineering background. That's true? - Electro. Electric. - Electrical, correct. - [Eric] Electrical engineering.
So I have an IT background and I had Fauzia Timberlake on a few episodes ago. She was a Rising Star and she actually had an engineering background too. So there's an allure about the math that I think, I know we've already talked about math and I try to keep these episodes humanly understandable, even though it gets very mathematical, but was that one of the things that kind of sparked, you know, lit something in you, but like, oh there's a mathematical way to do this? - [David] Definitely the mathematical and a way where you can not just leave it to, not to pure chance, obviously there's chance and probabilities, but you have some control over your outcome, just through the risk management, kind of shape the path of your expectancy and not just leave it completely to chance, like, oh, I hope this trade wins or whatever it is. - [Eric] And you know, tell me if this happens to you, 'cause this happens to me sometimes, I don't have a lot of friends that trade or do this stuff. It's really just my online community and people like you that get to speak to, and I don't want to get into fundamental analysis, but when I tell people that I mathematically, and I don't use that term, but basically say, hey, I use probabilities in my trading.
There's this automatic sort of go-to of, oh, like blackjack, oh, that's gambling. If you're doing probabilities, you're gambling. but if you're buying a stock because you know they invented a new way of doing things, then that's investing.
Like how do you see that type of sort of mindset? Because I think that's hard for people to transition from stocks to options because you almost have to throw out most of the fundamental analysis, because that's not the top thing that you're looking for. So like if you want to trade, let's say you want to trade Apple, you believe it's a good stock or whatever. But still, when you get into the options world, you still need to know their earnings, the IV, things that are happening. And maybe you have an undertone of like, I think Apple is going to go up forever or Amazon.
So maybe you just trade bullish strategies, which probably have worked really well obviously. But how do you think about those type of comments or questions about, for someone who's trying to transition from stocks to options moving from, hey, don't worry about the company as much, worry about the option parameters and let's talk about probabilities. What do you think about that? - [David] I think it's well, knowing what I know now, it's very easy to turn that around on its head because if they make that comment, it's gambling, or it's like blackjack.
I'm like, yes, except I'm the house, right. I'm gambling as the house this time, do you want to be the player or the house? And especially since most people are taught that, gambling in the casino is rigged in the favor of the house. And even the common people know that, they'll be like, yeah, of course you can't win against the house. Well, if you're going to be the house, that's exactly the approach we're trying to take. We want to do it in a way that there's some edge, you know? - [Eric] And edge is where you end up right? - [David] Yes, yes.
- [Eric] So when I reply to people like that, I'll basically reverse that sometimes. And it's like, do you not think that buying the stock isn't gambling too? - That too, right. - What's the difference? Like everyone saw their, what did your 401k do in March of 2020? It got cut by 30%. So by you doing nothing, you are gambling. And that's something I try to tell people, who, mainly non traders, if you will, more, you know, people who are just saving for retirement type of stuff that you not taking action is a decision and that has its own risks. And you're basically relying on, you just hope by the time you retire, there isn't a meltdown during that time.
But as you and I are, and most people who listen to this show, we're more active. And by active we feel like, and I hate to say we get, because I always try to underestimate, or I should say, I try not to overstate how much control I really have. Because I really feel like I have no control.
The only control that I have is when I've hit that confirm and send button and that's it. After that the universe starts working. But yeah, so getting the edge in your favor is definitely what we're trying to do from an option perspective. And so I'm interested to get your take on TastyTrade's version of that. And let me ask you, when did you do the Rising Star Segment? I saw it on YouTube.
And by the way, for those that are listening, if you guys want to see his segment, if you just put into YouTube, David Sun Rising Star, I think it's the first video that comes up. It says it was posted a year ago. Is that about when it was? - [David] It was November, 2019.
And just to kind of bridge that gap. So I found him in 2017, obviously got a lot of content, really accelerated my learning curve. But at the same time I was looking up groups to kind of share ideas with, or find like a group back and chat and have other like-minded.
So there's a couple of larger TastyTrade options groups on Facebook. I joined those, met a lot of good traders, absorbed a lot of ideas. And I actually got to the point where I launched my own hedge fund late 2018. And around that time I reached out to, 'cause one of my friends was like, hey, you should bring on Rising Stars.
And I didn't know you could just be like, I assumed they invited people, but apparently you can reach out and ask, you know, they're not going to take anyone. They're going to interview you, firstly via at email, then for a phone interview to see if you know what you're saying and you actually are a good fit. And then you go in. So in my Rising Star segment I didn't talk about the hedge fund, but that was sort of my impetus for reaching out.
Because I thought it would be kind of a cool story, like, hey, you know, somebody that found you guys, followed you, was able to have success, and kind of launch a fund and everything. But ultimately I didn't talk about it on air, but that was what kind of sparked it. So 2019, November, yeah, I flew in to Chicago for like eight hours or something like that.
I got there at midnight, slept for like four hours, Ubered over to the studio at like seven, had my interview, Ubered back to the airport and went home that same afternoon. And that was before, and I guess it was cool to have that experience, 'cause this is obviously just before, a couple of months before the whole COVID thing. So at that time- - [Eric] How long had you been watching TastyTrade before you did that segment? You said, seven, so maybe two years? - It was July, 2017 when I started watching. So July, just over two years. - [Eric] So, so did you, were you, I don't want to use, I hate to use the word, star struck, but was it kind of like, what did that feel like? Was it intimidating or nervous or were you just like super pumped or what? - [David] I was super pumped and it was cool because they're all really nice people, they're like really welcoming, and it was just like, because I've called in to the Tom and Tony show like multiple times, I've talked with Tom, I've corresponded with Tom via email. So it's like, it's not like meeting a stranger for the first time, you know, and again, they make you feel really welcome.
It was just a really cool experience to like see, the people you've been watching. - [Eric] I know, like one of the people I probably watch the most of is Mike and his Whiteboard. So I know like if he was there, I would probably be more, whatever, like, dude, I watch all your stuff. So that's cool. And I'll just throw in one more thing about Tom. So I have a local options group here in Orlando.
We're basically meeting online now because of COVID, but one of the guys reached out to them and was like, hey do you want to hop on our monthly meetup on Zoom? And he just said, yeah, and it was just like, it was, you know, there's 50 people on it. So I just think that that's pretty cool given Tom's stature in the industry. Which kind of reminds me that they recently merged or whatever with, I forget the name of the company, but they're going to be going global. Have you heard about that? - [David] Yeah I did, with IG. - [Eric] I don't want to talk about too much, but what do you think about that? I was kind of worried cause I had literally just opened up my Tastyworks account and I was like, well, what is this going to mean? But just prior to that announcement, Tom was on our meetup group about a month or two ago.
And really talking about the technology and all the things that they're going to be able to do and add. And so I was excited, you're gonna can be able to trade crypto in there, a lot of international markets. So he probably knew at that time that that was going to happen.
Do you think that's a overall positive for TastyTrade and their universe? - [David] I feel like as long as the level of service and the technology is still there. I mean, why not? It gives people access, it gives them more of a viewership, and like I said, if there's more products, more choice for the consumer, that should always be a good thing. - [Eric] I see it as a positive right now. I know one of the things that started me, started some thoughts in me was about, I'm still on thinkorswim, and thinkorswim I still think is one of the best platforms, I love it, and maybe because I'm used to it and there's all that stuff, I've been on it for years, but I do feel like it hasn't changed.
And there isn't, not that there's a whole bunch of things to change, but I would like to see some innovation. And I think what I'm hoping, my biggest fear for TastyTrade is that in 10 years, it's still the same technology. And hopefully they'll be able to continue to build out features and technology. But I think it's going to be a net positive after reading and hearing the announcements and some of their discussions.
But anyway, I don't wanna get stuck on TastyTrade too much. Let's get back to your quick version of the TastyTrade style and what are the some of the key concepts, 'cause I've read some of your essays that you like to get on paper and I'm interested to talk through that with you. - [David] Yeah, so obviously because there's so much content that I put out, there's a few main concepts that repeat themselves.
And unless you kind of dig in and look at all the nuances, which there's so much out there that, obviously trade small, trade often, is a huge one, that phrase gets thrown around. And this idea of letting the probabilities play out, multiple occurrences, selling premium obviously is one of the fundamental key concepts right there. Although, you know, in the past depending on the environment you can buy, if it's low IVR, but selling is kind of just the primary thing that they talk about.
So selling premium, using a mix of strategies, strategic diversification. One thing that I've found though is when you trade small, and small is relative, right, like small for a $10,000 account versus a million dollar account, that's going to be different. And of course the idea of management and risk and mechanics and adjusting the trades. And of course, one of the main things I did talk about is rolling a trade. And they don't like the idea of necessarily using a hard stop on a position.
When a position moves against you, you manage early, you can roll out, you kind of roll out or up and down the strike and the idea of keeping the dream alive so that you're always collecting a credit. So those are sort of the key tenements that people gravitate toward when initially they hear all this but there's a lot going on under the hood and kind of nuances. And I think one of them is people don't always realize when you roll a position, it's pretty much like closing one trade and opening another one. And you're still going to have like a unrealized.
Well, honestly, it's realized, like you have a draw down on that one position, right, even though you collected a credit and you're like, oh, I'm going to win at some point and I didn't pay a debit, so I didn't lose or whatever. The idea is that with a smaller account if you only have five positions and three of them go underwater, right, your P&L is going to get a big ding. And until you can get out of that, your capital is tied up until you can kind of recover.
But whereas with a much larger account, you may have maybe 30 or 40 positions and if two or three of them go underwater and you still have the other ones working in your favor, the proportional hit that you take from these, two or three, even if the losers get a little larger, it's just the effect of everything gets more muted. So I guess what I'm trying to get at is everything they teach can work. But I think the unfortunate truth is you do need a little bit more capital to use it efficiently if you want to have your portfolio not be too volatile. So I think that's the one thing that people have to understand and just kind of set the expectation. When your account is smaller, I just view it more as a training ground, don't necessarily expect to make a bunch of money, 'cause if you want to gamble, gamble, but if you want to really learn this craft and have something where it's a skill set that you can apply consistently for the long term you have to kind of set the expectations so that you don't get disillusioned or discouraged when things don't go your way.
- [Eric] Gotcha and and let me ask you, do they, or I shouldn't say do they, 'cause, how delta neutral is the recommendations? 'Cause here's I gotta, and I don't want to say I have a problem, but some of the concepts didn't work for me and one of the concepts was rolling. I just wasn't good at it. And typically I've had trouble rolling the the upside because the market has ultimately gone up and I would find myself, I looked and I looked back in 2019 and 2020, most of my losing trades were bearish slant type trades, especially in 2019. And so I just gave in, threw in the towel, and just said I'm just not going to try to be delta neutral.
I just can't, it doesn't work, and the idea that if you're, let's say you're short puts or put spreads or whatever, and they go against you, rolling out in time, we're looking in hindsight, that's going to work the last several years, because ultimately the market recovers. So if you can just hang onto that pain long enough and not close it and roll, then when the recovery happens then you know, you're a genius. So here's the bad effect that I've seen from the idea of rolling. So I have a Facebook group, I'm in a few groups, one of the questions that, I wouldn't say questions, one of the things that comes up that what I think are newer traders is that this idea that they're able to fix a trade. And I think that that, because usually when they post something to the effect of, hey, oh man, I took a beating on this, what should I do now to fix it? Because they think there's a fix, and they think rolling or adjusting is the fix.
I don't have the answer because I've never been good at it. Other than if you sold call spreads, I'll be honest, I don't think you can fix it. If the market's going up you can't fix it. If you sold put spreads or whatever, and a lot of times they're coming in with like, oh this expires in four days. What can I do? And I know like some stuff's just impossible, but do you think, I guess, where I'm headed with this is do you think that there's a proper rolling system that fits in with the TastyTrades? So if you're going with the 45 DTE, maybe you're selling delta 20, is that kinda where you hang out and I know we're going to talk about where we hang out on the delta curve, because I think there's a lot of variance there, but when you hang out farther out of the money, do you have a rolling system? 'Cause I've seen things where people say, okay, well, if I'm selling a delta 20, and then the stock goes against me and now my delta is delta 30, is` that when you roll? Or what's your criteria or how do you handle that I guess, is what I want to get to. I know that's a lot- - No, no there's a lot to unpack so I want to address kind of different points.
First of all, I want to address it on the portfolio level and on the individual trade level. As far as the individual trade level, you know, fixing or adjusting, there's a bit of mental counting that goes on, because ultimately when you roll, you are literally closing one position and opening a new one, and one profit or loss is realized. And then you open a new one that's becomes unrealized. And this idea of keeping the dream alive and this position where you're mentally, no keeping a log of the credits or whatever, and at the end of the day, you rolled it 10 times and you broke even well, really, that was one huge losing trade, one smaller winner, one smaller winner, and one smaller winner, ultimately you have enough winners that basically stack up and wash out that loser, that's literally what it is.
But again, this concept of when you have- - [Eric] Let me, however, the ego portion of saying I didn't lose is I think a factor nobody talks about, nobody wants to admit that they lost and that they were wrong. Which that is the wrong mindset, you are not wrong, when you go into a high probability trade, you are not wrong. You're never wrong, or you're right.
It's just where the probability landed in this magical distribution of winners and losers. And I think if you can disconnect that ego, which I've learned to do painfully, it's taken me awhile, I would just take the loss. I would just be like, damn you know, I lost, because for me, another something you said was, to me, there was too much mental capital being taken up in that loser. - [David] Yeah, mental capital, right. - [Eric] Where I could not, it would affect my future trades if I was hanging on to this luggage from a previous relationship, we'll call it trade, You know what I mean? - [David] So this idea of, look, if you're rolling this thing, purely due to ego, I don't think that's the right motivation, but if it's calculated and you go, okay, I have the risk capacity to enter this one position and let it work itself out.
And you make that determination with a plan, that's okay. And again, that comes back to what I said earlier, if you're well capitalized and you have 40 or 50 positions and one or two are these kinds of super losers that you're nursing, that may be okay, because they individually may not be drawing down your net liq that much to affect your mentality or overall position. So from an individual position standpoint, understanding mechanically, what's actually happening as in this taking a loss, taking a winner, winner, winner, until it evens out.
And you're mentally accounting for that, hey, this position I managed to a scratch or whatever. That's okay, as long as you properly budget for that capital allocation and the risk potential for that position. Now from a portfolio standpoint, rolling is really meant to sort of adjust your exposure from a delta level, from a theta level, you're monitoring your risk. Now I want to sort of challenge the convention of having to win, you know, and this whole idea of delta neutral. 'Cause I've thought about this.
If you only sold puts and you could roll it and they could win or whatever, of course you're going to have ups and downs, your portfolio net liq is going to have a certain volatility. Now let's say you decided to be delta neutral and you sell calls as well. And your focus is more on your exposure, to keep, because delta neutrality is only at entry. As soon as the market moves, you're no longer neutral, and you have to roll or do something to adjust.
- [Eric] And it's the same for the probability. The probability is only true right at the entry. And after that, the probabilities are constantly changing. So that's yeah, same thing. - [David] I want to pose this kind of thought experiment.
Let's just say you did all this stuff with the puts and the calls, and let's say you racked up all the P&Ls, and at the end of the day, let's say you made, $10,000 in total selling puts, and after factoring losses and all the adjustments. And at the end of the day, your calls, you rack up all the trades, and you made exactly $0 on the call side, right? You didn't lose, but you didn't win. What I can tell you is by not selling the calls at all, you're still going to make that $10,000 on the put side, but your volatility of your portfolio would be greater because what's going on is during the fluctuation, and as the market moves and it's going up and down, and from where you start to where you end, your P&L on both of them is going to end up at 10,000. But during that movement, whenever the puts are losing, the calls are padding your losses. and they're smoothing out the volatility of your portfolio.
Because TastyTrade talks about this a lot, but it's hard to, it's easy to miss this when you're too focused on just the concept, of trade small, trade often, keep the dream alive. There's all these things that people gravitate towards because they just kind of have this shiny object syndrome or they want to chase what's easy or what seems to be the magic recipe, but in between the line, the undertone is really about risk management. So if you made the same amount of money selling puts as in selling puts and calls, but you've reduced the standard deviation. And people have like the Sharpe ratio, which is measuring your return adjusted for the risk. But if you can boost the Sharpe ratio or reduce the standard deviation, the volatility of your portfolio without actually increasing your realized P&L is that so bad? Yes, it's more work, so maybe it's not worth it.
You're like, I just want to make my $10,000. I don't want to deal with the mental strength, mental capacity, but it depends on the mindset and your goal. If at the end of the day you look back and go, wow, I made the same amount of money, but my day to day movement was only plus or minus a percent, whereas, without it, I would probably be plus or minus two or 3%, right. That is objectively better. But subjectively it may not, depending on what you go through in your head throughout that experience and that time you spent, but that's I think the big takeaway for me, knowing what I know now. - [Eric] So let me ask you, and I know, so I've chosen to not do that.
I've chosen to not do the call side, not that I never get short, I do. There are times where I get short, I do it in other ways. I do it with instruments. Like VXX, UVXY, I have a better, you know, I'm air quoting for the listeners, system for when vol starts to pick up. And I'm short vol and short with positive deltas.
But I've had a hard time carrying negative deltas with options, admittedly, I'm not saying, and, and just, you know, not that you shouldn't or whatever, that's just me, I'm talking about my personal experience, I'm not good at it. So one of the things that I've done to adjust for what you're saying know though about, when you are carrying negative delta and things do go against you, it does smooth that curve. So what I've done is to just not be fully invested.
So for example, let's say we're talking about a $10,000 lot of money where if I was going to trade both sides, I might be using all of that money. But if I'm just trading half of that money to the long side, then that I've found that reduces some of that, because then at that point I know what my max losses are, and things like that. I can say, okay, at any point my max loss is only going to, if we woke up tomorrow and there was another COVID crash, all 10 of these positions are going to go to zero. I'm going to experience max loss.
So for me, what I've done is just said, okay, well, my max loss, when you add them all up is let's say 12, 15% of my account. I'm okay with that, I'm okay with that crash. Now, I could roll and see something, if I thought it was gonna be short term, but, and you know and I don't know if that helps with, but I guess where I was headed with the question of when you go delta neutral, and you're selling the call side, it actually doesn't take up the same, more capital.
- [David] Yes, the capital efficiency is definitely there. - The capital's efficiency's there, but does that mean that you are more fully invested, meaning you're trading two sides with the same type of capital versus say, me trading one side with the same amount of capital? Does that make sense? I don't know if that makes sense or not. - [David] No, I think, well, if you're using more capital, you're more fully invested, but it's not doubling your, it's not doubling your notional risk, but it is lowering your probability by virtue of being able to lose on both sides of the market. So it requires more management. - [Eric] You now have two risks. - [David] Yes, right, right, but in terms of the terms of the notional risk, yes, it's the same, that's what the capital efficiency means, you can potentially make more with not using more capital.
- [Eric] All right, that's it for my first segment with David Sun. If you enjoyed this episode, you definitely don't want to miss our next segment coming out next week. So be sure to subscribe to the podcast, so you don't miss anything. Thanks for listening and I'll talk to you soon.