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Wednesday, November 21, 2018

OPTIONS LESSON FOR WANNABE TRADERS

“Selling naked call/put premium gets you this guy!”

We now know, the extent to which $80 - $150 million dollars in hedge fund 
money went … POOF! “Aaaaaand it’s gone”!, in about 48 hours … the fund 
manager sold both out-of-the-money [OTM] calls & puts in Nat Gas [NG], for 
Jan, Feb, March, & April 2019 … “with Winter officially approaching, you go 
naked on both sides of the market equation, in the most historically volatile 
commodity known to mankind, and expect the market to not move the entire 
winter, all the while you collect fat premium via time [theta] decay? … Sure 
Skippy, and I got some beachfront property in fucking Kansas I’d like to show 
you … for sale cheap … how ‘bout it”?

And these are the “smartest people in the room”? … these are the kind of guys 
who end up burying money so fast when SHTF, they simply shrug it off as a  
“one off”, go someplace else, rename a new fund, and are back at it peddling 
the same horseshit to brand new wealthy chumps investors, who haven’t a 
clue. “The mistakes made here , by the fund’s manager, are legendary … you 
wanna be an options trader millionaire? … you wanna get rich trading options? 
… then listen up, cuz you don’t do what these “experts” preach … not now, not 
ever! … they simply have no fucking clue what they are talking about, and I 
don’t care how many books you write, how many videos on YouTube you got, or 
how many testimonials you collect … their premise is flawed, the market logic 
makes no sense, and sooner or later you go bankrupt … and investors did”!  
Before I get into specifics, what common sense does it make to expect Winter 
to play out exactly as averages say it will, and then compound the problem 
with being “naked” on both sides? … it makes zero sense.

They sold naked calls & puts … they got unlimited risk on both sides … any 
market move over the next couple of months, either up or down, with even the 
tiniest of volatility spikes, will hurt both sides of the position … whatever you 
think you’re gonna get with theta decay, is more than made up by any spike in 
vega [volatility]. Instead of being short naked both OTM calls & puts, which is 
the riskiest strategy known to man, there was a far better way to achieve what 
they wanted with very limited risk … SELL the at-the-money [ATM] calls & 
puts, and BUY the OTM calls & puts … if the market stays calm, the ATM 
calls & puts which have the highest time premium cuz their deltas are around 
0.50, will decay faster and farther … the OTM calls and puts which you’re 
long will NOT suffer time decay as much cuz of 2 important factors; 1) their 
deltas are much smaller, and 2) nobody is gonna sell OTM options “in the 
hole” [meaning cheap], with the entire winter ahead of us. And so, the options 
you’re short decay, while the ones you’re long don’t … that equals profit.

If SHTF, which it did natch, the short ATM calls & puts lose a ton of their 
time value going in-the-money [calls ITM] or OTM for the puts, while 
volatility spikes the OTM calls & puts which you’re long … if you don’t want 
to do the “straddle”, do the “strangle” … in any event, the market can’t be on 
both sides of the equation at the same time, so what you lose on one side, you 
gain on the other … combine the net premium you collected from the positions 
and subtract it from the width of the strike prices … THAT’S YOUR MAX 
THEORETICAL LOSS POTENTIAL AT EXPIRATION … NOT A PENNY 
MORE! … and if you did it right, that means any losses would be very small 
from a big sigma move in the underlying … your gains would be about 80% 
of being totally naked and exposed … “somebody tell me again how smart these 
guys were/are … I’m not flaming the manager cuz he was wrong … I’m flaming 
the manger cuz he’s an idiot, and should have known better … he hangs his hat 
out there as an “expert”, and then promptly proceeds to make a rookie mistake 
that cost investors $80 million, & buries his fund … this is worse than stupidity 
… this is gross negligence of the highest order”!

Rules # 1 and 2 in options trading; 1) ALWAYS KNOW YOUR RISK 
BEFORE YOU PUT THE POSITION ON, and 2) never forget rule #1. And 
that means never accept open ended risk, no matter how much the premium is 
or how good it looks, or how much of a genius you think you are … the 
premiums are “fat” for a reason!

If there’s one constant in trading it’s this; “shit happens” all the time, and the 
unexpected is to be expected, and when it comes to options trading, the mantra 
of “just sell premium, book it, and laugh all the way to the bank” is pure bullshit 
“I can’t tell you all of the gazillions of people I’ve known that have seen 
accounts destroyed attempting to collect “easy” premium dollars, or all of the 
hedge funds that blow the fuck up every few years, for the exact same reason 
… more than you can imagine”.

And despite what every options book ever written says, which is, “the way to 
make consistent money in options is to be a seller of premium”, over the course 
of my trading career which spans decades, the key to making money is THE 
EXACT OPPOSITE! … simply put, you want to BUY volatility when it’s low, 
and SELL volatility when it’s very high, through appropriate reduced risk 
strategies … however, most of the time volatility is normal to low in most 
markets, which means selling premium becomes a trip to the poor house! 
… and just cuz volatility may be high in a market [think stock indices right 
now, as the NDX100 VIX is at 7 year highs around 35 - 40], doesn’t mean it 
can’t go higher still and literally kill option writing strategies.

This is why I have always preferred BUYING volatility, and using strategies 
where any increase in VIX [general term for volatility in any market] 
produces profit … time your strategies correctly, and you make staggering 
sums of money, with reduced risk … and for the record, that’s what I’m 
attempting to do in the C2 options signals advisory for gold [via GLD], and the 
SP500 [SPY], which are both ETF’s traded on the NYSE.

Turning to today’s gold market … “natch, a bucket of warm bat guano” … why 
is this shit even open today? … once again, Asia & Europe dead meat, as far as 
range is concerned and trading activity … all there is are dealers trapping 
longs/shorts and running tight stops … quick trips up followed by quick trips 
down, and then sitting for minutes on end where the market can’t move 30 
cents to save its life.

And then comes the inevitable headline [to save stocks don’tchaknow] from 
MNI [Market News International, that “unnamed” senior FED officials are 
considering stopping rate hikes in the Spring of 2019 … and if you think this 
headline isn’t a plant, then I got the same beachfront property in Kansas I’m 
offering the defunct option hedge fund guru’s … gold benefits, but it isn’t 
about gold, it’s about floating the proverbial “trial balloon” to gauge market 
reaction to the unfounded rumor.

Which brings us right back to gold, cuz it goes from coma status to mini melt 
up in a couple of seconds … natch, you could buy the rally, but I’ve warned 
before what happens when you buy rallies in gold, and it ain’t pretty … and 
sure enough, ticking off some juicy buy stops above yesterday’s high, is just 
what the dealers want and need to slam it lower … “welcome to the 
retracement that now won’t rally”! … and it’s back to the same old same old, 
being stuck inside a relatively tight range with no place to go, with very small 
incremental price moves that generate panic among both longs and shorts 
… in other words, specs lose.

As I pointed out yesterday, at present there is no “flow” to gold as it trades 
… from a dead stop it either skyrockets, goes “Thelma & Louise”, or can’t 
move 30 cents in an hour one way or the other … everybody gets bullish at 
once, everybody gets bearish at once, or everybody looks at it and says it’s 
dead, why fool with it? … and lately, there hasn’t been anything else in this 
market. Our algorithm has been virtually silent for days; either can’t generate 
enough intraday volatility to escape the “false positives” and get long, or the 
market dies in its tracks … simply put, no “Hoover Dam” trade flow. Get this 
Thanksgiving Holiday out of the way, and things should return to normal 
[hopefully].

The thing that makes gold as treacherous as any market traded, is the fact 
that when the dealers turn it lower, the red spikes down are vicious and quick 
… many times you see hours of price appreciation get evaporated within 
seconds … that in turn kicks off sell stops which make the decline worse, and 
if you overstay your long position by simply a few seconds, that profit has 
turned into a nice loss, thank you very much gold dealers … what we need to 
see is generally higher ranges, and away from this $5 - $8 range bullshit, where 
it’s nothing but dealer manipulation for their benefit and your loss … given the 
massacre in stocks & credit markets, gold should be seeing $15 - $20+ ranges 
every day, with appropriate order flow that lessens dealer impact upon price 
… so far, we haven’t seen this, but I can assure you that time is coming. 

And as I write while gold is sitting doing zip, out of the blue comes a $2.50 
straight decline in 4 minutes to wipe out a few more longs that have been 
HODL since the high … no warning, no nothing, just a straight shot lower on 
“vapors” … it’s what dealers do, and just to rub salt in your face, it’s right 
back up to where it started after the stops are cleaned out … is it any wonder 
why this market drives people insane? Like I said before, when it retraces you 
don’t want it anymore, cuz you got no place to go with your long positions.

Yesterday, I made a copy of the monthly gold price … directly below, with 
commentary.

click to enlarge

And when this trend line band is broken, all hell is gonna break loose on the 
upside … “oh, we’ll get the ranges all right … be careful what you wish for”!

Mid afternoon in New York, and it’s an all too familiar pattern in gold of 
market punishment … it simply can’t hold gains or breaks and follow 
through anywhere that compensates for the risk you’re taking by being long 
[or short for that matter] … risk 1, lose 5 ...what the hell is that?

No PAMM trades today. It is what it is folks, and when there’s nothing to do, 
we just sit patiently and wait it out.

No trading tomorrow, I’ll be back at it early Friday morning … I’m outta 
here … until Friday mi amigos … Onward & Upward!!

Have a great Thanksgiving Holiday everybody!!

-vegas

OUR TURNKEY FOREX “PAMM/MAM” IS OPEN AND
OPERATIONAL, AS WELL AS OUR C2 OPTIONS ADVISORY 
SERVICE.  DETAILS IN “DOWNLOAD LINKS” SECTION IN 
RIGHT HAND COLUMN. START YOUR JOURNEY FROM 
WHERE YOU ARE AT TO “ESCAPE TO SUCCESS”!





















 

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