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”!

 

FACULTY LOUNGE PARTY TOMORROW

“I’m not stupid … the paint forced me into this corner!”

Oh, it will be glorious … all the self-anointed, smartest people in the room types, fresh with reams of data and “dot plots”, get together for the June 2017 FED interest rate hike party tomorrow. The toxic level of complete bullshit emanating from the Mariner Eccles building in D.C. would put most people in a coma … which is the desired affect … cuz nobody really has any idea what they say when they’re talking anyway … it all sounds good, kinda like they know what they’re doing … and as I have said before, if you have young kids in the house, please don’t expose them to the FED statement on Wednesday, cuz it could definitely stunt brain growth and development.

I’ll be taking my usual “red pill”, “yellow pill”, & “purple pill” to help ease the brain pain, but I swear, if I see the words “data dependent” and/or “transitory” one more F-ing time from these assclowns, my head is gonna explode all over the turquoise water down here in the Caribbean. These elitist Twits at the FED have done more harm to the middle class of America, over the last 100+ years of their existence, than any single other thing you can name. If there is any group of Apparatchiks that deserve public scorn, ridicule, and tar & feathers more than these Twits, I don’t know of them. This body was created by elites, has been run by elites, serves the elites, and makes sure the elites get what they want … all at the expense of the middle class who “pay the bill”.

Obama’s 8 tortuous years gutted middle class America with his “hope & change” BS, first speeding up the exodus of jobs out of the country for his Lib billionaire buddy tech donors, second imposing a health care regime that skyrocketed premiums & deductibles while doing absolutely nothing to improve health care itself, and third imposing onerous government regulations that made sure the economy remained sick; Obama being the first AND ONLY president in American history to never have had a quarter of 3% growth in the economy.

You want prosperity for America? You want a strong and vibrant middle class, along with a path to it for those less fortunate trying to work their way up the economic ladder so they can get ahead and have a brighter future? First step was getting rid of Obama; second step was not electing the corrupt and utterly criminal Cankles Clinton, who if left to her own devices with government power at her fingertips, would have turned the U.S. into Venezuela in short order, all the while her Clinton Crime Family would have profited handsomely via influence peddling, corruption, and bribery. It’s what they do; it’s what they have always done; they are addicted to money & power.

Now throw the FED into this bubbling pile of toxic waste, and their job is to find somebody to pay the bills long enough to keep the Ponzi scheme rolling along … that somebody is you. The only way for America to regain its status in the world as an economic powerhouse, is to start by getting rid of the FED and backing currency with gold. Of course, this solution is like showing a group of vampire’s a cross at sunrise inside a Catholic church, and their utter horror at the solution is your first indication it is the best policy … cuz if you think the assclowns in D.C. are working for your benefit and that of your family, then you are simply delusional beyond hope. They are there to do the bidding of their global money masters.

Equity markets, of course, will be in silent reverence of the process, and traders will wait for 2 P.M. tomorrow, when the oracles will release their musings to the masses to pour over and ponder every word and syllable trying to glean their brilliance and intelligence so that we mere mortals can understand. “As for me, I’ll simply ask the dog what he thinks after I give him some bacon & roast beef, and depending on how he lays down to nap after his feast, I’ll be better able to figure out what’s gonna happen. If he lays horizontal somewhere and starts to sleep, then I know 1) the “Plunge Protection Team” is at the ready should any idiot get the notion now is the time to sell stocks, 2) central bank bids underneath key stock index components will remain and get larger, and 3) stocks will not be allowed to go significantly lower ever again, especially in the stock indices, cuz their elite masters don’t want that, and also cuz some day they gotta retire and get a gig at Squid or JPM that pays 7 digits, and who wants to upset that apple cart”?

Well, there you go … my analysis is every bit as scientific as the “Wall Street Herd”, who like their FED brethren speak in bullshit and go to college so they can spend 30 minutes talking and nobody has any idea what they said. “You wanna listen to that? Ever actually read a prospectus or listened to a Wall Street analyst? Seriously, you can’t make it to the end without starting to drink heavily. Point is, none of it matters; this is such a circus show, and every FED meeting draws dolts who will listen intently for “clues” to what they are going to do. What they are going to do is continue to screw you and me by raising rates into a “falling down” domestic & world economy and making business conditions tougher for average people”. So, now I’ve saved you from drinking heavily [for the moment].

Turning to today’s market … “sleepytime” is the key word for today, as I expect nobody to do anything but wish they weren’t trading or watching a stupid computer screen. It’s gonna be that kind of day, as we wait with baited breath what the faculty lounge Twits come up with tomorrow at 2 P.M. “Is the circus hiring for the summer”?

Here in the pre-market, a few hours to the NY open, it’s “flatline city”; no doubt somebody will probably ramp the Dow30 up into the open so the Chipmunks can do their thing, but really, there is nothing going on now … yesterday into the close of course, the central planners ramped the Dow30 up about 30 points in the last 5 minutes of cash trading … absolutely can’t have a lower close if the Dow30 is anywhere near the previous day’s close; must have it turn green so Sheeple can be told the market closed higher and they can hopefully get that fuzzy illusory feeling of wealth tingling through their legs.

NDX100 higher this morning, and there isn’t any way this stuff goes lower today or tomorrow into the FED report; this baby will be propped up, goosed up, and bid supported the entire day, with the goal to keep it out of the news cycle. And who knows, that could be good enough reason to ramp the SP500 & Dow30 to record-er-er highs later today, cuz that would be seen as vindication that the FED is on the right track … even though everybody knows they are clueless Twits. We’ll see.

Chipmunks gotta be chipmunks, and so it’s no surprise they come out of the box on the open and buy … what else is new? … however, as I have explained so many times my mouth gets sore from having to repeat this to people, you absolutely cannot buy rallies or sell breaks in the stock indices; you have to do the opposite, and buying breaks and selling spikes up is what most traders do not want to do. Thus, they lose money, and then can’t understand what happened and why.

First trade of the day, directly below, sees me getting long not exactly like I want; well, no problem, I lower my volume a little and then wait for a spike up. I get the spike a lot quicker than I expected, and I liquidate on the then high tick. Granted, it went a few ticks higher, but as I have written before, when presented with spikes up, you liquidate and don’t care what the ensuing upside consequences are for the simple reason we know spikes up don’t last. Again, not being able to buy it like I want, forces me on the spike up to treat it as a scalp … if I want to make money, I have to make the trade and not worry where it goes.

This isn’t the kind of day where I think a nice “pony ride” up is going to take place with no worries … FED meeting tomorrow takes care of that scenario … much more likely this stuff chops around taking cues from NDX100, politics, and whatever else hits the newswires. So far, it’s a “chopfest” with a higher bias.

And sure enough, after some brief mini blasts to the upside that come out of the blue on central banks adjusting their bids under key index components, if you take away a few of those M1’s, what are you left with? That’s right, not much; and what we end up with on “waiting for tomorrow” Tuesday, is the slow glacial drift up. No breaks of any consequence, and no real moves up on any buying other than those dumb enough to sell this stuff looking for a down move [and good luck with that]. So, after the NDX100 gets taken out and shot the last few days, the Dow30 sits at record highs, and the new catch phrase among FED sycophants is now a “dovish hike”; there’s a bullish reason for anything/everything, and if you haven’t figured it out yet it’s called central bank manipulation.

These last few months especially, once the NY open is over and done in the first half hour or so, the market moves into its coma stage, where you can expect as little movement as possible, and then comes the next M1 from somewhere to lower the boom in 30 seconds to wipe out over an hour of “action” [if you want to be nice and call it that]. And if you are in a position, it leaves you in a terrible dilemma; do you stay in and possibly let the loss get bigger hoping it comes back, do you “double up”, or do you cut the cord and eat the loss only to see it come back and then know you got caught in chop? Meanwhile, to make matters worse, and to which I have cataloged in the past here on the blog posts, the SP500 is right now, one of the sickest markets going when it comes to trading, so it’s not providing the trading leadership it should be; all it does is “gap” from one price point to another on the M1. All this, of course, unless the market is breaking or rallying, leaves you in a not very comfortable trading zone; one I’m not willing to enter because the risks are not commensurate with the reward.

Which brings me back to my point earlier, which is you can’t care about the level of the Dow30 when you trade it; it’s all about the “setup”. If the market isn’t going to give you rallies and breaks, and instead goes into “chop mode”, you have to have the discipline and patience to wait it out and make the very high percentage trades, and if you can’t buy it like you want, your choice is to either wait it out or lower your volume and leverage some, until you get what you’re looking for in terms of “setup”. And to that end, I’ll be the first to admit, the Dow30 over the last 2 months for sure, and really since the end of February 2016 with only a very few specific exceptions, hasn’t really performed like in the past, thank you very much central banks. But that doesn’t mean you throw away all discipline and patience and do “stupid shit”, just so you can trade.

The only people who should care about the level of the Dow30, are those who regularly buy ETF’s and/or index funds; and then only when you are within about 5 years of your financial goals, cuz there is no rule that says the market has to be near record highs when you cash out, so the market might not be there when you need it most. As I have repeatedly said in the past, the PAMM’s total return after incentive fees over time will absolutely “monkey hammer” any long term ETF or index fund you choose to buy and hang onto in the indices, all the while totally avoiding overnight and weekend risk exposure that most certainly rears its head every once in a while over the years and can potentially cause great damage to any portfolio. So while lately, not very many days have seen multiple trades, I can assure you when ranges and volatilities pick up from 50+ year lows which we have now, that widening performance will become evident and manifest itself greatly. That’s why I don’t care whether the Dow30 is at 5,000 or 50,000; it simply doesn’t matter in making your cash balance grow.

Here in the late afternoon, we are seeing the Dow30 flirt with ever increasing “record-er-er” highs, first shooting up quickly and hitting a new all time high, then quickly falling back … this is a classic short covering modus operandi cuz there is no follow through. What this means for tomorrow, though, is that the new mantra of “dovish hike” most likely is a “buy the rumor, sell the fact”, and if they hit all cylinders perfectly, the Dow30 initially jumps on the rate hike and then sells off on “profit taking” [thank you Bob Pisani]. As I said, it’s all about the setup.

It’s about 45 minutes to the close, and I’ve had enough of watching paint dry for one day; I didn’t really expect today to be any great shakes one way or the other … realistically, making a buck today is about all you can expect from a market held captive by politics and the NDX100 takedown the day before the Faculty Lounge Twits meet and decide to raise rates … moving nowhere on nothing and then right back; rinse & repeat enough to kill an account if you get sucked up into this … hell, since Noon the Dow30 hasn’t even had a 20 point range top to bottom; the SP500 almost as ridiculous… cuz “fun-durr-mentals”. In that respect, making some pennies today is better than losing, so I’ll take it and move on. Tomorrow all hell breaks loose at 2 P.M.; and of course, “Onward & Upward”.

PAMM spreadsheet directly below.

Beach time! … the dog and I are outta here … until tomorrow.

Have a great day everybody!

-vegas

OUR TURNKEY FOREX  “PAMM/MAM”  IS NOW OPEN AND OPERATIONAL; SEE “PAMM/MAM MANAGED MONEY PROGRAM” IN “DOWNLOAD LINKS” SECTION IN RIGHT HAND COLUMN FOR DETAILS [VIEW ONLINE AND/OR DOWNLOAD] AND START YOUR JOURNEY FROM WHERE YOU ARE AT TO “ESCAPE TO SUCCESS”!