It seems every post lately has someone complaining about how there are no real traders...nobody can make money...blah blah. I nailed this one pretty good, and had the entire chat to show at least some of the thought process. It should be educational for some. You can also see the GME play which was a small loser, but was nearly a big winner with the $195p. I came into Thursday long about 7 other "strong" stocks that nearly all failed, so I was red all day Thursday but this trade nearly got me even on the day. Today finished +$50k.
Anatomy of a fun 2-day trade (AMC +$60k)
- Thread starter Dustin
- Start date
Nobody here is selling puts. I bought puts and sold them as the stock tanked...sorry if that is unclear.
Nice little trade you made there, however let me give you a hint:
You use options for directional trading, so you play for gamma.
Instead of buying dailies have a look at the vol surface first.
Term structure is downward sloping, meaning short term is cheaper than long term. Historical vol is 135 for the 20 average, JUL9 trades at 146, JUL16 at 165.
Short term vol is coming down hard from over 400.
The better trade IMHO would have been to sell 16JUL 51 puts and buy 9JUL 51 puts for a structure like this:
You are long gamma and short vol, but still pay decay. The advantage over outright straddles is the fact that you have cushion in case the move gets stuck and vol collapses AND you can trade these for real size with a single combo order for way less edge loss against the MM. 9JUL does 300k a day so you can easily throw 1000 spreads at it with a single order.
Collect profits by either getting rid of the extra puts or keep full size and buy back the delta via shares.
Straddles or outright puts are actually pretty mediocre choice here, because the weekly straddle implies a daily move of 6% whereas the actual move was 4% on July 1st. That should already give you a hint that you're overpaying as you are fighting a 2% risk premium.
In addition you have pretty insane skew risk here:
If you are wrong, you lose on delta/gamma and vol as your strike slides down the skew.
The calendar would also help against that.
You use options for directional trading, so you play for gamma.
Instead of buying dailies have a look at the vol surface first.
Term structure is downward sloping, meaning short term is cheaper than long term. Historical vol is 135 for the 20 average, JUL9 trades at 146, JUL16 at 165.
Short term vol is coming down hard from over 400.
The better trade IMHO would have been to sell 16JUL 51 puts and buy 9JUL 51 puts for a structure like this:
You are long gamma and short vol, but still pay decay. The advantage over outright straddles is the fact that you have cushion in case the move gets stuck and vol collapses AND you can trade these for real size with a single combo order for way less edge loss against the MM. 9JUL does 300k a day so you can easily throw 1000 spreads at it with a single order.
Collect profits by either getting rid of the extra puts or keep full size and buy back the delta via shares.
Straddles or outright puts are actually pretty mediocre choice here, because the weekly straddle implies a daily move of 6% whereas the actual move was 4% on July 1st. That should already give you a hint that you're overpaying as you are fighting a 2% risk premium.
In addition you have pretty insane skew risk here:
If you are wrong, you lose on delta/gamma and vol as your strike slides down the skew.
The calendar would also help against that.
If you took this trade with a max $15k risk on the open and closed it at the low, what did it pay?
Fwiw statistically Friday's are my best day of the week by 2x so everything is a yolo. I'm not interested in the safer ways to trade this setup on Th/Fri.
You could have made more by risking less, what's not to like about that?
If you are just in the game to impress your subscribers with the yolo...well, that's a different motivation
But, how much more? I'm trying to understand the actual risk:reward at the best price of the day...educate me. What subscribers?
That brings up another thing for the new guys who will see this. There's two kinds of yolo's...educated and un-educated. When I say yolo, I mean a trade idea that can make 5-10x+ in 1-2 days using over 23 years of experience as a guide. Yolo doesn't mean a stupid bet that has 1 in 100 chance of making you rich. Get out of WSB and trade RH for a real broker.
Most trades that I take are this style, and it's these trades that made up the majority of my gains for the year. You can see today that one trade dwarfed all my other trade attempts, and that's normal. Throw shit at the wall and see what sticks. Add to winners, never to losers.
2021 is already my best year ever and the top 10 trades accounted for over 50% of my income. Educated yolo's are an important part of the plan.
Most trades that I take are this style, and it's these trades that made up the majority of my gains for the year. You can see today that one trade dwarfed all my other trade attempts, and that's normal. Throw shit at the wall and see what sticks. Add to winners, never to losers.
2021 is already my best year ever and the top 10 trades accounted for over 50% of my income. Educated yolo's are an important part of the plan.
Well, that should be easy to compute if you fire up your analyzer, check the theta from your outright straddle and then increase the size of the short calendar until its theta matches the straddle.
Compare the gamma of the two positions and you most likely get a lot more gamma per decay paid from the calendar. More gamma->more delta per 1$ in the underlying so without running the exact numbers I'd say about 1/3rd more while being neutral to skew.
Be aware, though that you're short vol. In this scenario this makes a lot of sense since IV trades over realized by a lot. If you want to play for a breakout in a dull stock where vol is expanding (aka. a meme stock in the making), you should not use this structure
Whatever, man. I usually take the other side of these trades and I love people who are takers in overpriced gamma bets....day in day out. To each his own
Whatever, man. I usually take the other side of these trades and I love people who are takers in overpriced gamma bets....day in day out. To each his own
There's no right or wrong in the market, just profits.