Category: Options

Vegas, Volatility, and the NVDA Nightmare

In 2022, I was on top of the world in the trading realm. My main options selling account had netted a 38% annualized return, while the S&P 500 had tumbled by 19%. I strutted into 2023 with a swagger, cockiness in tow. Trading, I thought, was a game I had mastered, and I could almost taste the sweet freedom of retirement. I envisioned myself selling options from a beachside hammock or at least from the comfort of my home office.

Breaking the Cardinal Rule

My strategy was simple yet effective: selling Strangles on individual stocks. The plan was always to exit before earnings announcements, avoiding the heightened volatility they often bring. This strategy hinges on the stock price staying within a specific range, ideally moving sideways, enabling me to collect a profit neatly.

Below is an example of a Strangle: a stock is currently trading at $80, and the expectation is that it will maintain its course within the Strangle’s designated range, between $100 on the upside and $60 on the downside.

Unfortunately, in the spring of 2023, I broke my cardinal rule. Distracted by a work trip to Las Vegas, I left Strangles open on NVIDIA Corp (“NVDA”), a stock mired in artificial intelligence hype with a looming earnings announcement. My initial bet was for NVDA to stay within a $40 range. Little did I know, while I was immersed in the Vegas buzz, NVDA’s stock price was preparing to leap.

The Vegas Surprise

Wrapping up my trip, I was greeted by a financial shock. NVDA’s stock had not just breached my set range but had soared way over the expected move overnight, from around $305 to $379. And it didn’t stop there. Over the next three months, NVDA continued its meteoric rise, peaking around $500. My position, which was once hovering around breakeven, plummeted to a staggering $25,000 loss. Profitability on my overall portfolio seemed like a distant dream.

The Rescue Operation

In a state of panic, I reached out to the CEO of TastyLive (Tom Sosnoff) who replied later that night. (In a world where billionaire CEOs are as accessible as a fortress, the CEO of Tasty stood out with a same-day reply, shining a spotlight on Tastytrade’s unparalleled dedication to their customers.) His advice was consistent: stay mechanical. This meant rolling up puts, extending expiration dates, and waiting for the stock to stabilize. There was some comfort in knowing that I wasn’t alone in this predicament; even Mr. Sosnoff himself was nursing a bad NVDA trade at the time.

Without going into every painstaking detail, employing TastyLive’s mechanics religiously over the following months, I managed to pare down my loss from $25,000 to $3,000.

Deciding to Bail

As NVDA approached another earnings announcement, I faced a decision. I could extend the term and continue wrestling with this volatile stock, hoping to break even or eke out a small profit. However, tired and wary of another potential gap-up and potentially bigger loss, I decided to close the trade and accept a $3,000 loss on this position. After all, another artificial intelligence hype story could easily send NVDA soaring again.

Lessons Learned

This experience was a hard but valuable teacher. Here’s what I took away:

· No More Strangles on Individual Stocks: Especially not on stocks in hot industries like AI. The unpredictability is just too high. I’ve shifted to ETFs, which generally tend to be more stable than individual stocks.

· Stay Vigilant While Traveling: Reducing trades or at least monitoring them closely is crucial. Never neglect the account.

· Stay Small: This principle saved me. My initial NVDA position was just ~1–2% of my buying power in this account, allowing me the flexibility to manage the trade through its tumultuous journey.

· The Power of Options Selling: Unlike buying options, selling gives you tools to maneuver and potentially turn a losing situation around. (Had I purchased an option that turned sour, my only recourse would be to sit tight and cross my fingers, hoping it wouldn’t expire completely worthless.)

Looking Forward

As of now, this options-selling account is only up about 5% this year, trailing the S&P 500’s stellar 20% YTD gain. It is unlikely I’ll hit my target return of 18%; however, I have survived to trade another day. (Conversely, my wife’s retirement account, where we mainly sell Cash Secured Puts and Covered Calls is up an impressive 18%.) This journey has been a testament to resilience in the face of market unpredictability. Happy trading, and remember, the market always has a lesson to teach.

I first learned of tastytrade in late 2019. It would, however, take me a couple of years to finally open an account.  I spent those years wasting money on books, options courses, and fees on other trading platforms before finally opening an account at tastytrade. Learn from my mistakes and don’t waste another minute or dollar buying expensive options trading courses.  At least, before you decide, take a look at the priceless (yet free) educational content on tastylive, and then open an account on tastytrade.  These are the best places for any active options traders.

Streamlined User Interface

In 2020, during the pandemic, I started working from home, and decided to open an options trading account at a couple of different brokerages.  I wanted to create an additional income stream to contribute to my financial independence.

I unfortunately delayed opening an account at tastytrade and instead opted for the larger and more widely recognized platforms, one of which already held my retirement funds.  However, I found these other platforms (Fidelity and Interactive Brokers) to be clunky, confusing or both.  Tastytrade is like the Apple iPhone of trading platforms with its seamless and intuitive user interface.  It almost feels second nature.

For example, on Fidelity, I had to inefficiently open multiple windows to enter a simple options trade.  Similarly, while Interactive Brokers does offer more products than tastytrade (including orange juice futures), for all of Interactive Brokers’ power, it can be a bit clucky and confusing.  For example, it took multiple phone calls to support and tinkering with the platform to finally find the beta weighted delta of my portfolio; something readily streamlined into the user interface of the tastytrade platform.

Useful Educational Content

More importantly both Fidelity and Interactive Brokers lack thought leadership and independent research on how to optimize and efficiently manage risk.  While using these less streamlined platforms, I constantly found myself consuming research on tastylive to learn the mechanics and strategies of trading. 

Tastylive is a think-tank that goes beyond the typical brokerage experience.  They provide live daily commentary and research content that helps me to consistently make profits.  Tasty’s research often involves back-testing different trading strategies, running simulations, and evaluating market statistics to form conclusions. This is a much more data-driven approach to understanding financial markets, and it is designed to help investors and traders make more informed decisions.

I have binge-watched all the past episodes of Best Practices, Options Jive, and Market Measures; I recommend you do the same.  These programs helped me to learn trading strategies and to properly manage risk.  I now comfortably and consistently manage winners, and I don’t panic when some positions are inevitably challenged.  I have also watched every episode of Rising Stars, which inspires me to see retail investors, such as myself, be successful using the Tasty mechanics.

Finally, in the summer of 2022 I went fully into actively selling options on tastytrade. I funded my margin trading account with around $200k in June 2022. In six months of selling options, I made a return of roughly $38k or about a 19% return (38% annualized). Meanwhile, the S&P lost 18%.  I was hooked and knew this was my way to financial independence.

According to research at tastylive, an actively managed account can reasonably expect to consistently make an 18% return, which is 2-3x the return of passively investing in the stock market or approximately 4x the risk-free return (see link). For the first time (since discovering Bitcoin), I realized I have the tools to escape the corporate rat race and to earn my way to financial freedom with actively selling options.

I had found the holy grail – a way to consistently generate income from selling options.  After seeing numerous people laid off during the pandemic (including my former boss and a colleague), it felt good to know I could support my family with selling options if I ever unfortunately lose my 9-5.

Watchlists

I remember wasting money buying lists of daily options trades.  Don’t waste your money.  The tastytrade platform has built-in watchlists to keep you engaged.  Whether you are looking to trade earnings, high implied volatility or futures, tastytrade makes it seamless to find a viable trade.  In addition, there is a Follow page, where you can see real-time trades of the expert options traders at Tasty.

Each day, I enter one or two new trades.  I first check the various watchlists and if nothing meets my criteria, I check the Follow page to see what trades the Tasty personalities have put on.  Unlike day trading, I don’t have to watch the markets all day, and it takes less than 30 minutes to research and to execute a new trade or two each day.  This is great because I still work a 9-5.  I typically have 10-20 positions in my margin trading account, and given how seamless the platform is, I efficiently scan, monitor, and manage any existing positions.

Customer Service and Connection

The customer service at tastytrade is outstanding. Whether I have a question about a complex options strategy or need help navigating the platform, the support team is prompt and knowledgeable. I have even emailed the CEO of tastylive (Tom Sosnoff) and other tastylive personalities like Dr. Jim Schultz, and they have always provided a response the same or next day at most.  Also, since joining Tasty, I have attended two live events in NYC, which are fantastic.

Conclusion

Tasty has given me the tools, know-how, and confidence to grow my investment portfolio. It is empowering to know I have another stream of income to support my family by selling options. If you’re keen on embarking on a similar journey, don’t waste time and money like I did initially. Dive into the wealth of information that tastylive offers for free and get trading on tastytrade!

Happy trading.

Ah, stock options. The very mention of them is enough to make many people break into a cold sweat. I get it, trust me. The first time I bought a Call option was back in 2005, and let’s just say it was a short-lived, expensive lesson in what not to do. I had just moved to New York City and discovered Jamba Juice, a smoothie franchise next to my office in midtown Manhattan. Feeling bullish, I invested a few hundred bucks to buy a Call option. A couple of months later? Poof! My money was gone. I was left scratching my head, vowing to never touch options again.

Sell Options for Success

Fast forward 15 years, I thankfully came across Tasty Live, which taught me the fundamentals of selling options rather than buying them. Why? According to an article in Forbes, “90% of options buyers lose money.”  I pivoted to the other side of the trade – selling options where my chances of success are much improved.

Selling options does not need to be complex, you do not need to be great at math, and you do not need to know all the Greeks.  I have found consistent success with the relatively simple process of selling Cash Secured Puts, which essentially means you expect the underlying stock to go higher.

Selling Puts has many benefits: 1) high probability of success 2) lowers the cost basis to outperform the stock market, and 3) provides consistent cash flows.  Let us explore these points further.

The Wheel Strategy

In our retirement and Health Savings Account (HSA), I employ the Wheel Strategy.  Essentially, I sell a Put option on an underlying stock or ETF (meaning I expect the stock price to go higher). If, at expiration, the stock price is lower than the strike price, I buy 100 shares of the underlying stock at a discount, at which point I sell a Call option on the 100 underling shares.

The results speak for themselves. Since starting to sell options in our HSA in 2020, I am up approximately 30% year-to-date, outperforming the S&P 500 (up around 16%). Over the past three years, I am up a cumulative 125%.

While our HSA is on the smaller end (~$15k), it is empowering to generate consistent market-beating profits by selling options regardless of whether or not we are in a bull or bear market.

How I Sell Cash Secured Puts

Recently, I sold a Put in Block, Inc (NYSE: SQ) for my wife’s Individual Retirement Account (IRA) because the premiums I collected met our target returns (at least 2% return for the 30-45 days I am in the trade).  In addition, SQ is a company I do not mind owning if our option gets exercised.

Shown below is the order entry screen on Tasty Trade.

High Probability of Success

I typically look to sell the 30 Delta Puts, which signifies there is an approximate 30% chance the stock will close below our strike price, and I will end up owning 100 shares of the underlying stock.  In other words, there is an approximate 70% chance of a successful trade where the stock price remains elevated, and I collect the premium and move on.

In our example, I sold the $55 Put (#1 in the chart above) with a 29 Delta (#2); expiration date of October 20th or 45 days from when we originally put on the trade (#3).  The Probability of Profit (POP) is 72% (#4), which means there is a 72% chance I make at least $0.01 on the trade. 

Lower Cost Basis

Instead of selling the $55 Put, I could have just bought 100 shares of SQ at its then trading price $58 (#5), which would have cost ~$5,800 for 100 shares.  However, by selling the $55 Put, if the stock price is below $55 at expiration, I will end up owning the 100 shares for $5,344 ($55 Put x 100 shares = $5500 – $156 initial premium collected.); #6 in the chart above.  So inherently, you are advantaged by selling a Put to reduce your cost basis versus buying the stock outright.  This is a $456 discount on a stock I want to own stock.

Consistent Monthly Cash Flows

I typically look to sell options that expire in 30 to 45 days.  After I sell the Put, I immediately place an order to close the trade (aka buy back the Put at a lower price) to retain 90% of the premium I had initially collected.  In this way, I set it and forget it, until I get an alert the 1) trade was profitably closed and I keep the net premium, OR 2) stock price closed below the strike price at expiration, and I now own 100 shares of the stock at a discount.

In our example, I initially sold the Put and collected a premium of $156 (or $1.56 x 100 shares); #7 in the chart above.  I target buying back the Put (aka closing the trade at a lower price) at 10% of the initial premium collected. 

I immediately set a standing order to buy back the Put at $0.15 (10% of the initial $1.56 premium) to potentially book a profit of $140 ($156 initial premium – $15).  People typically think “buy low and sell high”.  In the case of selling options, we first “sell high and then buy low”. 

The expected ROE on this trade is 2.5% ($140 net premium /$5,500 initial investment); assuming I exit at 45 days, the annualized return is 20.6%; not too shabby.  (Subscribe to the Reclaiming F.I. Newsletter to receive a free return calculator spreadsheet.)

This strategy is a boon for retirees or anyone looking for enhanced supplemental income, especially when dividend investors typically expect to collect 2-5% dividend yield per annum.

The Wheel in Action

Continuing with our example, if at expiration the price of SQ stays above the strike price of the $55 Put, I keep the initial premium collected, and move on to our next trade.  However, if the price of SQ is below $55 on expiration, our Put option will get exercised and I will buy 100 shares of the underlying stock.  This is when the Wheel Strategy comes into play.  I typically sell a 30 Delta Call on the 100 shares of stock; this is what is known as a Covered Call.  Again, the 30 Delta means there is an approximate 70% chance the stock price will stay below this strike price.

Selling a Covered Call

In the example, if the Cash Secured Put is exercised and I buy 100 shares of SQ, I would then sell the 31 Delta Calls (A in the chart above) at the $62.50 strike price (B) and I would collect the initial premium of $148 ($1.48 x 100 shares); C in the chart above.  The Probability of Profit is 77% (D).

Again, I would immediately place a standing order to close the trade (aka buy back the Call at the lower price) at 10% of the initial $1.48 premium collected (or ~$0.15).  If at expiration the price of SQ is under the strike price, then I keep the premium and the 100 shares of the underlying stock.  Then I repeat the process and sell another ~30 Delta Call against our 100 shares. 

Conversely, if the price of SQ is higher than the $62.50 strike price, then the underlying stock gets Called away from us and I retain the profits.  Our expected return on selling a covered Call is 2.4% ($133 net premium /$5,500 initial investment); assuming I exit at 45 days, the annualized return is 19.6%.

Conclusion

Selling options has been a cornerstone strategy for me, and it has helped me to generate consistent returns while managing risk. If you have been skeptical about options, or worse, burnt by them, I urge you to reconsider and to explore the selling side. With the right education and approach, it can be a win-win situation. Happy trading!