Dough has been an invaluable place to learn from the mistakes of others without having committing my capital in it's endeavor.
Once again, our favorite trader Robyn, has done it with yet another earnings play. This time it is the video card manufacturer Nvidia. Anyone growing up in the 90s knows the importance of this company. Back in the day 3D Fx was a player on the graphics card platform. They had some really great ideas such as SLI by linking two graphics cards together for additional parallel processing power. Alas 3D Fx couldn't keep up with the bigger players such as ATI (AMD) and Nvidia (NVDA) and got acquired by the latter in 2002. Nvidia graphics cards all of a sudden had SLI power and a new market segment was formed. Again, I digress...
She sold a strangle, yet again, for 7AUG 19P and 22.5C. The MMM on this is 1.473 and it closed at 20.45 today. That means the stock can go up or down, priced by the market, 1.473 [18.977, 21.923]. That's all good because here is the analyze tab from ToS:
(click to enlarge)
She stands to make $40 while risking $2366.28. That's a 1.6% ROC. The current price of NVDA is at 22.6-7. At $22.6 she stands to make nothing and at $22.7 she is -$5.38.
Good trade, bad trade should run a few segments on her because she is also responsible for the "I'm Ready to Start" show. They also have 9 reasons that new traders should follow her into the fire as well:
Robyn is a "neutral" trader, she takes advantage of theta, trades high IV rank (debunked on 29JUL15 MM segment), # of occurrences bringing her broker the commissions...
#5 - Massaging trades into winners, #6 - Trading underlyings that she doesn't know, #7 - Plenty of Earnings plays...
Those are three reasons why a trader should NEVER follow her in the first place. You NEVER trade things you don't know, never massage losers in hopes of recovering a dog shit position, and never play earnings on stocks you don't know or don't play them at all! Refer to my strategy on post-earning plays which I consider to be significantly safer than pre-earnings.
Today I decided to follow my heart and not my brain in trading. Net result? An up day but my profits were eroded quickly when I took winners off the table as losers and then decided to get greedy which delayed closing out of winners and a few other winners turning south. TSLA rallied due to the initial buy to cover and then plummeted as I expected to new lows. I grabbed a few puts and rode the volatility train all the way down for about 100% ROI then before closing out the position I decided to add addition positions on, albeit too late, to get some more juice. Bad move... Market turned abruptly upward and the volatility soon faded.
All the while my initial guess on FB was correct but I got a little cautious of the sudden dip and exited my positions for a loss... The same position turned out to a handsome winner in 30mins! Apple spreads I had on were in the green at the starting bell and then Apple took a nose dive. NFLX also went down but I sold out of the put after an abruptly upwind gust.
Point of the matter is there is no way I can focus on 4x level 2 and charts at the SAME time. Managing these stupid positions all at once is not only taxing but costly. The result today was around 30 trades within 1.5 hrs which definitely gave Bob the Trader a run for his money. It's funny because I used to think it would be so cool to put on a large number of positions and "be like the pros." In reality, that is the dumbest thing I've been doing and need to adjust my mentality to trade SMART not often.
Had I kept my eyes on the prize for TSLA and NFLX while sitting out FB and AAPL today would have been a good day and perhaps a 5 figure day (banking +$10k). Instead, it was a four figure day turned three figures because of excessive failed scalping/trading. A friend of mine told me that his BioTech stocks tanked today which explains why my positions in NQ are further in the red and Mickey and his friends are doing a garage sale over there in Walt Disney land. Yikes... But I digress as I am here to talk about our famed trader Robyn. Before I start on her I have to mention that IF you want to scalp options for directional assumption do it on narrow spread and highly liquid contracts. $SODA would be a bad choice (foolish am I to listen to fools), GMCR doesn't trade actively either, but TSLA/GOOGL/FB/AAPL/etc are better as they have substantial amount of volume with no issues clearing when you hit the mid.
Here is the latest from her regarding GMCR from our TastyTrade expert:
So she got a $3.30CR for executing this strategy. Let's examine how. So she sold off the 67 AUG7 puts (for a loss) and sold a SEP18 55C and a SEP25 67P to obtain the $3.30CR. She sold a deep ITM put in a further month in hopes of theta decay combined with non-movement of the stock. In the case of non movement she would collect most of the $3.30CR.
Let's review here... She got a $2.98CR for closing out her puts and then she sold an inverted strangle for $3.30CR... What was her debit again? -$11DB on those 67 puts. So how did she get out of this one? She sold yet another 67 put for even MORE credit to "cancel" out this bad trade. But is that wise? Let's examine this strategy for the worst case scenario.
So she got $3.30CR for this "strategy." If she finishes between 55 and 67 she would stand to lose quite a bit of money... The width of the spread is 12 and she got $3.30 to facilitate this transaction. The put buyer would auto exercise leaving her with buying GMCR at 67 and then the call buyer takes delivery of the stock at 55 with an instant $12 loss per contact x 100. Her net loss would be $8.70/contract provided that she got the $3.30CR. This is if she holds til expiration without further adjustments. What about it ending OTM on either sides?
Well, the "best" case scenario is being between the width of the strikes because at 54, while the call is expiring worthless, she would have to take delivery of the stock at 67 which yields a $13 loss per contract vs $12.
So how can she win and why did she do this? Well, like I said before, she is screwed big time on this strategy and without admitting defeat and taking the loss she is trying to slowly buy more time as the executioner is finding more time to sharpen the axe. Whether her head rolls today or in a month or so is irrelevant. She is banking on the stock moving up so that the credit received will negate the price action and volatility compression in hopes of mitigating a huge losing position. Any further movement down south would spell her doom and she would be back to beginner status below Alex W and Jacob Wohl. No beuno, as Tony from Mexico would say.
This is how earnings are as binary events and why playing earnings has huge risks. You might end up delivering a huge amount of stock you don't want to buy OR taking delivery of huge amount of stock you don't want to own all for a thesis on statistics as presented by Market Measures? Please...
What I've found as a more effective way of playing earnings is POST earnings strategies where the market has already priced in the movement within 5mins of the opening bell. All the volatility is already gone and now it is more about level 2 reading and seeing if there is additional panic. This is MORE predictable than attempting to flip the coin and guess what happens the day before. Why? Because the initial reaction to some stupid news for a day or two is ALWAYS overstated in majority of the big stocks. Look at NFLX, DIS, GOOGL, FB, AAPL, etc if you need some proof of this. DIS is on it's second sell off day and AAPL is on it's 7th straight day of being under $120. This stock has been above $120 for months and now the market feels it is worth $114 but a while ago it was valued at $132. The current P/E on AAPL is 13.3, TSLA and AMZN doesn't even have earnings (no love, no profits), GOOGL is at 33.69, and NFLX is trading at 284.3 times it's earnings. Which stock is discounted? Hmm, I wonder... DDD was at one point trading 200 times it's earnings as well in the 20/30s after falling from almost 100 at the end of 2013. Surprisingly, DDD jumped 21% after missing earnings. Short squeeze?
What's on the radar for tomorrow? It's going to be news from the Government that people will price in regarding the interest rate once again. Stay strong as it is very rough out there and remember that CASH is always a position. When there is no clear indication of movement, direction, etc, play a neutral strategy (calendar/diagonal). Jump on the train and watch the T&S very closely for a good exit or use the IV_rank of course because below 50 means sell and above 50 means buy... Did I get that backwards? :) I think our TastyTrader might have as mentioned above.
Don't trade earnings! It isn't worth the risk. I say this with personal experience as I have a significant portion of my account resting on failed earnings plays I am looking to liquidate.
Maybe she should DOR... "I've got no where else to go..." A moment of silence for our TastyTrader.
After my last post on TastyTrades on sizing I have to mention once again the fine balance between greed and size. To make money you have to keep your costs low (commissions) and look for superior risk/reward opportunities.
Is it really worth trading earnings when you have unexpected moves that are outside of market maker move? (ATM straddle breakeven strikes).
Well... Let's take it from Robin the expert professional trader:
GMCR is at 53 right now. Calls are worthless and that's fine giving her some credit. Two calls at 83 (win), one put at 67 (big lose) and 72 against a 75 put (small win). I think she will be in for some pain tomorrow. NO way to roll her way out of this crazy loser.
She's at a max profit of +3 on the 75/72 times however many contracts she had on with this one. She's 14 down from the 67 strike... I'm assuming that's -1 delta per contract for $14 per contract... That's -$11/contract on 100 size contracts... I hope she listened to the Mantra of trading small. Let's put this into perspective.
She actually closed that out for $2.98 but $3 is close enough.
She got overall $1.25CR for doing this strategy and on the put side she is $11DB for this strategy... She lost 780% of the credit she received or she paid 880% of the credit she received. On one lot this is -$9.75 per contract or a total of $975.00. If she did this for say a "small" position relative to her portfolio of 10 contracts then that's -$9,750.00 lost on this trade for an initial credit of $1250.00 or a ten-fold loss on initial credit received.
For a person with a small account ($25k) following this trade this would have resulted in a 40% blow out on account. I am not sure if these guys know what they are doing but this is a great education point on delta and gamma risk.
Not a single one of these self proclaimed experts demonstrates an audit of profit or track record. For all we know they are doing papertrades on everything with nothing verified. Why? Well... check out Jacob the teen turn Hedge Fund's comment on these experts while being interviewed on TastyTrades:
(Everyone gravitates to writing premium until they get that one 5% loser that blows them out. $CMG. Jacob shorted, probably wrote, since beginning of 2015. Lucky he studied risk management because that rip up probably ripped him a new one post earnings)
They are all peddling subscription services! Just as https://twitter.com/IRSReporter says which is now becoming the pattern I've discovered myself. Even the self professed Erik Trofatter claims all his methods are proprietary but in fact it is just repetitions of market measures. The real pros figured this out before Black Scholes like Blair Hull and Thomas Peterffy who are now worth north of seven figures. These "genius" kid traders are no match for the real smart guys who already work for prop shops or automated trading firms.
So where do you go for information? Try books like Trading Volatility which is essentially ALL the useful content from TastyTrades without watching hundreds of hours of T&T jokes/nonsense. The only real forum of legit discussion is on EliteTrader forum NOT BigMike's. People there are experienced professionals with real feedback that isn't trying to peddle one single minded way of trading based on any one particular scheme. Find someone to bounce ideas with or off of and see what happens. ToS can be used for back testing strategies or trading 'live' in different trading atmospheres and historical times.
Review Dough's trades carefully and you will notice that they are almost always commission laden trades where the broker takes around 30% of the entire profit on execution. Why would you long put spread and then sell an OTM call up top? As the strategy moves in your direction the call starts to roll delta/gamma and if you want to exit the trade after it touches the upper leg of the put spread the call will almost always be bought back with a debit hence losing money... Unless of course your intention is to carry this through the Call's expiration then that might work but is it worth the upside risk of losing money shelling out for an initially worthless call? I've found out the hard way on this one today and a few days ago writing a near worthless put. The situation with the call is writing on an up gap and exiting it with a significant loss beyond initial credit. Put that I had experienced gamma risk and I found out live what it means to have gamma risk or pin risk upon expiration as I exited my position seconds before the closing bell... Was it a profitable trade? Hell no! But it would have been because the market rallied at the closing bell where the option I wrote was OTM. Worth the $40 on 10 contracts I wrote? Hell no.
When premium is cheap and there is direction... You buy. You don't sell. You only sell when other people are foolishly buying stupid rallies on stuff like FB, AAPL, TSLA, etc. Even when you sell you play the gap up on another month or at a different strike. But, what do I know.
One thing I've noticed with all self proclaimed experts and pundits is that they are often wrong and how they come to this admission defines his or her character.
I've been following TastyTrades for a little while now here and there and noticed that most of their problems are glaring issues with earnings. They claim that it is a wonderful opportunity to exercise the law of large numbers by betting on movement within the expected move priced in by the markets. Too many times their fellow Dough traders got DoughJoed by these unexpected moves. (i.e. NFLX, GOOGL, etc). That's got to hurt when the size of the trade is disproportionate and you end up losing all the little profits you nickel and dimmed from the other small trades.
This brings me back to my other post regarding trade small, trade often. This is such a bogus statement that I have to clarify this once again. Do NOT trade often! There is paper trading and simulated trades for a reason and do not fall into the temptation to trade because Bob the trader trades 40-50 times a day. Why does he trade a lot? It is because he has too many broken positions that he needs to fix and the broker wins on every transaction. It's not too hard to be a market maker with a huge spread, sell ToS, and then tell everyone to trade a lot to harness their commissions through Dough.
I used to think SPY was the best product to trade... WRONG! ES/SPX are much better. SPX is 10x the size of SPY, cash settled, expires Thursday of the third week vice Friday, and has larger options volume as compared to SPY. (10x size and often times larger equivalent volume). It is better on taxes since it is a 1256 and not considered an equity. The list goes on but the most important thing is I pay ~$1.2-1.4 per contract on SPX vs paying 10x that trading SPY! (SPY on a good trade is $6-7 and bad trade is $12-14 for 10 contracts). You compare a roundtrip of $2.50 vs $12-24 and do the math for trading "often" on 10 trades... That's $25 for buying and selling SPX ten times vs $120-240... Going on Bob the trader trading 40 times a day that would be $100 on SPX and $480-960 on SPY... That's on one day! Imagine doing this for 5 days in a row with SPY commissions in the upwards of $5k vs $500 for SPX.
Point is, find the right product and trade intelligently. ES is also more expensive to trade than SPX ($50 vs $100) with the same or more expensive contract fee. I feel kind of stupid coming to this realization this late into the game as I've already spent a few thousand dollars on commissions and could have saved a few hundred trading more intelligently.
Then one need to question the trading style for oil futures as well. Should you trade crude oil or USO ETF? Crude lot size is 1000 barrels. Contract price x 1000 = what you pay. So one contract goes a long ways as compared to the equivalent USO etf. Same deal here with respect to liquidity and sizing. CL is one of the most heavily traded commodities in the world. It is traded almost 24/7 while USO trades 9:30-4:00... Hmmm...
Keep sizes small on intelligent products and do not trade a lot! Managing multiple positions is insane and can be a handful. The best thing to do is to intelligently manage a FEW positions rather than throwing out a lot of positions hoping for something to stick.
Lastly, IV_rank is directional. It is highly inversely correlated to the movement of the stock and around earnings. IV_rank is one of many considerations for putting on a trade but it is NOT the end all be all as proclaimed on TastyTrades. A rolling 52 week high/low is no better than any other technical analysis indicator because just as Alex Weinsenbach says "Past trends cannot predict future events." Yet IV Rank is based purely on past performance and volatility movements...
Last night I made a good trading friend with another blogger (Henrik the Lazy Trader - http://www.the-lazy-trader.com/). We've had some good discussions of all of the above. Conclusion? All these gurus are morons and no better than you and I at anything they do. They typically have more capital to play around with or have alert/subscription services to feed them so they can become great "educators" vice trading. Almost all of them do not have verified trades or audited verified trades. This website is great are debunking a lot of these self-proclaimed prophets who make little or no profit (http://www.tradingschools.org/).
