I’m going to make this post public so share it with whoever you want, but with the market getting dicey again, I wanted to discuss some of my market philosophies if you’re going to survive and thrive in the market.
Great knowledge and summary of your overall decision making process in this post. I also like the part on "how to survive the market". Thanks your ongoing work.
Hey, reviewing this great writeup as it seems pertinent these days. I wanted to ask if you have any "rules for survival" regarding margin. I can imagine you have some thinking around it, and likely best practices that may differ when markets are trending up vs down and/or vix is above a certain number etc ... anyway any thoughts, would love to learn from your experience if you feel like sharing would help subscribers.
"When you sell puts, the worst case scenario is you have to buy some stock, so combining the power of short puts to offset the cost of long calls will keep you from panicking when a trade goes against you."
I want to make clear that I am not "disputing" your track record and success - I am taking a lot of wisdom from this post. And, I think this is quite clever: "When you look at my book everyday and you see how it is structured, you see all these lowball offers I have on the table and I’m waiting for something to fill, on my terms, like my dad used to, but I’m getting compensated for waiting."
But... 2 things:
1. The worst case scenario is not that you have to buy some stock. The worst case scenario is that you have to buy some stock and it is (potentially) way offside (or worse, goes bust like Enron) and you might get wiped out. Of course, I appreciate that you are not "blindly" selling puts in that you have a view on the stocks you are getting involved in. But market risk is not inconsequential - going back to LTCM, black swans seem to happen with far more frequency than what most price in.
2. Yes, you do get compensated for waiting but unlike you, your dad was under no obligation to buy even if the seller got to his level. He still retained the option. When you sell the put, you are (legally) short the option. And that is a very different situation than the one(s) your dad was in.
I think that’s a bit dramatic, when have we had a black swan that sustained? Stocks have been up for 100+ years, every crash is insanely met with buying and I sell puts on good names at key support. Stocks don’t just cascade to 0. They make plenty of stops along the way. As for the Enron comment, that isn’t on my list of worries selling puts on megacaps flush with cash. I always entertain all commentary, but bankruptcy risk is not on the table for names I sell puts on. I always tell people to not use margin the way I do, I’ve done this a long time, I also have alot of cash not in my book here that I can bring over if I ever needed to in your black swan event. How many black swan events have you experienced? If you read my point nine and click that link you will notice all of the recent ones I highlighted begin with a trend break which goes back to my point of I always tell people to remove leverage they’re scared of below the 21 ema bc all big declines ex a 9/11 terror attack are clearly visible before they occur
It may appear a bit dramatic but it simply isn't true that "the worst case scenario is you have to buy some stock". I am not trying to be pedantic for the sake of being pedantic - and I fully appreciate your statements on leverage but being legally obliged to pay for something that could be down far below one's obligation could very well lead to losses that are large enough that they won't allow for participating in a subsequent rally (and avoiding this risk relies entirely on being good - or lucky - enough to recognise the times that the market might sell off).
"Multi-sigma" events seem to occur more frequently than what (some) statisticians would lead one to believe. LTCM... 9/11... GFC... Euro crisis... stocks in 2016 and 2018... Covid...
There always seem to be a decent amount of one-offs! So for those who don't have a lot of cash in their books to bring in, it is very dangerous to think that selling puts has a danger limited to "you have to buy some stock".
great piece, thank you James 👍
Should highlight this one somehow.
Hi James, I didn’t receive an email once the free trial ended and I joined the paying sub. Could you please send this with the discord link. Thanks
Great knowledge and summary of your overall decision making process in this post. I also like the part on "how to survive the market". Thanks your ongoing work.
Hey, reviewing this great writeup as it seems pertinent these days. I wanted to ask if you have any "rules for survival" regarding margin. I can imagine you have some thinking around it, and likely best practices that may differ when markets are trending up vs down and/or vix is above a certain number etc ... anyway any thoughts, would love to learn from your experience if you feel like sharing would help subscribers.
"When you sell puts, the worst case scenario is you have to buy some stock, so combining the power of short puts to offset the cost of long calls will keep you from panicking when a trade goes against you."
I want to make clear that I am not "disputing" your track record and success - I am taking a lot of wisdom from this post. And, I think this is quite clever: "When you look at my book everyday and you see how it is structured, you see all these lowball offers I have on the table and I’m waiting for something to fill, on my terms, like my dad used to, but I’m getting compensated for waiting."
But... 2 things:
1. The worst case scenario is not that you have to buy some stock. The worst case scenario is that you have to buy some stock and it is (potentially) way offside (or worse, goes bust like Enron) and you might get wiped out. Of course, I appreciate that you are not "blindly" selling puts in that you have a view on the stocks you are getting involved in. But market risk is not inconsequential - going back to LTCM, black swans seem to happen with far more frequency than what most price in.
2. Yes, you do get compensated for waiting but unlike you, your dad was under no obligation to buy even if the seller got to his level. He still retained the option. When you sell the put, you are (legally) short the option. And that is a very different situation than the one(s) your dad was in.
I think that’s a bit dramatic, when have we had a black swan that sustained? Stocks have been up for 100+ years, every crash is insanely met with buying and I sell puts on good names at key support. Stocks don’t just cascade to 0. They make plenty of stops along the way. As for the Enron comment, that isn’t on my list of worries selling puts on megacaps flush with cash. I always entertain all commentary, but bankruptcy risk is not on the table for names I sell puts on. I always tell people to not use margin the way I do, I’ve done this a long time, I also have alot of cash not in my book here that I can bring over if I ever needed to in your black swan event. How many black swan events have you experienced? If you read my point nine and click that link you will notice all of the recent ones I highlighted begin with a trend break which goes back to my point of I always tell people to remove leverage they’re scared of below the 21 ema bc all big declines ex a 9/11 terror attack are clearly visible before they occur
It may appear a bit dramatic but it simply isn't true that "the worst case scenario is you have to buy some stock". I am not trying to be pedantic for the sake of being pedantic - and I fully appreciate your statements on leverage but being legally obliged to pay for something that could be down far below one's obligation could very well lead to losses that are large enough that they won't allow for participating in a subsequent rally (and avoiding this risk relies entirely on being good - or lucky - enough to recognise the times that the market might sell off).
"Multi-sigma" events seem to occur more frequently than what (some) statisticians would lead one to believe. LTCM... 9/11... GFC... Euro crisis... stocks in 2016 and 2018... Covid...
There always seem to be a decent amount of one-offs! So for those who don't have a lot of cash in their books to bring in, it is very dangerous to think that selling puts has a danger limited to "you have to buy some stock".
Wow not even two months later, kaboom. Top signals