My Thoughts Into The Week Ahead

I will post my best idea tomorrow, in this post I wanted to go over my strategy at the moment. Last night I was chatting with one of the members in here on Twitter and he asked me why I changed my style that was working last year ie I was selling puts so far out vs what I used to do just a couple months out. My answer was, your trading style is constantly adjusting to the current market environment, or at least it is if you want to succeed. What do I mean?

TLDR for those who don’t want to read this whole post: The market is overvalued, I’m not comfortable with shorter timeframes, so I levered up far lower in the off chance we do decline like we’re supposed to.

I began to sell these year out puts around Christmas, the question is, why? The answer is because I thought the market overvalued at Christmas and I think it’s even more overvalued now and I don’t want to get caught up in a flush lower which could even begin this week with CPI. The best part about selling puts the way I do vs being long/short equities is I don’t have to be right. When you sell puts and you do it right, you can win in all 3 potential outcomes that occur in the stock market. What do I mean?

Stocks either go up, down, or sideways. That’s it. Contrary to popular belief, the market is alot simpler than people make it. Every morning we wake up, people rush to Twitter to post their pontifications on what we’re doing that day, I use charts and flows in the options market to help me formulate ideas while others use macro data and earnings. Whatever it is, at the end of every day stocks have either gone up, gone down, or gone sideways. That’s it. So if you’re long only and stocks go down, you lose. If you’re short and stocks go up, you lose. I’m not a big fan of such outcomes, so I sell puts where I can win regardless of the outcome.

At the moment, estimates have come down on the SPX to 212, we started the year at 230 and I always said that would not happen. So we’re 5 weeks through the year and stocks keep going up as earnings estimates keep coming down. Being short is a hassle, I lost $150k in 4 days being short recently, take that out and I’m up well over 30% in 5 weeks this year. So how do you play a market that you think is overvalued but near impossible to short, simple, you sell puts far far lower. That’s it. Why? Because one of the three scenarios I laid out above is going to play out. We’re either going to go higher and I’m going to win, we’re possibly staying flat and I will win, or we’re going to fall and I likely win because my short puts are so far out the money.

Simple enough? That’s how I see the market in 2023. Coming into the year, I told you all I think we’re mostly flat, well I was wrong about that so far because we went vertical in January. Even so, that worked out for me because I was short puts. So when you look at my positioning and it all being for 11 months from now, it is simply because I do think the stock market is maybe 20-25% overvalued, but it doesn’t matter what I think, the market is the market and historically speaking, it always goes up, eventually. At the moment, with an FFR of 5%, what do I think fair value is? Something around 14-15x earnings which are 212, you do the math that is 3,180 on the high end.

Will it play out? I have no idea, for the moment stocks are bullish, we’re broken out, every bad datapoint is seemingly priced in and the market is forward looking past yield curve inversions, recessions, etc. I feel like I’m in a clown world, but, I continue to make money regardless of the situation. Now again, I am not sitting at my screens 6 hours a day daytrading, I’m a put seller, I take note of all the unusual action, I review my notes, I look at charts, and I sell puts at levels I don’t think ever see assignment. I tend to follow strength, at Christmas that was tech and it worked, at the moment I think it will be defensives and oil for the next month as Russia escalates the war in Ukraine the past 2 days and we get a hot CPI this week. Your opinions have to change and quick. I thought oil looked horrible last week, and it did, but then Putin said he wanted to escalate the war and I made some adjustments to my book yesterday I will post Monday but I closed out some tech that’s worked well and added some short puts on boring stuff that should hold up well if we get a risk off environment. Verizon,Altria,Occidental,Devon Energy, Activision,etc just high yielding defensive stuff that tends to do better should CPI come hot or the war gets messy.

The beauty of the market is everyday is an opportunity and you don’t have to be directionally right to well, at least when you sell puts. You just have to be sure you aren’t directionally wrong. What I mean is, should you sell puts, short term, your portfolio will fluctuate if the market goes down, but as long as names don’t go to the silly levels I’ve sold puts at, then I will be fine.If stocks do go that far down, great I will have a lot of deep values to choose from, I will take some and the rest I will roll the short puts out even lower into 2025. The most important thing is you never sell puts on something overvalued. I would never step in and sell say NVDA 180 puts with it up 100% off lows in 2 months. You have to sell puts at levels you think are a steal and just let time happen. It’s going to happen one way or another, you may as well benefit from it.

So I just wanted to give you a little deeper look into my take on what I’m doing and why. I could close everything right now and be up 25% for the year, and while most people would gladly take that, I have my goals in mind and I want to achieve them so I push forward and hopefully thrive regardless of what the market decides to do but the answer to the question about why I sell puts so much lower?

Because believe it or not, I’m more conservative than I look & I don’t like where we are