Don't want to Jinx it (which i probably will but whatever) but I think i'm finally getting the hang of this option selling thing and not throwing cash at the leveraged index ETFs and/or degen earnings plays and just hoping for the best. I made my first real killing as an option seller last week selling CROX puts. I know it's not a name that you trade but I've been watching it and I feel pretty comfortable with the action to be able to finally get some skin in the game. I love the idea of buying puts lower at a level that you would be comfortable going long at and just rinse repeat. I don't know why it took me this long to finally practice what you preach but now it's all I want to do. You the man
Hey it’s hard to watch names like crox go up 60% in a flash while you make just the premium selling puts but the point is as long as you’re happy there is always another trade to take
Is there any chance you could make the database of unusual option trades available to subscribers so that we could look up stocks we are interested in?
The problem is I can’t figure out how to keep up with who is or isn’t a sub with substack because people come and go all the time so the issue is I’d have to check near daily because there is no way to know who is or isn’t on here
Perhaps Substack can host (or provide a secure site for) the database and take responsibility for letting only current subscribers in. They do that now with posts. They should be able to do it for other things.
Hi James, I have read a lot of earlier posts of yours but haven’t found what’s you consider as unusual trade? What criteria it has to meet? Is it more about trade size, frequency, time to expire?
If it's ok to ask a little bit about managing your margin and drawdown (as you say the hard part):
So if you have $500 cash and $2,500 account value, with the remaining $2,000 levered 7x selling those super deep value puts, how do you manage drawdowns?
Because even though I think you're right that eg PINS would be super cheap at $17.50, how do you avoid running out of margin and getting forced to sell puts at a loss? Do you just effectively run a stop loss to sell positions and always raise cash margin to be 20+% of account value during times where you're worried that the market will come down?
Well I don’t have an answer for a book like that. You see my book, I have nearly $3m in there. If you’re using that kinda cash, it is very risky, just being honest. selling puts is definitely for people with larger balances
I apologize -- was using simple numbers to keep the math easy. Just replace with $2.5m instead of $2.5k.
What I'm curious about is how to manage drawdowns & margin calls with a levered put selling strategy? Is your thinking "when the market falls 10%, will probably need ~15% free cash margin to avoid a margin call, so let's keep 20% free margin to be safe"? Or do you think it's smarter to just continuously close positions to keep that 20% buffer during the drawdowns?
Right now, i think the market is about to rollover, the indicators i watch are not looking ideal, right now I'm closer to 20%, and ideally i wont have to adjust but if i do, i do. The key is mixing up your book, i have defensives like MO,BTI which will go up in down markets. I have oil, I have different things, equities rarely all go down together. It could be tech down oil up. So spread it around, leave a good cushion and eye it. It's going to adjust dramatically on red days.
What are your thoughts about being small delta short against a put position for those of us starting out using this strategy? Say we put on that TWLO Trade, I'm not sure the dela when you put it on. Guessing .18/.2 so 300 puts would be delta long 5400/6000 shares. Would a short 500 hedge make sense? If not why not? Again not for you but for new people learning this style of investing.
Well you absolutely can use put spreads, and I do sometimes to lower margin requirements. It obviously lowers your potential gain but something like that TWLO position today requires $217k in margin, which is fine bc there is still $100k almost in potential profit, but I could easily turn into a 40/35 put spread by buying 35 puts and it would drop by margin requirement by quite a bit to $150k ie 300/300 by $5 spread.
For me my focus is on return vs the margin utilized, not return vs the total risk, the reason being is, Im short puts at silly valuations and if need be and I had to roll down and out, it would be at an even sillier valuation.
So yes, definitely utilize put spreads for margin and if you're risk averse, as I said if I have to, I too will convert some to put spreads to manage margin.
Nice summary of what you do, I am also beating SPY and QQQ since beginning of the year, thanks a lot man! If you wouldn't mind to briefly elaborate on "4. Look at financials briefly to determine a valuations". Just few data points on what you look at? Thanks.
just in general, looking at the historical multiple, sector multiples, etc. If the name has trade say 10x ebitda historically and you sell puts at 6x ebitda, that isn't ridiculous. Again it's just one step in the process but it is a step. You don't want to sell puts at 80x sales or something.
Don't want to Jinx it (which i probably will but whatever) but I think i'm finally getting the hang of this option selling thing and not throwing cash at the leveraged index ETFs and/or degen earnings plays and just hoping for the best. I made my first real killing as an option seller last week selling CROX puts. I know it's not a name that you trade but I've been watching it and I feel pretty comfortable with the action to be able to finally get some skin in the game. I love the idea of buying puts lower at a level that you would be comfortable going long at and just rinse repeat. I don't know why it took me this long to finally practice what you preach but now it's all I want to do. You the man
Hey it’s hard to watch names like crox go up 60% in a flash while you make just the premium selling puts but the point is as long as you’re happy there is always another trade to take
Very nice explanation and post. Thanks.
Is there any chance you could make the database of unusual option trades available to subscribers so that we could look up stocks we are interested in?
The problem is I can’t figure out how to keep up with who is or isn’t a sub with substack because people come and go all the time so the issue is I’d have to check near daily because there is no way to know who is or isn’t on here
Perhaps Substack can host (or provide a secure site for) the database and take responsibility for letting only current subscribers in. They do that now with posts. They should be able to do it for other things.
Hi James, I have read a lot of earlier posts of yours but haven’t found what’s you consider as unusual trade? What criteria it has to meet? Is it more about trade size, frequency, time to expire?
Just when I’m watching the tape unusual size options going off in a particular name
This is so, so helpful. Thank you!
If it's ok to ask a little bit about managing your margin and drawdown (as you say the hard part):
So if you have $500 cash and $2,500 account value, with the remaining $2,000 levered 7x selling those super deep value puts, how do you manage drawdowns?
Because even though I think you're right that eg PINS would be super cheap at $17.50, how do you avoid running out of margin and getting forced to sell puts at a loss? Do you just effectively run a stop loss to sell positions and always raise cash margin to be 20+% of account value during times where you're worried that the market will come down?
Well I don’t have an answer for a book like that. You see my book, I have nearly $3m in there. If you’re using that kinda cash, it is very risky, just being honest. selling puts is definitely for people with larger balances
I apologize -- was using simple numbers to keep the math easy. Just replace with $2.5m instead of $2.5k.
What I'm curious about is how to manage drawdowns & margin calls with a levered put selling strategy? Is your thinking "when the market falls 10%, will probably need ~15% free cash margin to avoid a margin call, so let's keep 20% free margin to be safe"? Or do you think it's smarter to just continuously close positions to keep that 20% buffer during the drawdowns?
Right now, i think the market is about to rollover, the indicators i watch are not looking ideal, right now I'm closer to 20%, and ideally i wont have to adjust but if i do, i do. The key is mixing up your book, i have defensives like MO,BTI which will go up in down markets. I have oil, I have different things, equities rarely all go down together. It could be tech down oil up. So spread it around, leave a good cushion and eye it. It's going to adjust dramatically on red days.
Again, thank you -- much appreciated.
What are your thoughts about being small delta short against a put position for those of us starting out using this strategy? Say we put on that TWLO Trade, I'm not sure the dela when you put it on. Guessing .18/.2 so 300 puts would be delta long 5400/6000 shares. Would a short 500 hedge make sense? If not why not? Again not for you but for new people learning this style of investing.
Well you absolutely can use put spreads, and I do sometimes to lower margin requirements. It obviously lowers your potential gain but something like that TWLO position today requires $217k in margin, which is fine bc there is still $100k almost in potential profit, but I could easily turn into a 40/35 put spread by buying 35 puts and it would drop by margin requirement by quite a bit to $150k ie 300/300 by $5 spread.
For me my focus is on return vs the margin utilized, not return vs the total risk, the reason being is, Im short puts at silly valuations and if need be and I had to roll down and out, it would be at an even sillier valuation.
So yes, definitely utilize put spreads for margin and if you're risk averse, as I said if I have to, I too will convert some to put spreads to manage margin.
Hi James, how are the options flows doing for $JNJ - it seems like a broken chart and i wonder whether its a good idea to sell calls on it. cheers
Hey Miguel I don’t see anything significant in there it should do ok here just bc of its defensive nature
Nice summary of what you do, I am also beating SPY and QQQ since beginning of the year, thanks a lot man! If you wouldn't mind to briefly elaborate on "4. Look at financials briefly to determine a valuations". Just few data points on what you look at? Thanks.
Hey Simon,
just in general, looking at the historical multiple, sector multiples, etc. If the name has trade say 10x ebitda historically and you sell puts at 6x ebitda, that isn't ridiculous. Again it's just one step in the process but it is a step. You don't want to sell puts at 80x sales or something.