A subscriber who bought my Options 201 course wrote me today asking for some clarification on how to best stack your weekly butterflies. There were four aspects to his inquiry, namely: 1) which expiration to choose on which days of the week 2) how to distribute your exposure 3) deciding directional bias and 4) structuring ones trade based on the current IV environment. Let’s tackle these questions one by one:
I received a few emails asking about my posting schedule this week, and clearly it was from people who had not seen the heads up I posted last Sunday. So, just to ease everyone’s mind and to stave off further inquiries here’s the elevator version of what’s going on: I had eye surgery yesterday (acquired strabismus) which prevented me from putting up a post. Everything appears to have gone well, meaning I can still see with my left eye but my face looks like as if I just went three rounds with Lennox Lewis. And that’s pretty much how I feel as well, meaning I’m still a bit out of it.
I felt a little bit like Julius Cesar today, getting stabbed and prodded all over the place in preparation for my ‘procedure’ on Wednesday. Unlike Julius however I survived the experience and at least thus far it appears that my rapid COVID test has come out negative as I was told I would receive a phone call otherwise. Anyway, with enough time left before the opening bell I decided to quickly put together a post for you guys:
I rarely talk about myself as a rule for a number of reasons. Personal privacy is one of them but the most salient one being that, unlike most people today, I don’t regard myself as particularly interesting or worth of public attention. Of course as part of my weekly posting regimen I’ve let a few things slip here and there. So if you’ve been visiting this digital den of market domination for more than a few weeks then you are probably aware that I had to battle some health problems over the course of the past two years. I’m proud to claim victory on that end, meaning that I’m back to normal now, but there is one lingering issue that has continued to plague me for about a year now.
One of the more obscure topics I cover in my options courses is the difference between probability of expiring (POE) and the probability of touching (POT). This can be exploited by a savvy trader as the cost basis of every option is squarely based on the probability of expiring in the money (ITM). However most retail traders remain oblivious of the fact that very few ITM options will ever be held all the way into expiration.
Clearly I am not talking about basic algebra here, but in the context of participating (and surviving) as a trader in the financial markets this time tested maxim has rarely let me down. One may counter by pointing at social manias or the various financial bubbles we’ve seen implode over the past two decades. And I would agree for there is a not so subtle difference, but it is a very important one to which I decided to dedicate this entire post, as it will make you a better trader over the long term.
Since launching this trading blog in August of 2008 I’ve literally lost count of the numerous times when I watched the financial markets edge toward the abyss only to be stick-saved by some last minute incantation issued by our revered high priests of finance. Similarly I have long lost count of all the people who attempted to ‘fight the Fed’ and in the end paid the ultimate price of seeing their entire trading capital wiped out, either gradually or in a theta fueled pyre that even would put Burning Man to shame.
Bond futures are in free fall and we are quickly approaching a situation where the floor may give way underneath whatever has been holding up the stock market over the past month. Of course you wouldn’t be a regular on Evil Speculator if you did not recall the many times we have peeked over the proverbial abyss only for the Fed to step in and stomp all over the bears. Lucy has had some fun over the past 12 years and clearly it’ll take a bit of finesse to gauge direction and play the swings.
Whether you admit it or not the market has us all trained like Pavlov’s dogs. Grab yourself a copy of Meditations (Marcus Aurelius) or The Prince (Niccolò Machiavelli) and one thing becomes painfully. Despite all our technological advances human nature in essence has not changed one bit. And believe me when I tell you that Ms. Market has a bonafide PhD in how to press our buttons, a.k.a. the scientific study of fuckwithretailology.
It’s been almost 30 years since I’ve lived in Northern Europe and among several personal reasons a major incentive to leave for warmer climates was that I don’t care much for six months of non-stop crappy weather. The are two things I absolutely miss every single year however. One is a white Christmas (yes, I’m hypocrite) and the other is a real spring, especially early spring when the snow begins to melt and the first snowdrops push their tiny heads through the remaining vestiges of snow. And based on the numbers it also happens to be a good time for equities. So let’s review the freshly updated monthly stats for March.