Trading Blog

These days, everyone claims to be an ‘expert’ on absolutely everything. Apparently, it only takes having a Twitter account to be a seasoned expert on any given subject; all in all, the Internet is full of nonsense. It’s becoming harder and harder to find legitimate answers amongst the quagmire of false information online.

Our first advice to new traders is: "Learn First, Trade Later". The markets will always be there, but if you start trading without proper fundamentals, your capital will be gone very fast. The barrier to enter trading is so low today, commissions are near zero, and the whole trading game looks very promising.

Dividend payments, like oatmeal, may be smooth or lumpy. Smooth dividends are predictable, usually once per quarter. It is easy for options traders to believe these dividends are guaranteed, because they usually continue uninterrupted quarter after quarter. This also makes it easy to predict total return over a longer time span.

On April 18^th I wrote part I of this article, Coming to Peace With Market Volatility. I showed how the US equity market risk premium, defined as the annual average return of the Total Market minus the return of one-month US Treasury Bills, was a large 8.37% per year from 1950-2019. That’s the good news.

The ratio calendar spread is well-known to some, but for others the risk/reward aspects are not well understood. One way to cover a short position is to own 100 shares of the underlying stock. Another, more creative way is to sell a shorter-term expiration position and buy a longer-term position.

"Who you gonna believe, me or your lying eyes?" Our members and readers know that buying pre earnings straddles has been one of our favorite strategies that produced consistent gains in the last 8 years with very low risk. Yet there is a significant number of studies showing that this strategy has a negative expectation. 

Using the most popular S&P 500 ETF (SPY) to represent the US stock market, this article will look at different ways to manage equity market risk using historical ETF and options data from ORATS Wheel since 2007. We will analyze the following unhedged, hedged and allocation choices:

From 1950-2019, the average annual US equity market premium (return of the total stock market minus the return of one-month US Treasury Bills) was 8.37% per year. This was a large average annual risk premium for owning stocks.  The premium was volatile, with a Standard Deviation of approximately 15% per year.

Would you like to book a $1,300% gain on a one day low risk trade? I would. That would imply that you turned your $100,000 account into $1,400,000 in just one day. Do it couple times - and you are a billionaire. Sounds too good to be true? It is possible in a Twitterworld. In a real world.. not so much.

Over the past few months, the performance of the Leveraged Anchor strategy has exceeded our expectations.  There has also been a few things learned regarding adjustments after large market falls, that had never been contemplated (see Anchor Analysis And Options). 

What is the “relative yield” of an option? There is a tendency to think of yield in terms of dollar value in premium alone, but to not factor in other elements. This makes side-by-side comparisons invalid unless adjustments are made. Dollar value by itself ignores the true yield, not to mention moneyness and time aspects.

As our contributor Jesse mentioned, “Don’t tell me what you think, tell me what you own.” As our readers and members know, we offer a wide variety of trading and investing strategies, but I'm often asked where I'm investing my own money. In this article I will share how my personal holdings look like.