TrustyJules

Tradier is the lowest though you absolutely need Tradehawk with it - Tasty Works is less expensive than IB and has a good interface. Both work for European citizens.

Some things still not right:

Just got back in - late meetings all day here in Europe - it seems normal and I could modify an existing open GTC

Why?

Its going 2 be pretty disastrous for them. Just on my positions the cost could be 10000+

Vol.HQ doesnt belong to SO but to @Djtux - I am pretty sure he will not share the sources but its his call.

Its a metaphor for exactly that - a walk in the park is directionless...

Fail to see why you are surprised, any other outcome would have shown a price distortion that would be arbitraged away immediately by the market. The rest is of course also market maker margins in the spread. Options are probabilistic so if there was a trade that showed a consistent profit it is the other side of the trade of the options that would be guaranteed to lose money. They are obviously also in it to make money. What you show is also a typical example of the high probability low return rate and low risk of a high loss compared to the converse which is the low probability high return but low loss with high probability. At the start of any trade you are taking on a degree of risk and if everything pans out as it stands at the opening than noone should make any money. In reality however the market is the proverbial 'walk in the park' and so multiple parameters change both internally to the trade and external factors that influence the broader market. This can put your position in a profit or a loss as the case may be. In your case - and this is the trick with most such positions and ICs etc... it is to avoid the max loss. Regarding index ICs my recollection is that if you do it monthly you get your max loss twice a year (just under) and this exactly wipes out all your small profits. Therefore avoiding a max loss even once will get you into profit - there is no mechanical way to do this but simple ideas as selling ICs or spreads when VIX is high make sense as you gain from the drop in IV if it occurs allowing you a faster way out then hold till the end.

Figure 1 TLRY iron fly on 13 September 2018 Options have infinite combinations but the classic hypothetical risk free trade is the credit spread with a wing width that is smaller than the credit collected. Naysayers will tell you that in this age of algos and massively automation driven trading such pricing differences and arbitrage are polished off immediately. The chart above – however – is a real one and the pricing of the TLRY spreads endured over a fairly extensive period, it seemed in fact a free lunch was available. Others will argue that spread differences set by market makers make entering (or exiting) such positions at the theoretical profit an impossibility or just extraordinarily rare. This argument too must be rejected. Consider the chart below from a very recent NON OFFICIAL trade on Steady Options in the DJT: Figure 2 DJT iron fly on 4th April 2024 Although less pronounced than the TLRY example one can see that the mid of this spread traded above 5$ which is the width of the spread – although bid/ask was rather wide there was a considerable amount of trading that occurred above this level. Whilst one might expect to see such differences at deep ITM or OTM levels due to skew, it is unusual but not impossible to find these kind of discrepancies. Of course ‘haters are gonna hate’; and a chorus of voices will rise up to say that the above examples of mispricing are at once artifacts and on top of that will yield pennies only. Trading and capital costs will get you at best a special discounted menu at Taco Bell and never a proper dinner in the Ritz. That, however, would be untrue as well – options being leveraged instruments have this amazing ability to deliver outsized – infinite even – returns if you are right on direction. Sometimes it doesn’t take a genius to figure out that something is going to zero. The true story of LFIN and its meteoric crash with a business plan that was not far off the one of the South Sea Bubble: a promise of a future venture in crypto. At one point trading over $140 the stock reached a valuation of more than $6B. Correctly called by legions of retail investors on Reddit’s r/wallstreetbets; puts were bought by the bucket load and LFIN was trading near zero 6 months later leaving some traders with credible 5 figure returns and % profits of over 2000%. Are you convinced yet? If you are you can buy us lunch! In the article below we will dive into the three trades mentioned and conclude on some learnings aspects from them. Truly, there never is such a thing as a free lunch but that doesn’t mean there isn’t a buck to made if you are careful. When everybody was getting high Butterflies are common option instruments and often they are a bit of a toss-up between the net debit you incur in opening them (or the credit) and the width of the spread you have. A wide triangle of profit could be worth the risk of the stock ending under or over (depending on your spread and the side of the butterfly) your strikes. Normally due to call/put parity it is not possible to open a credit spread for more than the width of the strikes, the reason is simple. Market makers (or other market players) could simply buy or short the stock and create an opposite position that would effectively exploit this pricing difference and it would be immediately arbitraged away. Yet back in 2018 an observant Steady Options member noted that a new stock, TLRY, recently quoted was making a meteoric rise on the market. Figure 3 logarithmic TLRY stock from 07/2018 to 11/2018 Unsurprisingly this meteoric rise went hand in hand with exploding implied volatility – what’s more the IV differential between calls and puts also became insanely high. Figure 1 had a difference of no less than 70pts between the IV of the ATM call and ATM put. Near the close on Thursday 13th of September 2018 the ATM 5$ wide spread was trading at over 6$ - this was a function of the market closing however but several positions were opened anywhere between 25c to 50c over the width of the wings. Figure 4 TLRY option spread ATM 13th September 2018 - 10mn before closing The general presumption was that this mispricing could not endure. This proved to be far from the truth as the next day(s) it became clear that whilst it was possible to open this position – at a credit over the wing width – closing it for the spread width wasn’t working well. It was also noticed that the deeper in the money you would open a spread, the easier it was to do so for a decent credit. A particularly valiant trader opened 950 spreads over a multiple of strikes for such a credit. This wasn’t a trade to make the year – it was the trade to make retirement. Doubts set in as surely there had to be some hidden flaw which indeed could be read in places that option traders rarely examine: the borrow rate for TLRY. Figure 5 Borrow rates for TLRY stock on 13th September 2018 As can be seen from the stock price movement in figure 3 TLRY was moving really fast. Within a week you had to pay 20c for 400$ strike calls expiring in October and half a buck for the 50$ put in the same expiry. A 350% borrow rate translates at close to 1% per day or $120 for every ATM spread shown – the position is indeed guaranteed to yield the surplus over the wing width but you have to survive until expiry. What people started noticing – beginning with ITM calls - was that short calls started getting exercised. This meant that you had multiple choices with tricky outcomes: Exercise your long call (if ITM) and just risk the stock not dropping to the put level; Borrow the stock and stay short at a cost of 1% per day; Close the whole position at a loss because you cant get a reasonable price for your puts and what’s more exercise happens outside of normal trading hours so the stock could be anywhere when you try this because of additional volatility. A further risk was quickly identified even if you made it to expiry – with a stock moving so much there was a risk that your position would end between the strikes but that after market hours it would move out again effectively locking in your loss without enabling you to cash in on what should have been a positive position. Once again just the weekend cost of carrying a short in your account would wipe out any profits in the best of circumstances. To say there was no free lunch was an understatement, the trader that opened 950 spreads in fact took on a 27M$ risk when doing so. He lost 4 digit level dollars on just a few spreads that were exercised over a weekend and even then he was lucky as the stock vaulted upwards afterwards. Some others with smaller positions did manage to get out – key was that they did so before expiry neared. The closer to a Friday one came – the more likely it was that ITM calls would be exercised – the chief risk coming from them. The learning from this trade was not that it was fundamentally wrong but there are several things to be taken into account: Options mispricing at this level are always an indication of an underlying phenomenon of some kind that is outside of normal stock trading. In this case it was: The agreement in June 2018 to legalise pot in Canada which was to come into effect mid October; The very recent IPO of TLRY meaning that it had a narrow free float and a lot of limitations; What we would now call ‘meme-like’ euphoria regarding the prospects of pot stocks; The telling signs that could be deduced from options trading were: The extreme volatility of the options in question exacerbating price differences; Extraordinary skew between calls and puts making the mispricing more likely; The fact that simple observation of open interest of ITM calls indicated that massive exercising was occurring even if traders kept opening new spreads. The position was only vulnerable to early exercise which is a characteristic of American style options that are universally used for stock trading. Anyone who was not way ITM came out more or less unscathed from the positions opened but this was very tricky by the time TLRY hit $300 on 09/19/2018. Its hard to give a correct estimate but its likely near 50% of ITM calls with more than a month to go before expiry were exercised. The weekly expiry of 09/21/2018 was exercised overnight from Wednesday to Thursday for even higher percentages. With the stock halving again by that Friday expiry anyone not agile enough would have been caught full in the cross fire. Bill Gross called it: If you are bold you sell premium on DJT On 29th of March 2024 DJT – the social media company of Donald Trump – launched on the stock market. Like TLRY it was a high visibility launch and the stock was both praised and criticised from the start. New Jersey businessman Mike Crispi embodied the bullish sentiment best: Noone would want to deny Mike his day in the sun but a more interesting quote came from Bond King Bill Gross who stated that "A genius can have a high IQ or invest in the stock market during a bull market. A genius can also be an investor with the courage to sell DJT options at a 250 annualized volatility,". It turned out that Bill’s position likely had a lot of similarity to a credit spread like an iron fly or condor because Yahoo Finance found that: Figure 6 Source Yahoo Finance/Reuters DJT had huge volatility skew between puts and calls Monthly options expiring in about 2 weeks had the ATM put 2.4 times more expensive than the ATM call. This large skew up a feasible arbitrage scenario. For example, with the stock ~$47.5, the 47.5/42.5 call and put credit spreads should cancel each other out and make this a basically guaranteed break-even trade. But in this extreme volatility skew, this combination of put and call credit spreads could be opened for a credit quite a bit over the $5.00 wing width (and the amount over the wing width would be a guaranteed gain at expiration). On April 4, the following trade was opened using the April 19 expiration, it's called a Box combo. Note how the ATM 47.5 strike put is so much more expensive than the 47.5 call, and the 42.5 call is close in value to the 42.5 put even though the call is around $5.00 ITM and the put is OTM. This trade yielded a $5.65 credit on a box combo with a wing width of $5.00 (so the opening credit was 13% above the wing width). This means that at expiration, letting any ITM legs go through assignment you'd wind up with a $65 profit at all stock price points. But are there any potential pitfalls with this trade? The answer is yes, and it’s all due to the early assignment possibility with American style options. The extreme put vs call volatility skew that enabled this trade to be opened for a credit 13% higher than the wing width also created a trade which is delta negative prior to expiration. Here is the PNL chart at trade opening: Note how the thick blue line, which represents the profit at expiration, is $65 at all stock price points. However, the thin wavy line is the current status which shows a delta negative trade where the position’s PnL improves if the stock price drops but shows a loss if the stock price rises (this is because in this scenario the OTM put credit spread holds onto much of its value because the put IV is so much higher than the call IV). But why does this matter if a profit is guaranteed if you hold the trade until expiration? If the stock price rises enough to make the short 42.5 call have only a few cents of extrinsic value (time value) then there is a high probability of getting assigned on the short call. In this case you'd have to close the call side for at or near the $5.00 wing width and hold onto the put credit spread and hope the stock price stays above 47.5 until expiration so the put side expires worthless. There would be quite a bit of risk here as the stock price could very easily make a large downward move with such a high volatility stock. If the stock price were to make a significant decline after closing the call credit spread for near $5.00, you could wind up having to close the put credit spread at a higher price and wind up with a losing trade. In this particular trade, the stock price dropped (it moved in the right direction for this trade). On April 15 (4 days prior to expiration) with the stock price under $30, it was able to be closed for a debit slightly under $5.00 thereby generating a gain of just over $65. However, had the stock price risen by a few dollars after the trade was opened it would have turned into a much more difficult trade to manage. In the end, it did turn out to be a free lunch trade – but only because the stock price cooperated and moved in the correct direction. The lead balloon that was LFIN One of options many pleasant aspects is that you can express a view on the market without betting the farm and yet with potentially infinite returns. For comedic value there is no replacement for the story of the option traders and crypto pioneer LFIN (though RIVN and their criticism by Hindenburg Research come a close second). Once again the mispricing that traders took advantage of and later suffered their utter discomfiture on, was based on events that rarely affect ‘normal stocks’: A meme-like enthusiasm for this new thing called crypto(?!?); A stock market launch ostensibly backed by NASDAQ’s strict rules that placed a stock with very limited (in fact insufficient) free float on the market; The announcement of the ‘master stroke’ investment in an allegedly successful (but in fact nascent) crypto platform; An extraordinarily rare dropping of the ball by FTSE Russel Index managers that co-opted the stock into their index without respecting their own rules. All these elements put together boosted the stock from 5$ to over 140$ (intraday) and billions in stock market valuation. A critical issue was that the amount of stock required for the index funds was over half the alleged (inflated) free float. So a bona fide short squeeze occurred and everybody started talking about LFIN as if they knew what these guys were doing. As the madness hit its peak, the CEO Venkata Meenavalli went on CNBC where every average Joe could follow the live train crash. As the interview progressed, LFIN’s price dropped some 16% in after-hours trading, with CNBC helpfully displaying this sharp downward trend in a chart next to Meenavalli’s face. If you ever did a presentation and thought your point did not come across, think of Venkata and you won’t think so poorly of yourself. Figure 7 LFIN CEO interview on CNBC 18th December 2017, with live AMC prices as he speaks A few classic statements were: Q:How many bitcoin transactions have you done? A: We own 140 bitcoins (one coin was worth about 10k); ‘We are a profitable company.’ And also ‘We are a GEICO of this world.’ ‘We have a team of quants.’ Q:’Is the 6B$ market valuation absurd?’ A:’Yes.’ No less than 11 times he repeated: ‘You have to understand that...’ followed by some unintelligible remark. Needless to say the option traders piled in and the put buyers were seemingly quid’s in. Reddit fora were full of retail traders having positions between 10-100s of put options at strikes varying from 50$ to 2.50$. Here’s what happened with LFIN: The insanity of this chart cannot be overestimated, LFIN had listed for 5$ on 15th December 2017 and hit 142$ (closing at $72.38) on December 18th 2017 when the CEO made his ill-fated interview. If ever there was a reason to buy puts on a company the whole sorry interview as well as multiple discoveries by i.a. Citron Research made it 100% plain this company was one big scam. Throughout late December and January people bought puts and they were cheap at the price. The vast majority chose expiries in April and May. As March came around the bells of doom sounded louder and louder for LFIN, not only was there an SEC investigation but FTSE Russel reversed its decision to include them in their index and multiple other agency lawsuits and NASDAQ investigations were triggered. Within the space of a few days the stock went from respectable to being at risk of delisting. A T12 notice was issued end of March and this effectively delisted the stock. Now a trifecta of disasters faced put holders – some with deep ITM positions opened for 5$ at the 50$ strike for the April expiry: Institutional holders which had bought 45% of the theoretical free float had not finished unloading all their stock. With the halted trading they could no longer offload them; The CEO turned out to have lied about the free float in general and the NASDAQ stopped 26M shares from being circulated in violation of a lock-up; Short sellers and put holders held 250%+ of the free float – a kind of inverse short squeeze. Having taken millions of dollars in losses institutional holders realising the dearth of shares increased borrowing costs to 3000%. Simultaneously option holders – if they were lucky – had to exercise their puts and pray that trading would resume so they could fill their short positions thus created. Ominously no T12 trading halt had – up to that point – ever been lifted in less than 3 months. This would place all of the April, May and June put option holders in a dilemma. For one they were required to put up the full sum of the value of the shares they had exercised puts against. This was very hard for any call holders that happened to be long strikes around the money or had sold credit spreads. Put holders likewise had to exercise and pay the extortionate borrow fees of 250$+ a day without knowing when they could cover the short. In the end trading OTC resumed on 05/28/2018 but it took another month before the stock traded below 5$ let alone near zero. This meant that anyone that had gambled and exercised 2.50$ strike puts were out of luck. The general tenure in the reports of the retail traders about their experience is that even the ones that made 5 figures in the initial phase of the collapse, had doubled down so far after collecting their winnings that they were now out 6 figures. As the owner of this website famously wrote – position sizing is essential for successful trading. What shall we have for lunch? The stock market wisdoms that ‘there is no such thing as a free lunch’, ‘the market can stay irrational longer than you can stay liquid’ and so forth exist for a reason. Mispricing in options and opportunity for arbitrage exist – the above examples show that this occurs primarily in unusual situations where you have to take into account risks which do not exist when you trade established and liquid stocks. Black swan events like trading halts and their consequences are rarely understood until you are confronted with them. Should you therefore shy away from trading these opportunities? Of course not, where is the fun in that? However you should take into account that these trades are risky and size your position accordingly. Be prepared also to take a quick buck rather than wait for your ship to come in. if you are tempted to make a YOLO trade, remember the warning tale of the ‘Man who couldn’t lose’. It was a short tale of a man that always won in casinos, on his deathbed when asked what his secret was, his answer was simple: ‘Observe the room until you find the guy that is about to lose everything, the house, the car, the wife, the kids on his last gamble. Then bet against him, because that guy ALWAYS loses.’ So it is with any YOLO or retirement trade, you will surely fail whereas if you were less greedy you could have joined us for lunch at Taco Bell. Many thanks to our contributors @TrustyJules and @Yowster for this fascinating article.

IV has value but RV encompasses both and so is often more useful - nevertheless you cant completely ignore it because if its low (historically) and some event might make it move you could get more oomph out of your IV than otherwise. People vary in the importance they attach to it - I find it still relevant but check RV to mitigate being too optimistic. The stratospheric rise of IV before earnings is after all partially an outcome of the fact that IV is a basket to catch what the mathematical models cannot (earnings). @Christof+ always points this out and he is right. With RV over average and decline strong I find it less compelling - the second point about the outsized return however doesnt concern me so much. Its more important to see how many losers there are and how big they were. If they are low and we could be in line for a 75% one every 10 times we do this then it could be well worth it.

The analysis is not bad HOWEVER: 1) Note that RV encompasses both IV and theta changes as well as market movement - the rise in IV is therefore included in it and you cannot count it as a separate point in favour; 2) Current RV is above average which combined with the strong decline in RV means that there is a lot to make up

I wasnt saying to combine the two strategies - but one can. There are other ways to neutralise some of the delta too. The time to expiry plays a role in what is best, I was just giving you some options.

What you describe is not hegding but digging the hole deeper and exposing yourself to more losses. If you are looking to role the expiry of your IC itself then you are effectively taking a new position with additional losses possible. Not something I recommend. My example is, STOCK XYZ @ 100 and you have an IC: 10 SHORT PUTS XYZ June 21 60 10 LONG PUTS XYZ June 21 50 10 SHORT CALLS XYZ June 21 100 10 LONG CALLS XYZ June 21 110 So your call side is obviously challenged - buy 1 month out or further a call 1 CALL XYZ July 19 100. The reason to be ATM and a month out is to have maximum delta effect and still not lose too much to theta if the stock retreats as was your original expectation. If XYZ continues to advance then your hedge will help against the loss - mind that if the call delta rises too much more drastic measures are needed like moving the whole operation a strike or so up. In the above scenario if you are lucky you might for no cash outlay be able to get to: 10 SHORT PUTS XYZ June 21 80 10 LONG PUTS XYZ June 21 90 10 SHORT CALLS XYZ June 21 105 10 LONG CALLS XYZ June 21 115 Always mind that you want the shorts delta to be below 30 certainly if you are getting close to expiry - which is not quite the case above.

It depends on the length of time to expiry - there is a lot that can be done on solving IC positions as long as there is still time. The silent killer of ICs is gamma - a greek mostly overlooked but which will rip your IC position to threads in minutes if you are less than a week from expiry. In such a case perhaps best to close - suck up the loss and move on. When a short side is only challenged a few possibilities exist: - buy an option a month out ATM in the direction of the challenged side (put or call as the case may be). You can do so in a lesser ratio than the amount of ICs you have open - how many depends a bit on delta of your challenged position. Try and neutralise some or all of the delta and once the crisis passes sell your hedge option and wait for your IC to bring home the bacon (premium). - if you move the position - move as far as you can whilst still remaining near 0% profitability - half measures dont help and you will be able to move only inches for every yard you give on the unchallenged side. Look carefully at option calculators to determine the chance of your short or break-even being breached and move as far as you can from that.

I havent worked with any of the calculators you mention but can guess what happens perhaps. As a side note, you did not give the strike prices for your PMCC on WMT - from context I presumed that it is: BTO 1 C WMT 26.67$ 16 Jan 26 - at close yesterday 32.55-34.90-37.30 (bid mid ask) STO 1 C WMT 63$ 24 May 24 - at close yesterday 0.56-0.58-0.59 (bid mid ask) If you plot the return chart in One you will get this but One opens the position at the mid price (unless you specify otherwise): So first point is that the other option calculators could be taking bid and ask openings rather than mid which makes a huge difference due to the spread on the 2026 LEAP in the position. The second point is that the way they take IV changes into account or not, makes a difference. The plot chart above gives a theoretical max profit of 278$ if you were to close on Friday next week with the short expiring worthless. That is not a scenario that is realistic because IV of the short option will rise and - for the purpose of this discussion - we presume the IV of the LEAP and general market remains stable. If we plot the chart for Thursday next week and input a 9pt rise of IV differential between the short and the long you get this: On Friday it would be worse to the point that if the short is near or on its strike the IV of the short will even more seriously impact the return figure. I trade a lot of long positions that are similar to a PMCC but have longs nearer ATM and are ~6-9 months from expiry. The shorts are 1-2 weeks away - sometimes near expiry of the short its value can destroy the rise in value of my longs. This is a function of the IV differential and delta of course. As OptionCalculator is free I replicated the above there with opening the position at mid-prices: I am not sure how they take into account IV which I dropped by 10% - in One they change the differential between the options which is ok here but ideally you need to be able to change the IV on the individual positions per strike and date in the future to be more accurate in the predictions. In any case I get a different result than you because of these parameters - the outcome of option positions is not at all linear and therefore the different outcomes are probably due to different settings or presumptions that the software makes when offering you these outcomes.

Well you buy a further out option in the same (or later) expiry or you buy a same strike on a much later expiry. An option with 0 DTE and 12$ value that could go to zero is not very common - again without a concrete example it is hard to give anything but platitudes in response.

You sell the option, post the margin for it and wait for the decline to happen and then close near the bell for 4$ or 0$ as the case may be. Note that selling options opens you up to theoretically unlimited losses if you are wrong on your expectation so you may want to hedge your position for risk and to reduce required margin. Outside of a real context of a stock its really hard to give sophisticated strategies because too much depends on the stock in question and any risks associated with it or the general market in the interim.

Personally not in this situation but if anyone is in the interesting position of owning puts in the two banks that went bust its quite interesting to see what happens now that trading is suspended. Basically you cant close your puts but are forced to exercise them, I recall a ticker of some years ago that went bust and people had to exercise only to find that trading didnt resume at all. So they were forced for months or even a year to pay lending fees for the short shares which eventually ate up all their profit from the put position. Its interesting that for the two banks the document out appears identical: https://infomemo.theocc.com/infomemo/search I attached the specific notices to the post - note that these were downloaded today and may be subject to change so the main link above should be your reference. What is interesting is that the notices say that the OOC may decide to go for cash settlement which would be good for put holders. What I saw on other boards is that it is recommended to wait with exercise (if you can - the first expiry is this Friday) until the day of your expiry or if/when the stocks start trading on the pink sheets. At that moment you could exercise your puts (presuming you didnt hold the shares) at your leisure though its not guaranteed they trade for zero. It always seem like an option trader dream to have a put on a company whose value goes to zero but in practice its actually complicated, those selling calls are better off! SBNY notice.pdf SIVB notice.pdf

There will be a blog post with the case my post refers to (not SVN or SBNY).

ByBit is an unregulated crypto broker that is systematically abused by scammers - generally masquerading as western women but frequently are people operating from China or Myanmar - the practice is called 'butchering the pig' or “Shāzhūpán” in Chinese. This involves enticing punters to go onto platforms - of which ByBit is the MOST NOTORIOUS - getting them to make small profits and then enticing them to transfer vast amounts to the account. This is then subsequently locked because TAX needs to be paid - once that final transfer is made the scammer disappears and the ByBit account turns out to be empty. So the difference with TastyWorks that is a regulated broker where your money is protected by actually decent rule of law countries' regulation and enforcement, could not be bigger. Having said that ByBit's one redeeming feature may be that they dont have Tom Sosnoff who rubs many people the wrong way. No matter how dis-likable some people find Tom - he won't steal your money like 90%+ of people promoting ByBit. Worse is that there are many spoof platforms of GoByBit and these will also steal your identity and cause you no end of pain if you register your personal information and IDs on them. The scammers operate from all kinds of sources like LinkedIn, dating apps or serious investment websites trying to get people to contact them. The result is invariably that your money will be fleeced from you if you fall to their scams. So yes, the difference between TastyWorks and ByBit is very large though not as large as someone who attempts to promote the scammer site through a serious investment site where people aren't completely devoid of personal intelligence and actually experienced in trading real securities rather than vapor-crypto accounts. This was a public service announcement. https://www.theguardian.com/world/2023/jan/29/everything-is-fake-how-global-gangs-are-using-uk-shell-companies-in-multi-million-pound-crypto-scams https://www.tenable.com/blog/pig-butchering-scam-tinder-tiktok-whatsapp-telegram-scammers-steal-millions Note for Barbs @BarbaraBraun you are likely just an AI so there is no point addressing you directly but insofar as you are a human being - likely male and in China - try and keep your dignity and stop promoting scams.

Insider Buying and Selling In doing so we are competing with quant-based analysis that is poring hundreds of millions of dollars into similar things and rarely does the retail investor get a peek in with any edge. Courtesy of regulation, however, there are a number of things that we – the retail investor – can see as well (or as poorly) as anyone else and one of those things is insider buying. Due to grey zones in reporting and execution of trades, the exact timing is not what matters the most, it is simply a head’s up that insiders are buying. Why is this meaningful, well to quote one of the old-time investment greats: “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” —Peter Lynch Insider buying is much more significant than selling because so many reasons can cause a person to require money that have nothing to do with the company in question, the most obviously ubiquitous one being DIVORCE! Buying is extraordinary because those doing it are actually increasing their exposure to the stock in question when usually they are already employed by the company and on top of that tend to benefit from share options or company plans. Occasionally a CEO/CFO has to make a public show of confidence in his own company by buying (avoid those situations) but by and large the run of the mill insider buyer really has no reason to buy except they think things are looking good for the stock. In betting terms, insiders buying is them doubling down on an already very large exposure to the success of the company in question. Peter Lynch was very much a person who believed you should invest in stocks you understand. The example he gave of ‘unexpected’ insider buying (i.e. an unregulated one) was the 1950s fireman assuring fire safety rounds in an industrial area around Palmer Massachusetts who had to keep widening the walk of his round due to a particular company (Tambrands) expanding all the time. Without really knowing what they made, he bought shares in the company in question and retired a millionaire by 1970. In the same logic I invested (for my mother’s portfolio) in NVDIA back in April 2016 – why? My company pitched for their business (we didn’t get it) and their public RFP was the first document I ever read that made any sense to me as regards a strategy for AI (self-driving cars in fact). These two examples do have a warning inherent in them and Peter Lynch’s quote above is frequently cited but his second recommendation is more rarely reported: “Finding the promising company is only the first step. The next step is doing the research.” —Peter Lynch NVDA case The NVDIA situation was a case in point, the investment made for my mother was based on her having a diversified portfolio and an understanding of semi-conductor stocks. A nice RFP itself wasn’t the only reason to choose to take the plunge, it was combined with other considerations and this is how you should approach all insider buying. There was a very interesting Reddit post about this which we shall shamelessly steal from use as research in this article. You see, not all insider buying always leads to success. Figure 1 Source r/options on Reddit 02/25/2024 The above research by the redditor covered a 3-year period and provides sobering reading for anyone believing it is simply a question of blindly following insiders. Whilst the post was probably meant to get you to subscribe to insiderxtrade.com, it was quite enlightening. The period covers 3 years prior to Q2 2023 which was a particularly challenging stock market environment. One might conclude that the smallest cap stocks are only interesting in the shorter time frames and possibly that mid and larger cap stocks insider buyers are more on point about what they do. This analysis followed an older analysis that was less granular but likewise concluded that simply trading the S&P yielded more positive returns BUT insofar as the returns of the insider buyer were winners, they were larger winners than the S&P by some margin. So clearly whatever we do it cannot simply be to buy when insiders are buying. Whom should you follow? This brings us back to the same question: we should only follow the right insiders but the question is which ones? The answer is that we should follow those where other things tell us that the stock in question could be of interest but that we are unsure about the general timing of entering an uptrend. Warren Buffet’s idea that what went up last year will go up next year is a truism that is hard to follow in practice when we inevitably pick the one stock that nosedives despite a stellar prior year. An example of a reasoned approach using insider buying is given below for two companies in the defense sector. In RED is Lockheed Martin (LMT) and in BLUE is German stock market quoted defense firm Rheinmetall (RHM.DE). To understand the chart below, note that for both companies – as is usual for any quoted companies – they are subject to certain quarterly windows of buying and selling which are easily identifiable looking at the timing of purchases by insider. Points 1 & 2 in yellow are public events relevant to the two stocks in question – namely Russia’s invasion of Ukraine and the announcement by the German Chancellor of a “Zeitenwende” a fancy German term that Bob Dylan stated more simply as: “The times they are a changing”. This coincided with a €100 billion defense spending package to upgrade the German armed forces. No prizes for guessing that both items are relevant for a defense stock but where the first event drove both of them; the second only drove up the German firm. Whilst US companies in defense make more money – the few remaining in Europe stand to grow faster as they start from a much lower base. This made them interesting to invest in. The little white dots is the insider buying in LMT – in fact it is one man: John Donovan who hasn’t had the best of luck in his choices to get in. This from amongst the 115,000 employees of LMT and a very large corps of people that must report insider trades. LMT reports about 30 insider trades a year – mainly executions and sales. John is the lone bull and combines his LMT director position with a director position at PANW; The reddish pink numbers are buys by Rheinmetall insiders – in fact in that whole period there are only two sales and they are from a single person who also acquired many shares. Every number there represents between ~3 to 6 insiders buying stock. When you consider Rheinmetall only has 33,000 employees and the fact they report about 10 transactions per year, the difference between LMT and them is even more remarkable. The difference in performance is tremendous with Rheinmetall easily outpacing LMT but as one can see from (3) not all the purchases were necessarily perfectly timed. The meteoric rise of the stock in early 2022 led to a general pause in which not the company performance but the general market drove the stock, . Insiders kept buying all the time and this is where the combination of a company that is in a good place combined with sustained insider buying and hardly any selling makes the case compelling. Lonely John Donovan is not out of pocket but certainly the tightknit group of buyers in Rheinmetall have had the better of it. The differential is that in the Germans case there was so much more than just a regional conflict to drive the stock price that it was worth paying attention at what insiders were doing. Basically they confirm that the uptrend should last when you are an insiders and you know the end of a good thing is in sight you sell and certainly don’t buy. Trend Break Confirmation This brings us to a third way to look at insider buying in a different light – as a confirmation of a trend break to the positive. So far we have examined insider buying as something stock based, secretly hoping that some magnificent epiphany is driving the insiders and that we can profit by association. Needless to say, trading on insider knowledge is not permitted and therefore it makes sense to look at insider buying at a more metalevel. If you have been investing for a while you have been through a market downturn – my first exposure was the 1987 crash but many of you will recall the market collapse following COVID, dot.com, subprime or the government debt crisis and so forth. Warren Buffet always regales (and comforts us) with his quote that the flag goes out when the market goes down because in the House of Buffet it’s a good thing when ‘hamburgers’ get cheaper. The point is that we never seem to be able to be sure that the market will not go down further. Experience tells us that if you buy anywhere near the nadir of the market – in fact within quite a wide margin of the nadir – the recovery is extremely powerful. It’s a type of ‘buy and hold’ on steroids but our fear tends to drive us away from investing at the right moment and then looking back we bemoan that: ‘it was obvious this pandemic thing was going to go away one day.’ Or whatever equivalent new boom has followed the bust that made us skittish. The analysis below is again ‘researched’ by Putnam but quite a good guide for a different way of looking at insider buying. They noticed the following in 2020 after the COVID Armageddon: These were levels unseen according to them but what makes their analysis interesting is that on that basis they then made a choice about WHERE they would invest. They chose the heavy cyclical side of the market as the one that had been hammered the most and that tends to recovers fastest when a recovery sets in after the ‘doom and gloom’ is dispelled. It’s too late now to look at the insider buying in the period – at least on the NASDAQ site – but one must presume that their choice stock FCX had its share of insider buying. It is also very sensitive to the copper price which itself is directly related to economic activity: there is no economic growth without copper and its price has been a bell weather for the total economy since electronics started dominating our lives. Figure 2 FCX chart from 01/01/2020 to 04/2022 As you can see from the chart above, Putnam must have done well but frankly it didn’t take a genius to figure this out nor quantum access to data or even expensive tools. Certainly, you couldn’t possibly time the dip, but you could be more or less right: even a month or 3 would have been fine. What was key is the combination of insider buying and the insight into other drivers of a stock (in this case the realization the market was bottoming because of broad insider buying and the copper price bottoming out). The bottom line The conclusion of this post is that insider buying is not a direct trigger for investment but simply a useful contributing signal in certain circumstances. Options are ideal for making use of these signals because they can help play the market more subtly than outright share buys can. The approach to a duly researched insider buying scenario could be to buy a LEAP and sell some short options against all or part of the investment. This will give a little protection if the market goes down or sideways whilst making it possible to move the sold call up gradually if the stock picks up steam. The poor man’s covered call, as it is often called, is the option trader’s friend for insider buying strategies.

Ratio trading the earnings Everyone knows what a ratio trade is right? A ratio can be found in many shapes, forms and directions, the SO beloved Hedged Straddle is a ratio whereby a larger number of long positions are offset (in part) with short positions that are closer in time. Its a more sophisticated version of the humble sell 1 short ITM (In The Money) and buy 2 long ITM (whether with calls and puts) for zero cash outlay (or even a minor cash+ or cash -) except margin. This article is my own reflection of the use of this option strategy but inspired partially by what I learnt here on SO. I give it to you for criticism and suggestions - so agree or disagree with me, I look forward to the debate. The classic trade described above works both for calls and for puts, in the article I stuck to calls for illustrative purposes but it works just as well with puts. Now you may ask why would you want to do a ratio trade ahead of earnings? there is a large portion of stocks which will run-up in price ahead of earnings; as we know from the SO long calendar, IV will rise ahead of the earnings announcement. An option that is ITM is less affected by IV rising than one that is ATM or OTM and so the mere rise in IV benefits the trade; black swan protection - if the market were to tank really badly, the stock would end up below the short strike (if calls) and the whole trade would be a safe wash. To put it simpler, the ratio trade ahead of earnings is a way to be in the market without risking your shirt - your losses tend to be mitigated if the trade is managed well. Anyone who has bought long calls before earnings will have known the joy of a 100%+ rise but of course also the bust of losing 100% when the market is adverse to you. Certainly if you are long and right on direction, nothing beats the simple long position however the ratio trade allows you to attempt this multiple times without losing your shirt if you are wrong. And you will be wrong occasionally even if you follow the process I describe below, the trick is to minimize the times you are wrong and the size of the loss whereas you rake in the profits when you get it right. Now already some of you may be skeptical about the IV effect but believe me it is massive, below I will use AZO as an example. Why AZO? Well its a stock that seems to be rise before earnings but its not a perfect example and because its stock price is high the margin requirement makes it somewhat less practical to execute. Its an example and not meant to be followed, but it is a real live one, in any series of earnings a week there are never fewer than half a dozen potential candidates. Anyway, here is the schematic of an AZO 1:2 ratio based on 80 (short) and 60 (long) delta calls 15 March (i.e. after earnings which are unconfirmed for 29-Feb or 5-Mar). Now I know that the IV of this position will rise to 112% the day before earnings so if I were to input that IV today you would see the position gain 10K right away: That's pretty impressive eh? Of course its not really fair because that is the IV value right before earnings so lets bring the date forward to 1st of March - kind of a guess of the right date seeing we are not sure what the earnings date actually is. See how cool that is? Even if the stock would not budge, theoretically under these parameters our position would have GAINED in value. Note that reality tends to be more fractious than the juicy look of these charts but the effect really is there. The increase in IV is a buffer against theta losses and meanwhile we could make a bundle if the stock moved in the right direction. What do I need to choose my trade? When we are looking for a stock suitable to trade we need to clarify the following questions: Is this a stock that rises before earnings? When should I enter and when should I exit the position? What are the ideal deltas of the short/long position to maximize profits (and what is that profit target)? What ratio should I use? (this is much related to the previous question as we will see) What will the IV be on the planned end time of my trade? What stock price would allow me to break-even at the planned end-date of the trade and what stock price would get me (theoretically) to the planned profit? If we have the answer to all these questions we can make a trading plan and if on the day everything looks good then execute it and follow the plan. It also allows us to have a guideline to decide to take the winnings or cut our losses because we have set the most important parameters. So lets take these questions one by one, using the tools that are commonly used by everyone on SO - true some of these are paying tools but I think they are well worth it. A little hardwork with charting software can probably also get you to most of the outcomes without the need to use paying services. Which stock rise before earnings? Well you could just look at stocks and check back previous earning dates and find them - however thanks to SO I have found VolHQ really useful here - they have a return scanner matrix. To use one example that has worked very well in the past and that I have traded successfully consistently: SBUX. See the heat map that have: This is the sort of heat map you want to see - as you can see there are a couple of crossings where there are substantial profits. I always start out looking at the 80D one because I need to have a stock that actually rises and the 80D option is pretty close to the actual stock value. To show you the reverse type chart see UAA: UAA is not a good candidate for this strategy the few red bits notwithstanding, in fact UAA is a good candidate for a ratio put trade - but that's another story. When should I enter and exit the position? Now like I said we would look at AZO - the 80 Delta Return matrix of AZO looks like this: This is actually pretty good - so we should check out the 60,40 and 20 D long call returns as well: Now immediately you can see a sort of possibility here - somewhere between T-20 /T-16 opening and closing between T-12/T-8 seems to have the most consistent warm areas in the heat map. In fact when you look in detail there are probably several opportunities but the highest returns for all the options regardless of delta appears to be T-17 open and close T-9 (give or take a day depending on the option). Some other variants are conceivable and worth looking at - but this early one has the additional comfort that we have time to adapt if necessary before earnings hit us. That means presuming the earnings are announced somewhere in between the two dates currently mooted that we should open on or around 8th of February and close the trade on or around the 18th of February, In any case we shouldn't hold the position too long because it seems to worsen thereafter. What are the ideal deltas for the options to be used in the ratio? Here is where I think I can claim some originality - for a long while I presumed a one strike ITM, one strike OTM was the best approach or that possibly to be effective the ratio had to be 1:3 - but in fact nothing is further from the truth. It depends on the stock, the IV and the timing - there is no hard and fast rule though it is somewhat more common to have higher delta ratios being effective. This calculation is quite complex because you have to compare like for like. Practically speaking the comparison must take differences of capital outlay due to margin into account as well as the other parameters of option pricing. I made a spreadsheet for this and you need to fill the highlighted sections in yourself to get results (all other parts are filled automatically): You need to determine the stock price corresponding to the 80/60/409/20 delta calls respectively for the option series ending soonest after earnings announcement. In this case as it was uncertain I chose the regular 3rd Friday expiry because this series would be more liquid and relevant in terms of option pricing. The relevant strike prices are not exactly corresponding but close enough for my purposes - stocks with lower prices the gaps tend be linear 5$ from delta to delta, but not here as they are 740/800/840/900$ respectively for the 80/60/40/20 Delta call series. I input these in the yellow highlighted section. The orange section has the return as per volatilityHQ return matrix based on our timings above. The green section is simply last Friday's mid-price of the options in question. To determine which is the ideal delta combination with the above factors we look at the third and fourth set of table marked SPREAD and $2000 respectively. They are in fact the same except the first one gives a return in % and other the return based on a hypothetical 2000$ investment for each of the positions. In this case the 80 delta short and 60 delta long appears to be the winner as has the highest return of 65%. What ratio should I use? Well my excel sheet tells us that in the first section of the table marked PRICE - if we look at the 60 DELTA Call and match that against the column of the 80 Delta call we find a 2:1 ratio to be appropriate. Great you will say, can I trade now? Nope. There are a few more things to do and a few more caveats to address before you press that trade button. What will the IV be at the end of the trade? For this I return again to volatility HQ and let it run its normal calendar function. This is useful anyway because you can check at the same time whether the stock is suitable for a calendar. However I am looking at the third chart down on the calendar plots from vol.HQ: So at T-9 - our proposed exit date for the trade IV would be ca. 41%, this we can now input into our option valuation as we have entry prices (admittedly based on today's option prices) and we know our exit date and the IV at that time. What is my breakeven/target profit stock price at exit day? It turns out our break-even price is today's stock price - that's pretty cool - even if nothing happens we should be okay(ish), the projection is for the exit date at T-9: In terms of our profit - lets say we aim at 50% - for reasons I explain in the caveats below its better to be conservative and grab the money and run when you can. This would already be a great success - in this case the trade would have required 6K+ margin so I would look for 3K profit. As it turns out that is around the 871.50$ mark for AZO. Now you might say that is quite a climb but it is in fact only +7% compared to today - not at all out of the question and well within previous iterations of this stocks earnings run-ups. Ok now we have a plan: we plan to enter the trade on 8th of February on 2:1 ratio of the 740/800$ 15-Mar call options; we plan to exit at the latest on 18th of February if at any time the stock should hit 870$+ we liquidate because that would be our end game if it was the final day of the trade as well; if during the trade the option threatens to stick below 814$ we might have to cut our losses. In fact for this particular ratio it doesnt look too problematic as the cushion of IV is very large. Houston we might have a problem? (caveats) Ok so what are the downsides and tricky things regarding this trade? The black swan protection is a bit of a false security. Many people think that the trade will be ok if the stock tanks because in that case at expiry we would have the small credit (or debit) left over from the ratio. However this trade must NOT BE HELD THROUGH EARNINGS - therefore the IV will remain elevated and if the stock tanked you may find that the market prices your option well below the price at the end. Yes - WELL BELOW - even when the stock is ways under the short option. This is a real pain because unless you take the trade through earnings because the market tanked so massively it couldn't possibly pop up - it could just inconveniently rise to exactly your worst point (long strike). In that case you have the max. theoretical loss and no time left to adapt the position. There is no free lunch - the trade can lose money - certainly much less than an outright long but occasionally I have lost as much as 50% of the max. theoretical loss; Finding the right stock is not so easy and the heatmaps on vol. hQ are averages - it is very important to hover your mouse over the crossing of entry date v. exit date and see what the average is based on: Liquidity remains important - you cannot do this with stocks with very wide spreads. The ratio is more forgiving than the calendar in that there is no limit to do this on low value stocks but you cant have a spreads widening too much as you need to buy and sell twice; This prep work that you do - you have to repeat it all over before you actually commit to the trade. Between then and now some of the parameters (not all) will have changed and therefore be prepared to have a long hard look before pressing that COMMIT button; You have to watch these trades and adapt sometimes - do not forget to double check actual earnings dates - this is one reason why even very consistent but time narrow successful past experience is not enough. You could easily be a few days off and like I said whatever you do dont take the trade through earnings, the IV crush post earnings will wipe out even profitable positions pre-earnings that benefit from a post-earnings move in their direction. I am NOT KIDDING - I have lost money on Netflix going up 30$ over my long strike on a ratio trade held through earnings. Ok you scared me - any soothing words? No system is perfect and I am interested to hear feedback. However my experience has been very good so far and it is improving in particular as I have now nailed down better what sort of ratio to enter for every stock I go on. Including the periods when I was still finding my way (which included some clunkers I can tell you), I have roughly the following batting ratio: profitable on target (or near enough/over - always more than 10% on average 18%): 26 on or around 0% (includes +5/-5% but most frequently just +1/-1%): 18 losers on average about -20%: 10 Since I started selecting the deltas more carefully my hit ratio has improved with no real losers at all but the sample size is too small in my opinion. Right now I am trading blocks of around 2-3K in value though I have gone over 6K on occasion. I think they are ok for the retail investor - it would be quite hard to open a 100 calls and short a 100 calls in most stocks that are suitable. Generally though for lower volumes you get good prices - institutionals in fact have bad prices because they buy so much volume they influence the market price directly. Would you like to learn in real time how to identify those opportunities and trade them? 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Whatever you do - do not roll. NVDA earnings are next week and in he current market state a 10% rise is the least one might expect. I wouldnt be too worried on assignment - just sell in premarket.