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- Keep Your Passions Alive
Good Morning!
This is the Jumping Cholla (CHOY-uh). The newsletter that turns options market insights into a fun, easy-to-read email that helps you reduce your chances of getting pricked while trading!
And even if you don't trade, learning how to think like a trader builds a robust framework for problem solving, taking risks, managing a plan, and just living life.
Quote of the day:
"Do not let your passions die, follow them and they will lead you to your destiny"
- Lao Tzu, 6th century philosopher
Is wisdom just something some long hair wrote down 1500 years ago?! Regardless, our boy Lao brings up a good point. If you have passion for something, don't let it die, and even worse, don't kill it.
How does passion for trading die?
Losing money without learning. Then chasing losers. Then gambling to "make up" those losses.
Pro athletes don't think about the mechanics of their jump-shot every time they get the ball, they just do what they've trained to do. And FYI, they probably didn't love the training either, but they had a dream in mind fueled by their passion.
At the very minimum, if you aren't training yourself to think 1) why did I take the trade 2) how will I manage the trade 3) when will I exit, you're setting yourself up for failure.
And you should really dig into what your passion is. If its "making a lot of money," you may succeed temporarily, but without the foresight to walk out of the casino, you'll give it back. If it's something along the lines of "mastering an iterative and repeatable game" where each round and player interaction builds upon itself, well, then you're in the right spot.
Not Winning Isn't Losing
Like we said, if you're learning and taking those lessons with you on the next iteration, you are on the right path.
Here's some milestones that every single pro trader hits. Let it also serve as some encouragement in your progress.
Be able to control losses. Believe it or not, most people will never get here. So, if you can do this, you're at a huge milestone. Most let losers run, change the holding timeframe, convince themselves to "average-in", close the app and walk away, etc.
Scratching trades. When you are at the point when most of your trades "can be a scratch", you are 90% there. This means you are taking less risk than potential reward. Don't break your thinking, keep going.
Small winners. At this stage, you just need to break the psychological grip a trade's value in dollars $$$ has on your mind. When you know how to control a loss and scratch a trade, the hardest thing to do is to stay in a winner! It's not easy, but the more you do it, the more you realize that the dollars aren't the win; the trade setup, implementation, and management are.
You have the passion, just keep feeding it and it won't die!
BANG for Your Buck:
| 2/6/2023 SPX = 4136.48 | Handles of Movement | Implied % Move |
|---|---|---|
| BANG (intraday) | 48 | 1.1% |
| BANG (weekly) | 105 | 2.5% |
Here at the Jumping Cholla, the BANG is our translation of option volatility into potential underlying movement.
In gambling terms, this is where option bookmakers "set the line."
This expectation of movement (i.e. volatility) changes in real-time as underlying moves, option prices change, supply/demand of options change, etc. Take a peek at our write-up on the dealer feedback loop for more info.
In the world of options, volatility is generally expressed as the "annualized 1 standard deviation of the underlying's probability density function".
For the mathematically challenged (sorry, the differently abled!): when prices change, the new price should fall between the red lines most of the time.
Large Option Positioning
4200 strike creates large positive gamma for dealers and will act as resistance above and a magnet below.
Staying above the 4100 strike perpetuates the bullish lean.
3900 strike creates large negative gamma for dealers, which will exacerbate movement near there. In general, a break under 4000 gets the dealers to start hedging with the direction of the market and a pop in volatility.
Overall, "downside protection" i.e. puts, are priced historically cheap. But remember, there's a sh*tload of liquidity in ultra-short dated options, and as long as the marketplace can take these bets, what's the real need for longer dated hedges? Why not just wait until you need to buy the insurance?! (FYI, this works until it doesn't!!!)