How to trade Stocks using Volatility

[00:00:36.20] - Speaker 1
Welcome back, Tim. Good afternoon. And we are very excited today because we are back with Ryan and I think we did our first or second webinar together about a couple of weeks ago, a few weeks ago, maybe three. And we are very excited because this is a great time to go over volatility and looking at your experience. Ryan is going to be great to understand how you look at volatility, especially with events happening in the market. But before we start, maybe if you want to just introduce yourself to everyone and then we go into the presentation and the demo.

[00:01:10.12] - Speaker 2
Yeah, absolutely. Thanks for having me back, Fabio. For those who haven't joined us for Volatility Corner before, my name is Ryan Darnell. I'm the founder and principal of Cynical Capital and manage a small hedge fund that's multi strategy. I have been trading options and, and various risk management positions for 16 years now, starting at Deutsche bank and then another hedge fund before I as well as doing commodity finance before I eventually went out on my own and started my own fund about three years ago. I've got, you know, spent many years looking at these markets and I've partnered with Mentor Q to start to develop better, better screeners, better tools, better data tools to help us do analysis. So, you know, every few weeks on Volatility Corner what I like to do is, you know, walk through a few sample trades, look through the screens, through the screeners that are available on the new dashboard and you know, just talk about how we think through trade ideas. None of these are direct investment advice. I want to clarify that I'm not recommending any particular trades or any particular stocks. I'm just going to walk you through the thought process that I would use, you know, as a professional trader to, you know, kind of to develop a trade so you can start to apply these principles to your own research.

[00:02:35.13] - Speaker 2
So without any further ado, I'll jump right into it. So we're going to start with the most basic, you know, just a simple stock trade, you know, and how we can use those screeners. So you know, when you're on the dashboard you go down here to the screeners. I clicked on open interest. The one that's really interesting to me right now is the highest put call open interest ratio. So I'm looking for those, those trades where it seems like there might be a lot of bearishness in the market, a lot of put buying on the underlying. So I've clicked on this and I'm scrolling down through a few different ones. There's a few different things that pop out to me when looking at this, when looking at this screener, the one I'm going to focus on today is htz, Hertz Global Holdings. I want to again, clarify. I haven't done any fun, any fundamental research on Hertz other than, you know, just checking the charts. And so I don't have a strong view. I would always recommend before you do any kind of technical trade or trade based on volatility or things like that, ideally you'll have your own bias coming into it.

[00:03:39.19] - Speaker 2
So you're, you know, bullish or bearish, a particular name, you've done some research on it. If your fundamental and instinctive view aligns with the technicals and the volatility stuff, that's when there's really a, you know, the basis for a good sound trade. And so I'm going to give you one big piece of the puzzle. But obviously, you know, you want to have your own, your own, you know, base opinion and make sure that it marries up with your, with your core opinion. So I'll tell you first why HTZ jumped out to me so much. So what I'm looking for here, you know, so right now volatility is up, right? I mean, that shouldn't be a surprise to anybody. Market's falling, everybody's nervous, things are going on. So it's a pretty safe bet we're not going to want to buy optionality. We're going to look through the charts in a little bit. But options are going to be inherently more expensive. So, you know, my mind is. My immediate gut bias is, all right, look, we're probably going to want to sell options, so let's look for some options that have some relatively high implied volatility.

[00:04:42.06] - Speaker 2
But even if we're just thinking about, and even if we're just trading, you know, our first sample trade, we're just going to show how without any options, you can just develop a nice stock trade using these tools. You know, I want to talk through, you know, I'm still looking for high volatility, something where you're likely to get some action. So you can see HTZ's got very high volatility here, implied volatility up to 111, and it's been quite active. One of the things that really stood out to me though, was the call resistance and put support levels. So unfortunately, I developed this trade last night. Obviously, markets moved a lot this morning. So, you know, the entry point might not be, not hold quite the same, but, you know, again, the principles will apply in any situation. So the biggest Thing that I noticed about this one is we got a 405 spot price. Our call resistance is, is really close right up at 450. Meanwhile, the put support level has a ways to run all the way down to two and a half on put support. And similarly looking over here at kind of the one day min and one day max expected.

[00:05:51.21] - Speaker 2
You know the nice thing is even if we have a crazy outside day to the upside, it doesn't really look like we're going to, you know, break through that call support level. So it looks like we could have a good, good sized update and still be pretty safe. And, and it's only going to take a couple of big down days to hit that put support level. So to me, great short candidate. So if I was looking for something to sell right now in kind of panic mode from a purely option based perspective, you know, this would be something I'd start with because one of the things as a trader that we always look for is, is risk reward. So we say. Oh it looks like. Oh yeah, yeah, nice.

[00:06:36.11] - Speaker 1
I'm showing, I'm showing the chart. Yeah, with the levels from.

[00:06:39.06] - Speaker 2
Perfect, perfect. So one of the things we always look for is, you know, is, is the risk reward on the trade. How much are we risking? How much are we hoping to make? So in this one what I'm looking at is if we entered at 405, we probably set our stop level on the trade around say 460. And that would give us a little room if we kind of bumped right up through call resistance, maybe just you know, stepped over it. And so we're working about a 55 cent stop loss. If we want to make a 2 to 1 risk reward on that trade, you know, we'd only need to fall about a buck ten. So we'd be targeting give or take around three bucks. So that's nice because that's still well above put support. And you know again it's only about two moves down. So again it's a very straightforward trade. You know, if you look at the long term hertz chart, it's pretty beaten down. So I'd be a little nervous about you know, a long, like long term carrying a short position. But if you're looking for something to sell, it's kind of diversify your risk right now.

[00:07:48.10] - Speaker 2
You know, that profile that we see on HTZ would be a great profile for something to sell. You know, you got a 2 to 1 risk reward. You got a pretty clear stop because it's just above a one day outside move. Up and, and your stop can be just above the call call resistance level. So that's a clean one. So unless there's any questions about that, we'll jump on to how we could kind of make this trade a little bit more interesting with, with throwing options into the mix. Okay, so, so let's say that we agree that this might be nice to get short. There's a few challenges with that. One, if you're shorting, there's a borrow cost and two, I mean it's still a fairly risky trade shorting something that's, you know, pretty cheap. And you know, obviously the market's down right now. You don't want to get caught in a snapback. So could we de risk this trade a little bit, make it a little bit more favorable? And can we use volatility to play, you know, can we use what we know about options trading to monetize some of the current fear in the market?

[00:09:00.10] - Speaker 2
And I'd say absolutely. So first thing I'd look at HTZ and I'd look at, you know, this is how much the ski the smile was up even as of last night and I'm sure it's up a lot more today. And so what you can see here is for the most part this, the green line here is showing the puts have gotten way more expensive. And so it's a real good time to be looking at selling that. So I, if our target level was around three bucks, I'd look at selling this three dollar put. We've got 200 implied volatility and I actually priced this up and it looks like that puts worth something just, just for a single month on the put. Looks like we collect about 35 cents in premium I believe for the three dollar put a month out, which has given us, you know, I mean that's Almost not quite 10 of the value of the, of the stock price for a month. So you know, that's going to more than cover any borrow cost. Sell it. And that's going to give you quite a bit of room on your stop. So if you've, you know, so suddenly you're saying, hey look, I was planning to get out of this trade anyways at you know, if it, if it falls down to, you know, down to three bucks.

[00:10:16.05] - Speaker 2
But you know, maybe I'll sell a put down there, it's only a month and I am going to be committed to being in a trade a little bit longer. But if the trade goes against me, well I'm going to pick up that extra 35 cents. That can either let you kind of improve your entry level to the trade or depending how you're looking at your stop loss, you could actually just increase your, you know, your stop level. You could say, well, great, you know, now instead of working that was it 460stop. I think we had, we can now you, you know, say it's like 495. And if, and if it ends up sitting there or chopping in that time period, well, great, you can turn around and do that trade one more time. Because if you're able to, if you're able to collect on those puts a few months in a row, you're going to have a pretty healthy return on the stock, you know, annualized, even if it ends up not moving at all. So yeah, implied vol up a lot here. The puts are up a ton, really high put to open interest ratio.

[00:11:11.26] - Speaker 2
So if you were selling it, but you wanted to give yourself a little bit like a little de risking on the trade, lock in some, some premium with it, you know, that'd be the trade I'd do. And you don't have any downside risk on that if it continues to tank because you're short. So your only risk there is that it runs to the upside more than, you know, more than the 35 cents a premium that you collect it. And again, you might be able to reload and do the trade again as long as it doesn't run up too high. Maybe, maybe you reload and you know, in a month, if it's trading it 450 or 5 bucks, you can, you know, sell another $3 or 350 put and reset your stop and just keep playing that game. So that's just a very basic coverage, you know, covered put, which is kind of the opposite of the covered call. More people are familiar with covered call. Pretty common portfolio strategy. If you're on the stock in your portfolio, you sell the call against it. There's just a different spin on that if someone's looking to, you know, reduce their exposure to the overall market by getting short something.

[00:12:11.23] - Speaker 2
So that's a, you know, and I would like this trade even a lot more than the simple just going short htz right now because, because you are really making a play on how high the implied volatility is at 200% and the big put premium. Again, you're not the markets. This is a great. So we talk about how do professional traders think about the market. Well, it's very clear that the market is afraid of this, of this price of this stock Htz Collapsing. And, and that's why the put open interest is so high relative to the calls. Well, great. We can profit from that. We can know again, sell that put to people who are, you know, panic buying it and then short the stock and, and we're earning so much in premium that we can cover a pretty tight, you know, we can, we can put a stop loss on that trade and feel pretty comfortable about it. Basically, even if we stopped out at, you know, we ended up recouping a big chunk of our, big chunk of our losses. Any questions about that?

[00:13:17.04] - Speaker 1
Not that I could see it, but yeah, let's, yeah, I'll, I'll put them on the screen, Ryan, if the, if we get any questions.

[00:13:23.13] - Speaker 2
Okay, perfect. So that was htz. So now that we've kind of looked through an individual trade, we walked through, hey, how would I just build a single stock trade, say shorting the stock of htz? And then how would I use options, you know, to beef that trade up or make it more interesting, you know, then, you know, using a simple covered put to add, you know, to add some premium, help us get a better entry level and potentially get a really high annualized return. Because if the market sits there, we're going to actually be able to make far more return on just repeating, rinsing and repeating that trade. I mean, it's an annualized like 120% return almost of just selling that, that, that put. Obviously it's going to probably move. You're not gonna be able to do that over and over again, but a pretty good one. I see a question here. Would you consider a cal from Joel or Joel, would you consider calendar. Maybe you want to clarify that a little bit. I'm, I'm guessing you're talking about maybe a calendar spread there, or maybe we could get a little clarification on that one.

[00:14:40.07] - Speaker 2
So, but in general, for those who aren't familiar with calendar trades, the most common one is a calendar spread. So maybe we're selling a put, buying put later, later out. You can do the vertical spread. So you can do the vertical spread. You can do which is, would be, you know, say, selling a put, buying another put. That would be buying a lower strike put. So for example, if we wanted to sell the three dollar put and buy the 350 put, or, sorry, by the 250 put, that would be selling the put spread. That'd be the vertical spread. But we could do the calendar spread where we could say, sell the, you know, where we could sell the, you know, $3, may put and then buy back the, you know, $3 June put and you can finally do the diagonal spread which would be, you know, you sell the three dollar may put and you buy back the 250 or two dollar June put. So those are kind of the different mixes of spreads we talk about. And my answer to that for this particular case, no, I wouldn't, I wouldn't want to do a calendar spread with the biggest reason being that I wouldn't really want to buy anything back because the goal here is to sell some volatility.

[00:16:01.12] - Speaker 2
And you know, if volatility does come off a lot, we're going to be stuck. That position would leave us net long. Vega and Vegas are exposure to implied volatility declining. So if we sold the short dated put and then bought the longer dated one and then, you know, market stabilizes a little bit, I think we could see ball come off a lot, especially on something that's up at 200. So when you go to sell that long put, you know, I, I, there's a good chance you would take a bath on that and end up net losing on the ball trade. Unless I had a particular view that I thought that the main event driven thing for HTZ was gonna, was gonna happen. Not this month, but, but next, you know, if I, if I really thought it was going to happen after May, then I might do that trade. But for now I would avoid that. And let me tell you the other reason I actually love spreads. Diagonal spreads and vertical spreads. I highly recommend them for option sellers. I tell there's, I meet so many retail traders who love to sell options and I always try to warn them that can end very badly for you because it only takes a couple days to give back, you know, years and years worth of profits selling options.

[00:17:15.11] - Speaker 2
In my opinion as a retail trader, you know, you're not trading someone else's money. It's your money. You know, bite the bullet. If you're selling an option, do the spread instead. You know, sell the call, buy the out of the money call, sell the put, buy the out of the money put. That way you're just capping your losses. You're just saying, hey, if this trade goes wrong for me, this is the most I can lose. And maybe that's what Joel's getting at there. And I love that idea in general. But you know, again, I can't emphasize enough when you're just outright selling options that you should buy back an outside strike so that you can cap your losses. The reason that's not necessary on this Trade is that we are selling is that we are short the stock in the, in the trade that I framed up, we're selling the stock and selling the put. So we don't have any risk as long as we remain short that stock because, you know, we'll make one for one. So if that ends up going to 2 bucks, yeah, we're gonna lose a buck on the put, but we're gonna make, but we're gonna make all that and more on the stock that we shorted.

[00:18:20.11] - Speaker 2
So, so that's really a very low risk trade selling that put. Now, counterpoint to that, let's say that we get to three bucks, the option still has some value left on it. You want to, you want to unwind, buy back your, your share, your shares, because you know, you don't want to stay short anymore in case it bounces back, but you don't want to, you don't want to pay at the premium for the put. In that case, I would probably buy a lower strike put if I didn't, if I wasn't willing to just unwind the whole trade right away because then we'd say, all right, well, hey, look, I made a buck on this trade. Maybe I'll buy the. And there's not a lot of time value left, so let's look to buy the 250 put. The 250 put. That way, you know, we're only risking giving back 50 cents of our, of our profits and you know, plus whatever premium we pay to do that, and hopefully it'll be, you know, cheaper by then if a few weeks have passed. So that would be the way that I would play that. Again. I think it's a great point to talk about doing spreads to manage your risk.

[00:19:24.20] - Speaker 2
I, I do them all the time. Even for my own hedge fund. We never want to run unlimited risk. But again, if you have the equal and offsetting position in the underlying, it's a pretty conservative trade. And most, if you go to your broker and look to trade options, that's usually considered level one. Like buying a call, sorry, buying the stock and selling the call, or selling the stock and selling the put is a covered trade. So that's usually the least risky level of options trade. Again, as soon as you become naked short options. Yes, please look to buy something else that's gonna at least cap that risk so that your exposure is defined even if it's cheap, even if you're, you know, even if you're, you know, even if you were to say, sell the, the four dollar you know, sell the $3 put and buy the $1 put, you know, for one tick or, you know, for the minimum price. It seems silly, but you can just say, hey, you know, I know exactly how many dollars I can lose on that trade. And when it's your own money, it's a little different.

[00:20:27.04] - Speaker 2
If you're a professional trader, we might not do that trade because we might say, oh, well, I'm overpaying for the, you know, the $1 put. But when it's your own money, I think putting a, putting a hard cap on how much you lose is invaluable. The other reason I'd be careful about that though is because look at the shape of this. If I'm selling a put and we're going to talk about this next, for the next trade idea, we're going to look at spx. I really don't want to be buying puts even higher up on the volatility smile. So if anything, I'd want to reverse that, you know, if, if anything to take advantage of the shape of volatility, I'd be wanting to buy puts closer here and selling puts there. So yeah, but we'll, we'll look at an example of that now for spx, unless there are any other questions. Give just a second here for more questions and then I'll start to queue up spx. So as I mentioned, you know, you got to have a view on, on htz. But if you told me, hey, coming in today, I was bearish htz, I'm really long stock market and nervous, then I'd say, you know, that that's the kind of trade that then everything is, is coming together, everything is aligned.

[00:21:37.11] - Speaker 2
So it could be a good trade idea for you, but you'd have to evaluate each one of those on an individual basis and what your portfolio and outlook is. So now let's look at SPX here. My fund trades a lot more spx. We tend to do more macro and index type stuff. And so I'll kind of walk you through one of my favorite trades. Unfortunately, we don't have the intraday volume, which I'm sure is a lot higher. So I'm going to be showing you last night's but it'll still give you a pretty good sense of how I would think about this trade. So same as htz, we have a really strong put skew right now for SPX. And I'm quite confident today with the Vix up 30% that this smile is up. I don't know if it's still up 30%. It was up quite a lot this morning that this smile is going to be considerably higher right now. So. So first off, as I said, it's going to be a good time to sell volatility. You can just pull up bigs real quick. So, so anytime you see big spikes like this, your first reaction should be, hey, that means it's a good time to sell options.

[00:22:53.09] - Speaker 2
Because quick reminder, for anybody who's still getting more familiar with options, there's three things that drive option value. How close it is to the money, how much time it has till expiry, and how volatile the underlying is. So the VIX is the basic measure of how volatile the stock market is. And so when you see this spiking, generally your first impression should be people are scared, people are panicking. I don't want to buy options now. Now's the time to sell it. As Warren Buffett likes to say, you want to sell umbrellas when it's raining, right? Sell umbrellas when it's raining. So for options traders, you know, the flip side is, is also the case. We call it, you know, a lot of people get addicted to selling options and collecting premium even as implied volatility is getting really, really low. We call that picking up pennies in front of a steamroller, right? Don't, don't go out there and pick up pennies in front of a steamroller. Don't get greedy selling more and more options to try to earn more income as well as falling. Because when this happens, you're going to get a great opportunity to, you know, to sell, to sell those options and properly get compensated for the risk.

[00:23:59.02] - Speaker 2
I like selling options. I like being short volatility. Most traders have a bias. I tend to lean towards selling, but, you know, but I try not to be too biased. I try to be careful and make sure that I'm selling, like I said, selling umbrellas when it's raining. So that should be our default mindset is, hey, VIX is spiking today. Volatility's up. We're expecting this smile to look something like this today. So what's the trade? What do we want to do? So we want to be net selling options in the trade that we do. I would assume most people here are going to be long. My fund is, certainly has a default long allocation to the S P500 in the broader market. Most people, I hope you have, you know, some allocation to the S P. Even if, even if you don't, your day trading account or your play money, you know, Everybody should like it's a long term, you know, the evidence shows pretty clearly that a long term buy and hold strategy in the S P is, is a sound strategy. But now let's say you want to, you want to overlay that, you want to trade around that you're going hey, wait a minute, I'm, I'm awfully nervous right now.

[00:25:02.05] - Speaker 2
Market's tanking. I think it's going to get worse. So what do we do with options? So here's a, here's a nice volatility trade. So we know we want to net sell more options than we're buying. So we're not net paying premium. So what I would look at here is so we're, we're trading right around here like 5,400 on SPX. So again we see here this, this huge put skew so we don't want to panic and buy options up here on the most expensive part of the smile. But we're bearish, we're long the stock. How do we protect ourselves? Well, I'd want to start to start to buy options lower maybe here and sell options out here. Right. So that we're benefiting from the smile, we're benefiting from the curvature of the implied volatility. Now that doesn't mean that in absolute price terms the, that will, this option is going to be more expensive than this one. But implied volatility terms, you know how much you're paying relative to the kind of risk you're taking, you're getting paid a lot more for this option. So I'd be looking to buy a put spread, a vertical put spread here.

[00:26:16.28] - Speaker 2
So you know, maybe buy either the 5200 or the 5000 and then sell a put higher up, really high up here and then that's gonna still cost us net premium. But then we could still sell a call. We're not getting as much favor benefit from selling calls because obviously the skew is not great. But we also know that the absolute implied volatility level is high. So if I sell a call at relatively poor sku, but then I sell that out of the money, put a relatively high skew on average, I can get pretty favorable implied volatility levels relative to the put option that I'm buying. And I'll net be selling options if I set these strikes right. So I'm going to show you real quick one of my trading screens and just, we're just going to check out the July XSP. These are divided by 10. So and it looks like for you Know, using July expiry, we could get a 500 put scroll up here. So the five. Actually the 520 put. So we could go all the way up to 520, and we could buy that for right around 13, 14 bucks. So 13, 14 bucks.

[00:27:39.07] - Speaker 2
That's pretty expensive, right? You know, against the 520. So we're definitely, you know, our break even there before we would make money on that trade is we'd have to fall below 500. You know, personally, I'm concerned about the market. I think it has a lot of room to fall, but that's a lot of premium to pay away, especially. And we just agreed the market spiking. So these puts probably cost double what they cost just yesterday or two or three days ago. So how can we cheapen this up? Well, now let's go look at, say, the 480 put. So if we were to go down to 480, and I don't know if people can see this, I'll zoom in a little bit better. So if we go down and look at the 480, looks like you could potentially get around seven bucks. Not quite seven bucks for that. So we could do the vertical put, spread the520,480 for just around $7 of premium. So we could do, you know, so if the market's trading around 540, we can effectively say, hey, on a chunk of my S P 500, you know, my spies or VO or whatever, you're long in your port portfolio for seven bucks, you could basically, you know, protect your portfolio on, you know, so what are 20 bucks away over 540.

[00:29:04.15] - Speaker 2
So you'd only be exposed to another 4% downside, and then you'd have another 10%, you know, of downside protection. So if we really tank and, you know, break below 500, you'd be protected all the way down to 480. That's a lot of downside protection on your portfolio. You're basically taking away 10% of the downside. And, you know, just wait. We're about to look at. But. But that's still net paying for option premium, right? So, and we agreed we don't want to be paying for that. So then the question is, could we sell something so that we're not net, so that we're not buying optionality on net? And when we scroll up here, it turns out. And here's the strike right here. Sorry for anybody who's. This is just my trading screen I use for my own fund. You can see we were doing some of these trades earlier. So if we go up to the 580 call, 585 call, you know, we could, we could pocket something like 760 in premium. So we could collect, you know, $7. So we could basically do this trade for no cost, no premium. You could turn around, knock out 10% of the premium on your portfolio for, or sorry, you can knock out 10% of the downside risk on your portfolio if you're worried about falling, you know, 14% if things go into full panic mode and you could turn around and sell a call to finance that and you would net be out no premium at all.

[00:30:40.01] - Speaker 2
You could turn you, you know, if you sell that call, you are giving up some upside if the market turns around and rips back higher. But 585, I mean, versus 540, so you're still allowing your portfolio to rally 10 more than 10 this quarter. So you could basically get, you know, knock out 10 of free protection and do that. And sorry, you could, you could knock out 10% of the downside in a 15 sell off and you could still give your portfolio over 10% upside to run this quarter. And you could do that at no cost. And the reason you can do that today is because again, you know, implied volatility is high and you're not selling two options and buying one. So that's a nice way because a lot of people think, you know, if you're just kind of a vanilla option, if you're just getting into options, you might think, okay, if I want to protect against the market going down, I think just buy a put. Well, that's exactly the wrong way to think right now because we just said it's raining and that's buying umbrellas. So you don't want to be paying a big premium for options.

[00:31:45.09] - Speaker 2
But if you, but this goes back to why understanding the smile is so important. If you understand that, hey, I'm buying an expensive option right here at 520, but I can sell a really expensive option here and I can understand that overall outright volatility is high. I can also, you know, collect a decent amount of premium for selling, you know, the higher strike options. You know, there you go. So that's a nice trade that no premium. It's, you know, it significantly limits your downside with, with still giving you a material way to run on the upside. And you're kind of taking advantage of what the implied volatility smile is showing you. So that would be the kind of trade of the day. If I was looking at spx and if I had that particular view. Any questions?

[00:32:43.04] - Speaker 1
No question. But that was great. That was actually a great way of like showing how to read the smile and how to use the volatility at your advantage. So in this case, you are achieving, you know, protection without paying premium. And potentially, of course, if time decays, you also can benefit from that, I guess.

[00:33:05.13] - Speaker 2
Yeah, you could even profit from that trade. Right. So it's also possible that if we end up getting stuck here or chopping around and, and then the, you know, the, the call that you're short out of the money and the put that you're short out of the money decays to near zero. You just have, you'd be left with an at the money put, which would have some value. And so if you're not as scared anymore, you could turn around and sell that put, just lock in a profit. So not only do you have the chance to make 10% if the market rallies back or more and have the protection of the downside, but if we get stuck, you have the chance to just make some outright money, collect a few bucks of premium. So, yeah, it's a, it's a nice example of how understanding the smile and understanding your different kind of types of spreads, we'd call that one a three way. So we talked about, you know, vertical spreads, calendar spreads, diagonal spreads, that one's called a three way, where you're basically selling one, you know, selling one option to finance, two options. So in this case, selling a call to finance buying a put spread.

[00:34:10.07] - Speaker 1
And of course you, you need to belong the underlying to of course benefit from not having potentially unlimited risk on the call side to the upside.

[00:34:19.17] - Speaker 2
Exactly. And so that was just going to be my next point was if I wasn't long the S P500, instead of selling the call and buying the put spread, I would sell a call spread, a vertical call spread. So we do. Some people call that like. Well, that's kind of like an iron condor, basically. So a four way, you're selling a call spread and buying a put spread. And that way, you know, similar trade but you know, limited exposure. And that would again work well for you because, you know, the calls get cheaper and cheaper and cheaper. So buying that extra call. So say you sold the 580 call and you wanted to go cap your exposure. Well, look, that's the cheapest point on the smile. So that's not going to be a super expensive put at all or call at all. In fact, we can check out that trade. I can tell you right now. Yeah, look, I mean, that falls to a buck. You go 620. And so if you wanted to just cap your risk so you're not running unlimited downside, you know, you could maybe, maybe sell this instead of selling the, you know, the 580, sell the 575 and then you can buy this and you're still.

[00:35:32.22] - Speaker 2
And now you have. If you didn't, if you weren't along the underlying, you just wanted to bet on the S and P going down because you just bearish the S and P use options to do that play. You're willing to run some upside risk. You could cap that upside risk by selling just a slightly lower strike call at no cost. And then you're only risking about 30 bucks, 40, 45 bucks to the upside with a chance to make 40 bucks to the downside. So you're getting almost even. You're getting it. You're using the volatility smile to basically let you bet on 40 bucks of profit on a sell off. But we only need to fall 5% for that to start making money. Whereas your risk of 40 bucks on rally only starts kicking in around 15 higher. So I'd call that a pretty darn good risk reward. Right. You got more or less equal symmetrical payoffs. But, but one can happen much sooner or much. You're much closer to the good, to the joy than you are paying. So that's a nice trade to consider as well. If you want to just put on an independent trade.

[00:36:43.11] - Speaker 2
Or for example, like maybe if you had stuff in your IRA and you were doing this in your brokerage account, you didn't want to run unlimited exposure in your brokerage account, that'd be another way to look at that trade.

[00:36:55.21] - Speaker 1
Yeah, and the other point to remember is that you can always close one leg of the transaction on the option, or even just one single option and potentially benefit there. So there's always the flexibility to be able to get out of the different option that you buy or sell.

[00:37:13.08] - Speaker 2
Yeah, I'm glad you brought that up. We have a general rule as an option trader, not every option trader is the same. If you tend to sell out of the money options and you're quite diversified, then it can make sense to be short what we call teenies. But you never want to be short options that have very, very little value. In my opinion, the average retail trader should not do that. You want to go ahead and make sure you buy back teenies. You can always live to find another day. So that goes back to not picking up pennies in front of A steamroller. So, you know, if you sell an option for five bucks and it goes down to 20 points, just go ahead and buy the thing back and sell another option. If your view is like, let's say you sell, sell a put, you know, on the S and P and you collect an out of the money put. And I work with some investors who do strategies like this. You know, they have some cash sitting in their portfolio. They sell puts whenever volatility spikes in, the market falls because they're willing to put that cash to work if the market falls low enough.

[00:38:11.02] - Speaker 2
So it's a nice conservative strategy to manage some of your cash. Another good strategy to look at right now, by the way, that I like is, you know, money market rates are still very good. So if you've got some cash sitting there, you're nervous about the market at 4, 4%, and then you turn around and sell some S P puts against that cash. That's called a cash secured put. You know, if the market tanks, you'll be able to buy in at really nice levels. If it doesn't, you just boost the return on your cash with the put premium that you collected. So, yeah, so to give you an example of how we would manage that trade, if we sell that put, it, say an out of the money put at five bucks, and then it ends up going down to 20 points. Well, yeah, maybe we don't think the market's going down there, but we'll just buy it back and resell another put further out higher strike to get four bucks again because, you know, let's not be greedy here. You, you, my view is you always want to be compensated for the risk you're taking.

[00:39:11.23] - Speaker 2
And so if you're short of put, you're always exposed to the market collapsing, but at least get paid a lot of premium for that risk. Because when it does go, it can go fast and it can be kind of blinding speed. So you might as well get paid for the risk if you're going to take it. So if you have on a call spread, say you're short that call spread to finance the put spread, and prices fall, of course we're going to be celebrating. All right, the put spread I bought is in the money. I'm making money on this trade. Everything things happy, right? But you can't, you can't get complacent and say, all right, I made profits on the trade. I'm just going to let these options expire. Now it's time to go to work. If that call that you sold way up above got really cheap. And it went from, you know what, we sell it for like 7 bucks down to 20 points, buy it back, and now you're just long extra upside. So if the market snaps back, you're going to participate 100%, and it didn't really cost you hardly anything.

[00:40:05.22] - Speaker 2
In fact, you participate 200 if you bought that extra out of the money call, and the market would really go screaming. And that happens every now and then. So, I mean, it's not crazy to say that we'd be back at 6,100. Maybe not by July, but, you know, sometime this year could happen. So buy that back. And likewise with the put spread, if you're on the put spread and that short put gets really, really cheap, you know, buy back. Why cap your downside protection. Then you'll go from having 10% downside protection to unlimited downside protection. And again, if you're worried about paying the premium, there'll be other options to look to sell. But. But make sure you get compensated appropriately for the options that you're selling.

[00:40:50.13] - Speaker 1
Yeah, and the other point, Ryan, is when you look at selling option, I think the most important thing is to look at the time in the trade rather than the premium that you collect, because the less time you spend and then you always have the option to sell more and then you collect more premium and your annualized return would be higher.

[00:41:07.05] - Speaker 2
So that's exactly right. Anytime we sell an options trade, we look at the annualized, you know, the annualized premium. So if you're only in the trade for a week, then you can multiply that by 52. Whereas if you're in the trade for a month, you only get, you only multiply by 12. And when you're annualizing, so that is again, it's, it's so critical to say, well, I don't want to give up 20 points of my premium. I don't want to give back a few hundred dollars or a few, a few thousand dollars. But if you take your annualized return on that trade by getting to resell, re up another option, you might actually double or triple your annualized return by turning over the options more frequently.

[00:41:46.18] - Speaker 1
Yep.

[00:41:48.08] - Speaker 2
Yeah, that's a great point. Any other questions?

[00:41:55.05] - Speaker 1
Not that I can see, no.

[00:41:58.06] - Speaker 2
Okay, well, I'll prep a few more trades for our next volatility corner meeting. I thought it might take a little longer to through these today, but, you know, I'll be around for the next 15 minutes and you know, if people have more questions or want to write in and you know, make requests for, you know, our next our next webinar together. Just let us know. We'll try to, yeah. Prepare for those. Yeah.

[00:42:26.26] - Speaker 1
And if you guys have any, as Orion said, you want us to cover any specific asset, please send us an email. And we'll be back, I think, Ryan, in a couple of weeks. So we'll we'll go over things would be different in a couple of weeks. There's going to be a lot of interesting things. It's going to be a massive VIX expiration in the middle of April. So I think there's going to be a lot of interesting topics to discuss. And of course, we can always go back and look at different strategies to maybe look at some interesting underlying. But I think this one was great. And thank you so much, Ryan, as always.

[00:43:02.04] - Speaker 2
Absolutely. Thanks, everyone.

[00:43:04.02] - Speaker 1
Have a good one. Bye. Bye.