- short with a married put (not sure if this is correct name, it's opposite of a covered call. Buy 100 shorts and sell a put)
Knowing the risk/reward profile of each is very key. Some of those plays are time sensitive (which makes them gambling).
Investopedia is a great resource. Considering it was scraped for LLM traing, I would expect the gippity to do well with this question.
I can't emphasize enough how important ig is to not only know the mechanics of a given strategy, but also to really know the risk reward profile and the profit/loss curve as a function of time and underlying price. Those those the REALLY important parts to know.
What is more, if a person really is bearish, then if the underlying goes against you - you want to average down. The stop loss advice is bad.
Which means instead of a stop loss on shorts, you buy more shorts. Just as when entering a long position, it can be good to only open an initial 25% at first so you have room to average down. If the play is good, you can expand the position still and also then put in stop losses to lock in PROFIT.
OTOH, it is important to have an actual exit strategy so you don't just average down indefinitely too.
Sigh, then there are yet more strategies that can be employed, not necessarily 100% bearish, and some of these strategies might be neutral or bearish. For example, buying an ITM bull put spread is a neutral strategy, it gains value with time as underlying stock price stays the same.
There are also iron condor, where you buy both a bull put spread and a bull call spread. There can be variants of that as well by buying 2x of one compared to the other legs.
Jesus, this is quite a range of options. It's late where I'm at, I'll try to fully understand them tomorrow. But from a first glance they seem...very complex and risky for a beginner trader?
Also I didn't mention in the post, but I did ask ChatGPT to come up with strategies that limit my losses.
I'm glad you found some value. I spent a bit too long on Reddit to really want to give a lot more investment tutorials anymore though. I'll entertain doing so at an hourly rate to teach you all about it though! (slightly tongue in cheek, but it is a legit offer for you, let me know and I could hit you up on linked in)
Otherwise, I'll likely check back on this thread every few days, happy to entertain some more convo here for sure.
To be honest, I'd like to ask you about stuff beyond the tutorials. Do you do this full time? How long did it take until you got to make enough for a decent living?
Do you see any opportunities to start a self-funded business in this space, ideally related to software?
For context, I'm well aware of the success odds. And I'm quite risk averse. The reason I'm looking into this domain is because I want to start some kind of business. What exactly? I don't know yet. What I do know is that I struggle to stay motivated working on ideas that don't genuinely interest me.
Also to be totally transparent - I'd love to continue the conversation over LinkedIn / a call and buy you lunch / a beer (somehow?). But I can't afford paying the rate you're probably entitled to ask.
No, I try to avoid even doing it part time now. When I was younger, I was spending a lot of time learning and researching, from 2009 to 2011 it was perhaps around 20hrs to 40hrs per week.
> How long did it take until you got to make enough for a decent living?
My biggest trading flaw in hindsight is lack of patience and too high a tolerance for risk. My original investments from 2006 to 2011, holding just about any of that until today would have been _huge_ payouts.
In 2011 I learned about options and went all in on them. My life savings of $20k went towards it. It turned out well in the end, by shear super luck. Gambling that went from $60k, back down to $10k, where I then went all in on just AAPL and that position exploded with a 1200% profit - 10k turned into $120k in a week. I cashed that out & put a downpayment on property. That property did really well in terms of valuation (buying at a low price and then long term holding is just king).
I didn't have enough money to invest again until about 2021. That did not go well. I lost approx $160k over a couple weeks, the majority of that in one day.
IMO, what is the "right" way to do it? In essence, the goal is to put money in and forget about it for a good 10 years. This way you don't spend too much of your own time. You don't micromanage it, you don't sell too early, just forget about it.
Though, you want to take advantage of compounding. Initially, amounts are small. Use your income as a constant additive value. That initial and persistent boost of equity, say as little as +$100/ week, will add up very quickly and will initially grow your account the fastest. Eventually, the overall portfolio will be equal to a lot more than just a few paychecks. That is where you when you want things to sit & simply grow for a years. 5, 10 years is really not that long of a period of time. Don't try to get rich quick, try to get rich gradually instead.
Why do I recommend this over gambling? (I'll define gambling here as any type of trade that has an intended hold window of less than 3 months)
Two reasons: (A) Gambling will be deceitful, you have good odds of winning, but the odds of hitting max profit are less than the odds of hitting max loss, and even then on favorable trades - you need an unreal level of consistency to come out ahead. The losses can sometimes be more rare, but are outsized. Lots of folk do the fun math of what happens when they make 10% on every trade, but they don't take into account that every 5th or 10th trade might be a 90% loss.
(B) Your time. Gambling with a few hundred dollars might make you $1000 ~ $3000 without too much trouble. Though, for how much time/effort? To boot, you are more likely to lose everything. Which is to say, if you win - it'll be nice, but not life changing. If it is life changing, then you're gambling a lot (and either have rich parents, or really don't care if you lose a year or two of salary gambling). Regardless, my point is about the time commitment, it is stressful. In 2021, I could have burned $1 every 5 minutes for the entire year, and that still would have been better than what I wound up doing.
> Do you see any opportunities to start a self-funded business in this space, ideally related to software?
Certainly. Though, it's much better if you can figure out a way to be the person selling shovels compared to the people digging for gold.
> Also to be totally transparent - I'd love to continue the conversation over LinkedIn / a call and buy you lunch / a beer (somehow?). But I can't afford paying the rate you're probably entitled to ask.
Tempting :)
I'll likely hit you up on linked in. Look for that in the next coming days.
It takes a few months to really learn up on them really well.
With respect to risk & being new - The stock market does not know (or even really care) about your experience or your effective buy price. The risk profile of a trade is the same regardless of your experience. Where experience does matter is to avoid outright mistakes and to better stick to your plan. Some people sell at the first sign of red - when instead their strategy was to stay the course. Others do sell at that time because it was part of their strategy. Experience helps you to correctly enter trades with the profit curve you think they have, experience helps you define and stick to a strategy, and experience helps avoid various mistakes (for example, it's pretty easy to accidently buy instead of selling a credit spread). Last, experience helps you "fold". It's akin to poker in a way, it takes some experience to know that, yeah - you have a 5% chance to win a given pot, but you really need to instead cut your losses and just fold your position. People are generally so loss adverse that they do anything to wish for a stock to reach their break-even price again, and they keep buying more and more trying to average their position down - experience can help to cut the emotions of walking away with a (for example) 30% loss and simply getting on with your life.
With that said, the risk profile of all of those strategies (except for naked call selling) is less than that of long stock! Namely because the loss and profit are bounded. With stock at $122, you can lose $122. If you buy a put, you can lose at most the price of the put you bought (perhaps something like $50). Though, the chance of NVDA going to $0 is about zero.. The chance of an NVDA put going to zero are generally very good. The put is thus less risky from a max loss perspective, but more risky in terms of price volatility (specifically delta risk, the underlying could move a mere $10 and make that put worth 90% less, or perhaps multiples more)
For anyone, I suggest sticking to strategies where you can trade losses for time. Long stock are an example, if the underlying goes against you, and if the stock is fundamentally good, then you can "wait" for a price recovery. This is called bag holding, and it's not necessarily a bad thing. Not all trading strategies even have bag holding as an option, instead it is just a realized loss and you are down money no matter how right you were a day later. I talked to a number of people that kicked themselves for not buying PTON puts during its height - with experience you learn that to also get the timing right - is superman level luck. You have to be directionally correct, and correct in terms of timing damn near down to the day.
I agree with you that AI is a giant bubble. How hard that will pop and when, is anyones guess. Taking my advice from above, it's not something you can bet on because you won't be able to have time on your side if you're wrong about the timing. OTOH, you could just short NVDA (which does not have a time component), but.. I kinda think that is crazy sauce. NVDA is akin to the people that were selling the shovels to the gold miners during the gold rush - it's exactly where you want to be during a bubble. Other stock that I think are in a bubble, something like TSLA, which is currently priced as if the "robo-taxi" upgrade is just a few months out - it's just too challenging to make a good play. Which is to say, it's not that easy to actually make money on stocks going down. In 2021 I made a boat load selling call spreads on AMC, but selling spreads is actually just really risky. I was burned a few times, but certainly made huge returns there. Overall, the profit from selling a spread is simply low compared to the risk (it is nice that often you will make money selling spreads, but you need to do so 9 times out of 10 to stay even!).
You also need to understand "liquidity crunch" when it ...
> Jim Cramer is kinda of an idiot, but buying NVDA at about $75 (or whatever it was then) back then was actually incredibly good advice (life changing advice really, that was quite an ideal time to make those plays).
This is the only thing I'd caveat, as it seems to suggest he gives good advice. I feel it's more benefit of hindsight; it's hard to pick winners from stocks, there tends to be only a few out of the many that are losers. Also glanced over this Reddit post which shows how he's underperformed the S&P500: https://www.reddit.com/r/wallstreetbets/comments/109cswl/inv...
Indeed, I agree. That "actually incredibly good advice" was more a case of a broken clock being correct than anything else IMO. Nonetheless, buying anything over AMC or GME at the time were good moves. The advice to not buy garbage was sound. Since then, AMC is down some 90%+ (and not to mention is now extremely diluted - there is no hope of recovery in price there). GME was rocking the $90 range and would be down now by more than 50%.
Answering the question most directly, of what strategy would you want given a thesis that we are at peak AI.
I do like thinking about the greeks [1] when designing a position. First, let's clarify, we want to take advantage of price drop over a time period of approx 6 to 12 months. Let's say we're thinking a price drop of perhaps 30%. With these parameters, we want a strategy that has high delta & gamma values, but minimal theta & vega values. (any stock position has values for each of the greeks. For example, in the case of long or short stock, delta is 1, theta is 0, gamma is 0, and vega is 0)
Low theta - That is to say, we want a position that will not lose value as time goes by.
Low vega - if volatility drops, we do not want to lose money.
Really if volatility changes at all - we do not want to lose money.
High Delta/Gamma - we do want the position to be responsive to price change, notably to decreases in price.
Long puts potentially have high theta, high delta, high vega. Long puts are not a good match because of high theta (and a drop in volatility hurts us, but if the price crashes, vega will help us. But, if the price crashes, then delta dominates, so we actually really don't want vega - delta is where we are making money, we are directional!)
Short stocks have delta of 1, gamma 0, theta 0, vega 0. That matches the greeks. Though, short stocks have both a maintenance requirement and an unlimited loss potential - the unlimited loss potential does not match our parameters.
Though, if we both sell and buy some puts (ie: a spread), then the overall position is the difference of the greeks. If we choose strikes that are close together, then theta & vega will be pretty close and would therefore nearly cancel. (EG: Theta of a put at $90 might be 0.35, theta at $85 might be 0.32, the overall theta of selling one and buying another is 0.03)
The difference in delta will also nearly cancel too. But, we are looking to take advantage of the difference in intrinsic value, when time has played out and there is no longer any extrinsic (AKA time) value on the contract left. Which is to say, this type of play only pays out (win or loss) near the time of expiry.
So, a narrow put spread has: low theta, low vega, low'ish delta. This is kinda the best you can do for the greeks perhaps. Very high delta positions are not very favorable unless we think the price change is happening starting from tomorrow (and in which case, we are also screwed by short term stuff, short-term, the market is totally and completely and utterly irrational). Very high delta positions are things like shorting, long puts, or buying very wide bear spreads. In all cases those are not great, either unlimited losses, or high exposure to theta (which is another way to say, they are dependent upon timing even more so than you being directionally correct)
Bottom line: a {"narrow" bear put spread} fits the parameters best (to the best of my knowledge).
The total loss/profit of buying a narrow bear put spread would be:
(A) The max loss for any long position is the cost to enter that position. Anytime you "buy", that is a long position. In this case we are buying bear put spreads, max loss is therefore the full cost of the spreads.
(B) The max profit is the price difference of the spreads minus the purchase price (for strikes that are 30% below current price, it's probably a very good return, perhaps 3x or better; that is a good return because it is extremely high risk - I would rather be the one selling that spread than the one buying them)
At this point though.. we are almost literally saying: "3 to 1 odds that NVDA will be at X price on date Y" << and that is gambling. I can't emphasize enough how that is gambling.
For anyone with Chat GPT - I would be curious what it would say if asked:
- I want a bearish trade strategy with bounded max loss and a profit or loss realization time frame of approximately 6 to 12 months. Do not consider stop losses as a way to bound either max profits or max losses.
- I want a bearish trade strategy with high delta and low theta and vega risk, that also has bounded max losses (without using stop losses to create a bounded max loss).
First response from Chat GPT is not bad. The decision of a long leg that is ATM or ITM and short leg OTM is interesting. Both strikes could easily be chosen to be OTM, the location of the strikes is really based on personal conviction and investment thesis.
Illustrating this, let's look at an example two spreads of NVDA, which is at $128.70 right now:
Spread #1 - ITM long leg, OTM short leg
- A $130 put costs $13.90 and has a delta of -0.43
- A $126 put can be sold for $11.75 and has a delta of -0.39
Effective delta is 0.04, cost to enter is $215 (which is max loss), max revenue is $400 (max profit is $400 - $215 = $185)
Spread #2 - OTM long & short legs
- A $110 put costs $5.50 (delta of -0.23)
- A $106 put can be sold for $4.30 (delta of -0.20)
Effective delta is 0.03, cost to enter is $120 and max profit is $280 in this case.
Spread #2 is more risky as it requires more price movement, though the payout is more than 200%, while the payout on the first spread is roughly 80% (both are VERY solid payouts. The catch is how many times in a row can a person do this? These trades require a person to be correct at least 30% of the time).
It does not seem like the Chat GPT is considering delta exposure in case your market thesis is correct. Perhaps that is a fault of the prompt, and we should have simply asked for a positive delta value.
Though, for this first Chat GPT response, there are few things that are kinda wrong.
> "Complexity: Requires understanding of options and managing multiple legs of the trade."
- both legs are typically managed at the same time. The overall complexity is a fair point, and not mentioned is that expiry requires more active attention compared to positions that do not have an expiry.
> Considerations - Volatility: Be aware of the implied volatility of the options, as it can affect the premium.
This is not important for us. We are choosing a narrow strike range in order to offset volatility changes between short and long legs. The overall value of a spread does not change that much when volatility changes. When selling single leg options, knowing how the premium can change is super important, much less so for put spreads.
> Considerations - Market Conditions: Ensure the market sentiment and fundamentals support a bearish outlook.
This is a bit odd. If your investment thesis is a bearish outlook, then that should be treated as an assumption. I suppose a better consideration is "be sure to consider that your investment thesis could be incorrect, in which case you will be looking at a 100% loss. Do not invest money you cannot afford to lose, and this money has a high chance to be completely lost"
--------------------------
Second response from Chat GPT is again really interesting.
Though, it's straight up wrong when it comes to synthetic short. Synthetic short have unlimited loss potential [1] - that comes from the short call. If price increases by a lot, the price of the long put goes to zero and the price of the short call increases without bound.
I need to spend more time understanding the greeks. What I can say is that I've tried Interactive Brokers' "wizard tool" and they also recommended me put spreads.
Quite an interesting blog. I'd be interested in an rss feed... Does anyone know of any tricks to make/get one? Nothing in source, nothing in /rss or /feed.
Hiya! I'm the creator of the blog, really appreciate the feedback, it's actually made my day (and it's only morning!).
I'll look into adding an rss as soon as I have some time. Looks like it should be pretty straightforward with Astro: https://docs.astro.build/en/guides/rss/
Will post a reply when I have it on. Send me a message on LinkedIn (see profile) if you want me to DM you for an update.
20 comments
[ 4.3 ms ] story [ 52.9 ms ] thread- sell vertical call spreads
- sell naked calls
- sell calendar spreads
- short with a married put (not sure if this is correct name, it's opposite of a covered call. Buy 100 shorts and sell a put)
Knowing the risk/reward profile of each is very key. Some of those plays are time sensitive (which makes them gambling).
Investopedia is a great resource. Considering it was scraped for LLM traing, I would expect the gippity to do well with this question.
I can't emphasize enough how important ig is to not only know the mechanics of a given strategy, but also to really know the risk reward profile and the profit/loss curve as a function of time and underlying price. Those those the REALLY important parts to know.
What is more, if a person really is bearish, then if the underlying goes against you - you want to average down. The stop loss advice is bad.
Which means instead of a stop loss on shorts, you buy more shorts. Just as when entering a long position, it can be good to only open an initial 25% at first so you have room to average down. If the play is good, you can expand the position still and also then put in stop losses to lock in PROFIT.
OTOH, it is important to have an actual exit strategy so you don't just average down indefinitely too.
Sigh, then there are yet more strategies that can be employed, not necessarily 100% bearish, and some of these strategies might be neutral or bearish. For example, buying an ITM bull put spread is a neutral strategy, it gains value with time as underlying stock price stays the same.
There are also iron condor, where you buy both a bull put spread and a bull call spread. There can be variants of that as well by buying 2x of one compared to the other legs.
Also I didn't mention in the post, but I did ask ChatGPT to come up with strategies that limit my losses.
Otherwise, I'll likely check back on this thread every few days, happy to entertain some more convo here for sure.
For context, I'm well aware of the success odds. And I'm quite risk averse. The reason I'm looking into this domain is because I want to start some kind of business. What exactly? I don't know yet. What I do know is that I struggle to stay motivated working on ideas that don't genuinely interest me.
Also to be totally transparent - I'd love to continue the conversation over LinkedIn / a call and buy you lunch / a beer (somehow?). But I can't afford paying the rate you're probably entitled to ask.
No, I try to avoid even doing it part time now. When I was younger, I was spending a lot of time learning and researching, from 2009 to 2011 it was perhaps around 20hrs to 40hrs per week.
> How long did it take until you got to make enough for a decent living?
My biggest trading flaw in hindsight is lack of patience and too high a tolerance for risk. My original investments from 2006 to 2011, holding just about any of that until today would have been _huge_ payouts.
In 2011 I learned about options and went all in on them. My life savings of $20k went towards it. It turned out well in the end, by shear super luck. Gambling that went from $60k, back down to $10k, where I then went all in on just AAPL and that position exploded with a 1200% profit - 10k turned into $120k in a week. I cashed that out & put a downpayment on property. That property did really well in terms of valuation (buying at a low price and then long term holding is just king).
I didn't have enough money to invest again until about 2021. That did not go well. I lost approx $160k over a couple weeks, the majority of that in one day.
IMO, what is the "right" way to do it? In essence, the goal is to put money in and forget about it for a good 10 years. This way you don't spend too much of your own time. You don't micromanage it, you don't sell too early, just forget about it.
Though, you want to take advantage of compounding. Initially, amounts are small. Use your income as a constant additive value. That initial and persistent boost of equity, say as little as +$100/ week, will add up very quickly and will initially grow your account the fastest. Eventually, the overall portfolio will be equal to a lot more than just a few paychecks. That is where you when you want things to sit & simply grow for a years. 5, 10 years is really not that long of a period of time. Don't try to get rich quick, try to get rich gradually instead.
Why do I recommend this over gambling? (I'll define gambling here as any type of trade that has an intended hold window of less than 3 months)
Two reasons: (A) Gambling will be deceitful, you have good odds of winning, but the odds of hitting max profit are less than the odds of hitting max loss, and even then on favorable trades - you need an unreal level of consistency to come out ahead. The losses can sometimes be more rare, but are outsized. Lots of folk do the fun math of what happens when they make 10% on every trade, but they don't take into account that every 5th or 10th trade might be a 90% loss.
(B) Your time. Gambling with a few hundred dollars might make you $1000 ~ $3000 without too much trouble. Though, for how much time/effort? To boot, you are more likely to lose everything. Which is to say, if you win - it'll be nice, but not life changing. If it is life changing, then you're gambling a lot (and either have rich parents, or really don't care if you lose a year or two of salary gambling). Regardless, my point is about the time commitment, it is stressful. In 2021, I could have burned $1 every 5 minutes for the entire year, and that still would have been better than what I wound up doing.
> Do you see any opportunities to start a self-funded business in this space, ideally related to software?
Certainly. Though, it's much better if you can figure out a way to be the person selling shovels compared to the people digging for gold.
> Also to be totally transparent - I'd love to continue the conversation over LinkedIn / a call and buy you lunch / a beer (somehow?). But I can't afford paying the rate you're probably entitled to ask.
Tempting :) I'll likely hit you up on linked in. Look for that in the next coming days.
It takes a few months to really learn up on them really well.
With respect to risk & being new - The stock market does not know (or even really care) about your experience or your effective buy price. The risk profile of a trade is the same regardless of your experience. Where experience does matter is to avoid outright mistakes and to better stick to your plan. Some people sell at the first sign of red - when instead their strategy was to stay the course. Others do sell at that time because it was part of their strategy. Experience helps you to correctly enter trades with the profit curve you think they have, experience helps you define and stick to a strategy, and experience helps avoid various mistakes (for example, it's pretty easy to accidently buy instead of selling a credit spread). Last, experience helps you "fold". It's akin to poker in a way, it takes some experience to know that, yeah - you have a 5% chance to win a given pot, but you really need to instead cut your losses and just fold your position. People are generally so loss adverse that they do anything to wish for a stock to reach their break-even price again, and they keep buying more and more trying to average their position down - experience can help to cut the emotions of walking away with a (for example) 30% loss and simply getting on with your life.
With that said, the risk profile of all of those strategies (except for naked call selling) is less than that of long stock! Namely because the loss and profit are bounded. With stock at $122, you can lose $122. If you buy a put, you can lose at most the price of the put you bought (perhaps something like $50). Though, the chance of NVDA going to $0 is about zero.. The chance of an NVDA put going to zero are generally very good. The put is thus less risky from a max loss perspective, but more risky in terms of price volatility (specifically delta risk, the underlying could move a mere $10 and make that put worth 90% less, or perhaps multiples more)
For anyone, I suggest sticking to strategies where you can trade losses for time. Long stock are an example, if the underlying goes against you, and if the stock is fundamentally good, then you can "wait" for a price recovery. This is called bag holding, and it's not necessarily a bad thing. Not all trading strategies even have bag holding as an option, instead it is just a realized loss and you are down money no matter how right you were a day later. I talked to a number of people that kicked themselves for not buying PTON puts during its height - with experience you learn that to also get the timing right - is superman level luck. You have to be directionally correct, and correct in terms of timing damn near down to the day.
I agree with you that AI is a giant bubble. How hard that will pop and when, is anyones guess. Taking my advice from above, it's not something you can bet on because you won't be able to have time on your side if you're wrong about the timing. OTOH, you could just short NVDA (which does not have a time component), but.. I kinda think that is crazy sauce. NVDA is akin to the people that were selling the shovels to the gold miners during the gold rush - it's exactly where you want to be during a bubble. Other stock that I think are in a bubble, something like TSLA, which is currently priced as if the "robo-taxi" upgrade is just a few months out - it's just too challenging to make a good play. Which is to say, it's not that easy to actually make money on stocks going down. In 2021 I made a boat load selling call spreads on AMC, but selling spreads is actually just really risky. I was burned a few times, but certainly made huge returns there. Overall, the profit from selling a spread is simply low compared to the risk (it is nice that often you will make money selling spreads, but you need to do so 9 times out of 10 to stay even!).
You also need to understand "liquidity crunch" when it ...
> Jim Cramer is kinda of an idiot, but buying NVDA at about $75 (or whatever it was then) back then was actually incredibly good advice (life changing advice really, that was quite an ideal time to make those plays).
This is the only thing I'd caveat, as it seems to suggest he gives good advice. I feel it's more benefit of hindsight; it's hard to pick winners from stocks, there tends to be only a few out of the many that are losers. Also glanced over this Reddit post which shows how he's underperformed the S&P500: https://www.reddit.com/r/wallstreetbets/comments/109cswl/inv...
I do like thinking about the greeks [1] when designing a position. First, let's clarify, we want to take advantage of price drop over a time period of approx 6 to 12 months. Let's say we're thinking a price drop of perhaps 30%. With these parameters, we want a strategy that has high delta & gamma values, but minimal theta & vega values. (any stock position has values for each of the greeks. For example, in the case of long or short stock, delta is 1, theta is 0, gamma is 0, and vega is 0)
Low theta - That is to say, we want a position that will not lose value as time goes by.
Low vega - if volatility drops, we do not want to lose money. Really if volatility changes at all - we do not want to lose money.
High Delta/Gamma - we do want the position to be responsive to price change, notably to decreases in price.
Long puts potentially have high theta, high delta, high vega. Long puts are not a good match because of high theta (and a drop in volatility hurts us, but if the price crashes, vega will help us. But, if the price crashes, then delta dominates, so we actually really don't want vega - delta is where we are making money, we are directional!)
Short stocks have delta of 1, gamma 0, theta 0, vega 0. That matches the greeks. Though, short stocks have both a maintenance requirement and an unlimited loss potential - the unlimited loss potential does not match our parameters.
Though, if we both sell and buy some puts (ie: a spread), then the overall position is the difference of the greeks. If we choose strikes that are close together, then theta & vega will be pretty close and would therefore nearly cancel. (EG: Theta of a put at $90 might be 0.35, theta at $85 might be 0.32, the overall theta of selling one and buying another is 0.03)
The difference in delta will also nearly cancel too. But, we are looking to take advantage of the difference in intrinsic value, when time has played out and there is no longer any extrinsic (AKA time) value on the contract left. Which is to say, this type of play only pays out (win or loss) near the time of expiry.
So, a narrow put spread has: low theta, low vega, low'ish delta. This is kinda the best you can do for the greeks perhaps. Very high delta positions are not very favorable unless we think the price change is happening starting from tomorrow (and in which case, we are also screwed by short term stuff, short-term, the market is totally and completely and utterly irrational). Very high delta positions are things like shorting, long puts, or buying very wide bear spreads. In all cases those are not great, either unlimited losses, or high exposure to theta (which is another way to say, they are dependent upon timing even more so than you being directionally correct)
Bottom line: a {"narrow" bear put spread} fits the parameters best (to the best of my knowledge).
The total loss/profit of buying a narrow bear put spread would be: (A) The max loss for any long position is the cost to enter that position. Anytime you "buy", that is a long position. In this case we are buying bear put spreads, max loss is therefore the full cost of the spreads. (B) The max profit is the price difference of the spreads minus the purchase price (for strikes that are 30% below current price, it's probably a very good return, perhaps 3x or better; that is a good return because it is extremely high risk - I would rather be the one selling that spread than the one buying them)
At this point though.. we are almost literally saying: "3 to 1 odds that NVDA will be at X price on date Y" << and that is gambling. I can't emphasize enough how that is gambling.
[1] https://www.investopedia.com/terms/g/greeks.asp
*Disclosure* I am currently long NVDA stock, a p...
- I want a bearish trade strategy with bounded max loss and a profit or loss realization time frame of approximately 6 to 12 months. Do not consider stop losses as a way to bound either max profits or max losses.
- I want a bearish trade strategy with high delta and low theta and vega risk, that also has bounded max losses (without using stop losses to create a bounded max loss).
First response from Chat GPT is not bad. The decision of a long leg that is ATM or ITM and short leg OTM is interesting. Both strikes could easily be chosen to be OTM, the location of the strikes is really based on personal conviction and investment thesis.
Illustrating this, let's look at an example two spreads of NVDA, which is at $128.70 right now:
Spread #1 - ITM long leg, OTM short leg
- A $130 put costs $13.90 and has a delta of -0.43
- A $126 put can be sold for $11.75 and has a delta of -0.39
Effective delta is 0.04, cost to enter is $215 (which is max loss), max revenue is $400 (max profit is $400 - $215 = $185)
Spread #2 - OTM long & short legs
- A $110 put costs $5.50 (delta of -0.23)
- A $106 put can be sold for $4.30 (delta of -0.20)
Effective delta is 0.03, cost to enter is $120 and max profit is $280 in this case.
Spread #2 is more risky as it requires more price movement, though the payout is more than 200%, while the payout on the first spread is roughly 80% (both are VERY solid payouts. The catch is how many times in a row can a person do this? These trades require a person to be correct at least 30% of the time).
It does not seem like the Chat GPT is considering delta exposure in case your market thesis is correct. Perhaps that is a fault of the prompt, and we should have simply asked for a positive delta value.
Though, for this first Chat GPT response, there are few things that are kinda wrong.
> "Complexity: Requires understanding of options and managing multiple legs of the trade."
- both legs are typically managed at the same time. The overall complexity is a fair point, and not mentioned is that expiry requires more active attention compared to positions that do not have an expiry.
> Considerations - Volatility: Be aware of the implied volatility of the options, as it can affect the premium.
This is not important for us. We are choosing a narrow strike range in order to offset volatility changes between short and long legs. The overall value of a spread does not change that much when volatility changes. When selling single leg options, knowing how the premium can change is super important, much less so for put spreads.
> Considerations - Market Conditions: Ensure the market sentiment and fundamentals support a bearish outlook.
This is a bit odd. If your investment thesis is a bearish outlook, then that should be treated as an assumption. I suppose a better consideration is "be sure to consider that your investment thesis could be incorrect, in which case you will be looking at a 100% loss. Do not invest money you cannot afford to lose, and this money has a high chance to be completely lost"
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Second response from Chat GPT is again really interesting.
Though, it's straight up wrong when it comes to synthetic short. Synthetic short have unlimited loss potential [1] - that comes from the short call. If price increases by a lot, the price of the long put goes to zero and the price of the short call increases without bound.
[1] https://www.optionseducation.org/strategies/all-strategies/s...
I'll look into adding an rss as soon as I have some time. Looks like it should be pretty straightforward with Astro: https://docs.astro.build/en/guides/rss/
Will post a reply when I have it on. Send me a message on LinkedIn (see profile) if you want me to DM you for an update.
Let me know if that works for you, it's my first time I've set up an RSS.