Zero Day Options are about to Destroy Lives

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Episode Transcript

Speaker 1 (00:00):
Right now, there is a trading strategy that is so
dangerous it is virtually guaranteed to ruin the lives of
anybody who participates. But even worse, this trading strategy is
gaining in popularity so rapidly that the collateral damage this
thing causes when it does blow up will impact everybody.
And this strategy is called selling zero day till expiration options. Now,

(00:25):
if you've ever heard of the expression picking up nickels
in front of a steamroller, well, this strategy is like
picking up pennies in front of a nuclear bomb. And unfortunately,
I know a thing or two about getting hit by
a financial nuclear bomb because of trading options. Back in
twenty fifteen, when I was a stockbroker, i'd recently become

(00:46):
an options trader. For a time period that lasted probably
a couple of months, I was selling options like crazy.
At that time, they didn't have as many zero day
till expiration options as they do today, but at that
time they still had some that'd expire in a couple
of days or a week on the major market indices
or individual stocks. I would sell both calls and puts

(01:07):
on individual stocks and on the market as a whole.
It was almost guaranteed. I felt like I was printing money.
I felt rich, I felt like a god. I started
off with just a couple of thousand dollars in my
trading account, and on every trade I was making a
couple hundred to sometimes a couple of thousand dollars, to
the point where sometimes even on a single trade, I
would make more than I made in an entire month's salary.

(01:30):
I thought I was taking on zero risk option buyers
were paying me for I thought they were the suckers
because they were walking away empty handed, and my account
was going up and up and up. Just for some context,
at this time, this was still at the very beginning
of my career, so I was making forty five thousand
dollars a year at this point. But in just a

(01:50):
couple of months, I had traded my account up from
a few thousand dollars to about twenty five thousand dollars.
And to me at the time, twenty five thousand dollars
was a ton of money. In fact, it was literally everything.
And then disaster struck. Just like the house in a lottery,
eventually somebody gets the winning numbers and the house has
to pay out. But in this case, I was playing

(02:12):
the house without being able to set the odds myself.
So I had a few trades open that I thought
there was no way these things could go in the money.
I thought they should definitely expire worthless. But the market
made a move I did not think it could make,
and in one trade I lost everything. It completely wiped
out my entire account. Now again, to many people, twenty

(02:32):
five thousand dollars isn't a big deal, but think about
this in terms of percentages, because a one hundred percent
loss is devastating. I was taken out by it for weeks,
probably months. Actually, I got sick to my stomach every
time I thought about it. I had gone from feeling
like I was on top of the world, like I
was rich, I was making more money from trading than
I was making for my paychecks, to overnight feeling like

(02:55):
a fool, like I was never going to be able
to financially make it, like I was never going to
be able to recover from what I had just lost.
But it taught me a very valuable lesson about trading
and investing, mainly risk management, like there's a reason why
the best investors and best traders throughout all of human
history all have the exact same number one rule, and
it's never give yourself an opportunity to have a large loss.

(03:17):
Never expose yourself to something that could blow you up.
Risk management is always the number one key. It's really
the only thing that matters in investing. So no matter
how good the odds seem like they're in your favor,
if there's a point zero zero one percent chance that
you'll lose everything, it's a sucker's bet. Stay away. However,
many people today have not learned that lesson. Let's take

(03:38):
a look at the specific strategy that individuals are using
today with selling zero daytail expiration options. Very simply, it
means that you are selling options that expire on the
day that you open up the trade. Now, this alone
gives people a false sense of security because they think, hey,
there's only a couple of hours until this expires, so

(04:01):
there's much less of a chance that this could move
against me. There's just so little time. So here's the
basics of this strategy. I am going to sell a
put on something like SPY, SPX or one of the
Magnificent Seven. Magnificent seven are the big stocks that are
responsible for all of the stock markets outperformance recently, which
is Google, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. We're

(04:25):
going to focus on in video, which is up a
staggering two hundred and thirty five percent last year, because
this is where most of this trading is taking place,
and zero day options trading is one of the biggest
reasons why this is actually taking place. Here's how this works.
Everybody is selling puts on these stocks. If I sell
a put to somebody, I have the obligation that I

(04:48):
may have to buy that stock from the put buyer
at any time between now an expiration. Usually that'll only happen, though,
if the stock price drops below the price specified in
the put contract, which is called the strike price. So
let's look at a concrete example. As of the day
of this recording, in Vidia closed at six hundred and
ten dollars per share. So maybe when the day opened,

(05:09):
I would have sold a put contract with a strike
price of six hundred five dollars per share. Now, at
some point in the day, I very easily could have
sold this put contract for about a dollar fifty. Now
you're probably thinking a dollar fifty that's nothing. But with options,
every contract represents one hundred shares, so that one dollar

(05:30):
and fifty cents is the per share price. So we
multiply that by one hundred to get one hundred and
fifty dollars. And I'm probably gonna sell ten contracts, so
it'll be one thousand, five hundred dollars. So the market
opens around six ten, it goes up and down, but
it closes around six to ten as well. I sold
my puts at six oh five, which means I am safe.

(05:51):
Within just a few hours, the market closes in Vidia
closes at six ten. My put option at six zho
five expires worthless, and I walk away the lucky seller,
getting to keep the entire one five hundred dollars that
I collected by taking on the risk of selling that putt.
And for a stock that only goes up, this seems

(06:12):
like a risk freeway to print money, right, Okay, So
here's the problem with this. Everybody's doing this trade right now. However,
we know that any time somebody sells something, that means
somebody else is buying it. Right For every seller, you've
got to have a buyer. So if everybody is selling
these puts, who is buying that? While the answer is

(06:35):
market makers. You see, a market maker's job is to
make the market in the security in which they are
a market maker, which means they are responsible for making
sure that at some price, if somebody wants to buy
or sell something, that they will take the other side
of that trade. But here's the thing. Market makers do

(06:55):
not make money on market movements. They're never gonna just
take one side of the trade and hope it works
out in their favor. They will always stay market neutral.
They'll always be one hundred percent hedged because they make
their money on the spread between the bid and the
ask on anything. They're basically operating like a middleman. Like
when you go to Walmart and you buy something, you're

(07:18):
paying a higher price than what the whole saler sold
it to Walmart for. Walmart is taking the spread between
the whole saler and you, the retail buyer, in the
same way the market maker is taking the spread between
the buyers and the sellers of anything. So that's their
whole business is just to make money on the spread.
They will not maintain a book that will profit or

(07:39):
loss based on market movement. They will always be one
hundred percent hedged. So this is where it gets crazy.
How do you hedge when you've bought a put. We'll
consider the profit and lost scenarios of being on the
buying side of a put. If you buy a put,
you will profit if the stock goes down, and you
will lose if the stock goes up. So in order

(07:59):
to hedge that, you need something that will act completely opposite.
If the put loses money when the stock goes up,
you need something that will make money when the stock
goes up. And if the put will make money when
the stock goes down, you need something that will lose
money when the stock goes down. That way, no matter
what happens, you're perfectly hedged. So the question is what
type of instrument can you use to make money when

(08:22):
the stock goes up and lose money when the stock
goes down. It's very simple, just buy the shares. And
that's exactly what market makers are forced to do. When
everyone starts selling puts. They have to take the other
side of that trade. Because there's nobody else out there
who's buying those puts. They have to buy the puts themselves.
In order to hedge, they have to turn around and

(08:43):
buy the shares of the stock. Itself. That way, they
stay market neutral and maintain a market in those options.
So put those pieces together. This means that as the
stock goes up and more and more people pile into
selling puts, that causes market makers to have to turn
around and buy shares, which drives the price up even more,

(09:06):
reinforcing the trading behavior. But that's not even the worst part.
These individuals who are selling puts are not just stopping there.
They're taking the thousand dollars, the two thousand dollars they
collect from selling the puts, They're turning around and they're
using that to buy calls. So buying a call and
selling a put are both two different ways to make

(09:27):
money on the stock going up, and they're both two
different ways to lose if the stock goes down. So
people are selling a put taking the cash from that
to buy a call. So now you have no money down.
You financed your purchase of a call to make even
more money. As the stock goes up, and as more
and more people buy calls, who are they buying those
calls from market makers? Market makers have to sell the calls,

(09:51):
which means they have to hedge those short calls. And
how do you do that the same way you hedge
a long put, which is buying the shares. So both
of these trading strategies that feed in on themselves individuals
selling puts, collecting cash and then buying calls are both
forcing market makers to turn around and have to hedge
their books by buying the shares, which is pushing the

(10:12):
stock price up to crazy heights. Now, by the way,
one of the things that I teach members of Harisey
Financial University how to do is how to properly use options.
Everything we're discussing in this video is literally the exact opposite,
most dangerous way to use options. In reality, there are
some very very simple, very low risk strategies that you

(10:32):
can implement using options to hedge your portfolio so you
limit your downside risk if the market crashes your portfolio doesn't.
You can also use options to produce safe and steady
income on a stock portfolio, even if those stocks are
not dived into paying stocks. You can also play small
bets that have asymmetric upside potential to where if it

(10:53):
doesn't work out in your favor, you maximum could lose
a very small amount, but if it does work out
the way you think it is, you could make a lot,
you know, ten one hundred one thousand times what you
paid for the option. And beyond that, I teach you
how to use all these different strategies inside how to
fit it inside of your overall portfolio allocation strategy. On
top of that, members get access to live coaching calls,

(11:15):
the community, and tons of other training material. If you
join now, you can get thirty percent off your membership
for life. You just need to use code YouTube thirty
link is below, and there's limited slots available, so don't wait.
So traders right now are selling puts, using that cash
to buy calls, putting zero money down, profiting on the
stock going up, and zero risk right because there's no

(11:37):
chance this stock actually goes down. Well before I show
you how badly this could blow up, and how terrible
the collateral damages that this thing could cause when it
does blow up, consider how rapidly this trading strategy is
gaining in popularity. Number One banks on Wall Street have
their quants warming up to using these themselves, and they
cite the same fallacy that for something with a show

(12:00):
heelf life shorter than twenty four hours, it minimizes risk
of being caught out by unfavorable overnight market moves, except
it does nothing about unfavorable intra day market moves. On
top of that, we have a giant list of right
now a dozen or so ETFs that are all designed

(12:20):
to use these exotic options trading strategies in a way
that will catch most people off guard. Taking a look
at the investment strategy of just one of these funds,
you can see this is exactly what they do. They
sell call options and they sell put options. This one
specifically does it on the S and P five hundred index,
and it is a daily strategy for these zero day options.

(12:43):
And just to be safe, the fund will make sure
that the options will have a notional value of no
more than two hundred percent of the fund's net assets,
which means that in the worst case scenario, the most
they could lose is double the amount of money they
have in the entire fund. Well, this means that this
exotic options trading strategy, which for you to get approved

(13:04):
to trade options, you usually have to demonstrate that you
have some sort of experience or knowledge with how options work.
But these ETFs are going to be made available to
unsophisticated investors who will not be able to understand these strategies,
let alone be able to use them in their own accounts,
but they can buy these ETFs that do it for them,

(13:25):
which will contribute more and more to these gamma squeezes
happening all across the market. Now. Usually big money in markets.
Whenever there are trends like this, big money gets in
on the trend first and then exits by unloading on retail.
This happens all the time, but we saw this most
famously the financial crisis, when banks loaded up on mortgage

(13:47):
backed securities and then unloaded them on unsuspecting retail investors
once they knew they were worthless. So anytime new exotic
strategies start rolling off the factory lines and ETFs just
popped up out of nowhere, all with the same strategy,
I get very suspicious because this is exactly how this
thing blows up. Once you have enough retail money coming in,

(14:10):
it allows the big boys to get out and exit
the trade. And as soon as somebody starts exiting the trade,
now you have a buyer of those puts, so the
market maker doesn't have to take the other side of
that trade anymore. Just in case that doesn't make sense.
Let's look at this from the individual's perspective again. Let's
say I'm doing this trade today with in nvidio opening

(14:30):
and closing around six ' ten, and I have sold
my puts at six oh five. Now, obviously I'm just
a young dumb trader. I don't have that much money
in my account. I'm just doing this on my phone
while I'm not my day job. And so let's say
I only have twenty thousand dollars in my account. I
was expecting that day to have twenty one thousand dollars.
But now let's say even just in the middle of
the day, in Vidia drops just a little bit more

(14:53):
to five ninety. Well, now I lost fifteen thousand dollars.
Or let's say instead of me just selling ten ten
contracts because I wanted to make thirteen hundred bucks, let's
say I had sold twenty contracts because I wanted to
make twenty six hundred bucks. Well, now, if Nvidia starts dropping,
it could very quickly wipe out the entire value of

(15:13):
my account and get to the point where not only
is my money gone, but I actually owe the stockbroker
more money than I have in my account. That's right.
My account balance could go negative here, because if I
start off with a twenty thousand dollars account and I'm
expecting to make a grand or two grand on this trade,
but suddenly it moves against me and I have to
close out, and it's gonna cost me twenty thirty forty

(15:37):
thousand dollars to close out the trade. I don't have
that money anymore. And while that situation can happen, and
it's devastating, I've seen it. When I was a broker.
I had to talk to clients who had millions of
dollars in their account a few days before they got
themselves into some risky trading positions. It blew up overnight.
They wake up and now they have a couple hundred
thousand dollars due and nothing left in their account. I've

(15:58):
seen it before. It ruins live. It's possible, But what's
more likely is that your broker will catch it right
before it happens, because it won't be moving so fast
that they can't catch it, and they'll just close you out,
which means that instead of letting you get to the
point where you're gonna owe them money that they might
not be able to collect from you. They're gonna go
into your account and they can do this and they'll

(16:18):
just sell all your positions so that you're wiped out clean,
zero dollars left over for you, but you don't owe
them anything. Now, this is merciful because you don't have
to end up with a big bill due to them
with no money to pay. But it also sucks because
what happens if Nvidia pops that day after they sell
you out sucks to suck. You should have managed your
risk better. But this is where the real problems actually

(16:39):
start unfolding in the broader market, because a small intra
day move can be enough to force me to have
to close out my position or my broker do it
for me. And when I close out a sold put,
that means I have to buy the put to close
it out. And when I buy puts now that's more
puts that the market maker doesn't have to buy. Or

(17:01):
in other words, that means they have shares that they
were using to hedge their book that they no longer need,
so they have to sell those shares so they maintain
a market neutral book, which means this strategy pushing the
shares higher and hire suddenly starts to reverse as the
market makers get to sell. And when the market makers
sell and the stock goes down, it forced me out,

(17:22):
which means the next little move down might force somebody
else out down the street. And when they get forced out,
they buy to close their puts, which forces the market
maker to sell the shares, which pushes the shares down
even more, and we see a complete unwind of the
entire thing that drove this thing higher to begin with.
And this is how you get a flash crash after
a massive run up in the market. It happens all

(17:43):
the time. You don't know how long it takes for
that pressure to build, but eventually it can unwind in
a flash, and not only will it ruin the lives
of the people who are engaging in this trading strategy,
but it can also push the market into a new
bear market, which hurts people who just I have regular
investing portfolios. Now I'm hoping you will take my word

(18:04):
for this and you won't need to experience yourself, because
it is devastating, like I said before, having sleepless nights
because you don't know how you're gonna be able to
recover financially from a big mistake thinking about all the
things you could have done with that money instead of
just watching it evaporate in front of your eyes. It's
not fun. So three takeaways. Number one, if you are

(18:25):
currently engaging in a trading strategy like this that wins
ninety nine times out of one hundred, and on the
one unlikely off chance that it doesn't go in your favor,
it could blow you up. Just stop now, because eventually
it will ruin you. Get out while you're ahead. Number two,
if you've already been caught on the wrong side of

(18:46):
one of these trades. I know how it feels. You
feel like your life is over. You feel like it's ruined.
You feel like you'll never be able to recover. Trust me,
you will. You can absolutely come back. It'll be very
difficult and it'll probably take you a long time. But
if you decide to come back, you will take the
lessons that you learned. Consider it a very expensive college
course if you will, and start doing things the right way.

(19:08):
And number three, if you want to learn the strategies
that the professionals use to manage their risk effectively, and
you don't want to have to learn these lessons by
losing tens or hundreds of thousands of dollars yourself, and
you want to learn how to beat the averages over
time because remember, like a bell curve, the average performance
exists because a lot of people underperform and a lot

(19:28):
of people outperform, So you want to be on the
side that outperforms. Then it's time to sign up for
Haresy Financial University because that's exactly what I teach members
how to do. Remember to use code YouTube thirty that'll
give you thirty percent off of your membership price for life,
and there are limited slots available, so sign up with
the link below before it's too late. Thanks so much, Faunching,
Have a great day.