Episode Transcript
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Speaker 1 (00:07):
All right, let me
start off by just saying thank
you to everybody here that'sjoining several advisors.
I see several individuals.
Some of you are familiar withour webinar, some of you are not
, but this will be a very goodeducational conversation that is
going to be led by my colleague, Melanie Schaefer, with the
good folks of Trader Oasis,Trader Oasis and Options Animal
talking about options, and theyknow a little bit about this
(00:29):
space.
So Melanie's going to lead off.
For those that are here for theCE credits, I will be emailing
you after this webinar.
Just check your email.
I'll get your information.
I'll submit that information tothe CFP board and, if you
happen to be among other peoplethat are into options or maybe
are curious about options, tellthem that this is happening.
It's going to be a relativelyquick, 30 minute conversation,
but one that I think everybodywill enjoy.
(00:49):
So with that, I will hand itoff to Melanie and thank
everybody again for joining.
Speaker 2 (00:54):
Thanks, michael.
Yeah, and welcome Eric and Greg.
As Michael said, it's half anhour, so we're going to get
right into it.
Guys, let's open with somethingevery investor can use right
now the collar strategy.
How do you get real downsideprotection while still keeping
upside potential alive in amarket that's this jumpy?
Speaker 3 (01:12):
So I'll take that one
.
Eric, you know the collar tradeis a very dynamic tool if you
think about it.
You know, if you go toVistapedia or Wikipedia or
wherever you want to, to get thetextbook definition of a collar
, it's a.
It's a very locked down, safestrategy where you're combining
a protective put option and acovered call option to basically
(01:35):
collar your stock Right whenwhether it's an earnings fear
that you've got in front of you,whether it's a potential big
sell off in the market becauseyou feel like the AI bubble is
going to burst, and it's apretty static trade, and then
people are familiar with it from, again, the textbook definition
.
But I think the way to do itthat gives you a little more
(01:57):
dynamic approach is don't thinkof it as a static trade, but
rather think of your threeinstruments that I just
described.
You know you've got your longequity position, your short call
position and your long putposition, but think of them as
individual instruments that youcan move in and out depending on
the trend of the stock.
You can structure them indifferent strike prices and
(02:20):
different time frames to reallyfit your investment objectives.
So, if you wanted to still giveyourself downside protection,
it's a strategy that you canemploy that gives yourself a lot
of flexibility.
I stumbled on the trade when theinternet bubble was bursting.
Gosh, it's 25 years ago now.
(02:43):
I guess it's been a long time.
I've been doing this for awhile and it really changed my
perspective on risk.
I don't have to try to time themarket perfect when I use the
collar and that's what I loveabout it is it does think of it
this way it's an insurancepolicy that I can put on and
take off when I see thehurricane coming or just during
(03:08):
hurricane season.
You know, if you live inHurricane Alley there in Florida
, you're in hurricane seasonright now and you know,
fortunately we haven't had a lotof them, but again, knock on
wood, it's still really early inthe season.
But if I was, if I could justbuy insurance on hurricanes
during hurricane season.
That's essentially what thecollar trade allows me to do.
It's a really cool trade.
Speaker 2 (03:29):
Talking a little bit
more about risk management and
the mastery of that.
Most retail traders blowthemselves up with sizing.
Can you walk me through how asize positions can make such a
difference and can be such anexpense, if not a disaster?
Speaker 3 (03:45):
Position sizing is
important the bigger your
portfolio gets.
Obviously, when you're you know, when you're trading several
million dollars, if you've got alarger portfolio, it's
important to not to have allyour eggs in one basket, but
that's sometimes difficult whenyou're a retail trader and
you're trading a $25,000 account.
(04:05):
The beauty about the collartrade is the position sizing.
You can still manage riskwithout position sizing.
Again, the traditional RIAmodel tells you to diversify,
and every investing house is alittle bit different.
Some might say I only want 2%of any asset allocated into one
(04:29):
equity, or I might be okay goingup to 10% allocated into one
equity, and a lot of times yourdecision-making process is
defined by your client too, asto what their investment needs
are.
Again, the beauty of the collartrade is I'm not using position
sizing as my risk management.
I'm using options toolscombined with my equity.
(04:52):
So, to be quite honest, I couldhave my whole portfolio in just
Apple if I wanted to and stillmanage risk.
And that's again.
It all comes down to riskmanagement and how you want to
approach it.
Now, the bigger you get, youknow you're managing a couple
billion dollars.
Maybe Apple's a little bit toomuch to say I want all of my
(05:14):
money just in Apple, and soyou're going to spread, and it's
not for risk management, to behonest.
It's more for opportunity,because there's other
opportunities for growth outsideof just Apple that you may want
to expose your portfolio to.
So for me, position sizingisn't as much about risk
management as it is opportunitymanagement.
Speaker 4 (05:33):
You know, I did like
to piggyback on top of that.
And when you talk aboutposition sizing and a lot of
people think position sizingthey think capital and that's
because the vast swath oftraders out there are looking at
equities only, and so when youtrade an equity, you buy stock.
Let me, your maximum risk iszero, is whatever you paid for
the stock, it could go to zero.
(05:53):
And so, from a position sizingstandpoint, you know, if you use
traditional metrics of, youknow maybe 2% or 5% per
instrument, or you know equitythat you're trading to your
portfolio.
Certainly, if you've got a$25,000 portfolio, you're really
limited, or we have people thatare trading a $5,000 portfolio.
However, the beauty of thecollar trade is that we will
(06:15):
want to.
We don't want to focusnecessarily on capital, but we
want to focus on risk.
And Greg mentioned buying a put, and a put is literally an
insurance policy, and there'speople who trade options for a
lot of different reasons and youcan trade options for
speculation and there'scertainly a lot of that going on
.
We can talk about that as as asan approach or as income, but
(06:35):
you can also combine it and dorisk management, and as an
example, I was just looking atNVIDIA right now.
So a trader could go out andbuy NVIDIA for $170.65 a share
right now and get a December putat $170 and a $180 short call.
So one of the benefits of whenyou're trading options is it's a
(06:58):
benefit, but it's also achallenge is we trade more than
just stock direction.
Too many people focus on stockdirection.
We're also trading or makingmoney off of time.
So, theta, if those of you thatare familiar with options and
volatility vega, so we can makemoney off of options.
And you talked about volatilityand it's been mentioned here
(07:21):
Options become expensive whenvolatility is very high.
We see implied volatility go up.
The VIX is a good idea or agood example of an implied
volatility measure thateverybody pays attention to, and
we know when the VIX is high,options are expensive.
So when you go to buy and put,it's expensive.
But if you're selling a call aswell, it's expensive too.
(07:43):
And this caller trade that I'mlooking at right now on NVIDIA,
an investor could go out and dothis trade with a total outlay
of $17,833 and, quite literally,because they have a long put at
170, between now and Decemberexpiration, the maximum that
they could lose is $830.
(08:03):
I'm sorry, $883.
Literally $883.
Cannot lose more than that.
And if you just wanted to sitin this trade and try and reap
and it's a theta positive trade,it's a bullish trade, so it
makes money if the stock goes upas well.
So you, greg, mentionedpreviously dynamic and that
could be a trade that literallyyou could go, you know, go on a
(08:24):
cruise for the next three monthsor whatever, not come back
until you know.
Here we are in December andworry about this trade and see
whether you're making profits ornot in it.
So this is the point that I wantto get across is shifting your
focus from just looking atcapital but also looking at risk
(08:45):
.
And that's where we can reallydial in with a collar trade, the
risk component.
And from a traditionalportfolio management standpoint,
risk management isdiversification.
Right, we hear diversificationall the time and certainly
diversification has its place inan options car type portfolio.
It does make sense to have somediversification, but it's a very
(09:08):
blunt and crude instrument tosay that I'm going to have four
different sectors and if onegoes down, you know this other
sector, you know might, mightnot.
If one sector goes down, itdoes, you know the other three
don't.
Well, that works until, likeyou have, the global financial
crisis, when the best performingsector was healthcare was down
23% and during that period oftime I I my portfolio was up 35%
(09:31):
.
That during the globalfinancial crisis, it's uh.
I was loving life because youcan actually structure the
collar to be literally anythingcan be a bearish collar, can be
a bullish, can be a stagnantcollar can be a bullish can be a
stagnant collar and I want toadd to that performance in 2008.
Speaker 3 (09:44):
Because I've known
eric for a long time we worked
together for a long time I knowthat you were not positioned to
bearishly.
You weren't, you weren't uh,you know brad pitt and uh,
michael burry from, uh, from thebig short, and you knew what
was coming and you were shortcredit default swaps.
You know right.
I was not there, not that youwere betting for the collapse.
Speaker 4 (10:04):
I thought it was.
You know I'm an eternaloptimist.
I thought it was over.
I'm like, oh yeah, it's goingto get better.
We're turning around.
This isn't the bottom yet.
This isn't the bottom yet, butsome of the best trades that
I've had have been when a stockgoes down and right.
So in a collar trade, we'reselling a call someplace, which
means we're going to sell ourstock.
And you know, this is somethingthat I think retail traders
(10:25):
need to get over is is it OK tosell your stock?
And if you're going to make,you know, 30 percent annualized
on a trade, that might be OK,you know, making 30 percent
annualized to sell your stock,it's.
It's interesting how muchconfusion there is on covered
calls.
Barron's wrote an article aboutthree years ago and in there I
(10:45):
can't find this article and Iwish, because they took it down.
I wrote a letter to the authorand said hey, you made a big
mistake.
But this guy said the risk of acovered call is if the stock
goes higher and you sell yourstock.
And, ladies and gentlemen, letme tell you that is the exact
opposite of risk.
That is, if the stock goeshigher and you sell your stock.
And, ladies and gentlemen, letme tell you that is the exact
opposite of risk.
That is where the maximumprofit is attained.
Now you may not want to sellyour stock, and maybe for tax
(11:09):
reasons or some other reasons,and there are prudent things to
adjust.
And actually using a collartrade is pretty interesting
because if you buy back thatcall, so you sell a call, stock
goes higher, that callostensibly becomes more
expensive.
If you don't want to sell yourstock, you buy the call back and
you book a loss.
So there could actually be atax benefit without selling your
(11:29):
stock, realizing a tax lossharvest off of the call.
So there's a strategy thatworks there.
But I think most of our clientsat Options Animal recognize
that hey, selling your stock issomething you should celebrate
because that's where you hit themaximum profit.
Speaker 2 (11:45):
Yeah, so I want to
get a little more into this and
talk advanced trade adjustments.
Craig trading Apple is yourspecialty.
Show us how you'd plan thetrade to fight risk and then
adjust.
If a stock sells, the news stepby step, what do you do before,
during and then after?
If a stock sells, the news stepby step, what do you do?
Speaker 3 (12:01):
before, during and
then after.
Well, I want to talk a littlebit about Apple.
I love the stock.
I've been a fanboy for yearsand years.
I mean I was a fanboy when itwas just the iPod, not just the
iPhone.
That's how long I've ownedApple and traded it.
I'm very concerned about thefundamentals of Apple and I
(12:35):
believe Apple, from a from aproduct development standpoint,
is losing the edge that they'vehad for going on almost 20 years
now because they've failed todevelop.
I mean they're trading at aforward PE of almost 30 right
now, whereas their earningsgrowth is somewhere in the 8%
range, 9% range, forecasted forthe next nine years.
I mean that's an expensivestock.
I know there are othercompanies that trade with higher
PEs.
You know NVIDIA, another one ofthose we just talked about but
(12:56):
the difference with NVIDIA istheir earnings growth is in the
double and triple digits,sometimes quarters, and so it's
easy to justify a highervaluation.
So for me, unless Appleabsolutely surprises us with and
again it's what's the name ofthe?
It's called the like Jawdropping, Jaw dropping, Right,
(13:17):
yeah, Jaw dropping.
I hope they surprise us andthat there is something in there
, but the market right nowdoesn't show that it is.
I mean, if you look at thecurrent 30 day implied
volatility on Apple, it's ataround 21 right now, which is
historically pretty low.
(13:37):
So from a trade standpoint thatactually makes it interesting
to trade the event, both if theevent becomes a disappointment
or an excitement.
So you know you could structurein an equity trade.
If you own the shares, you justgo buy the stock and you buy a
(13:58):
married put along with it.
You go buy actually, look at, Ihaven't looked at an options
chain yet, I've got a vanillacollar right set up here on
Apple.
Have you got a vanilla collar?
I was going to say a vanillacollar might be the best way to
play.
Well, that's great.
Speaker 4 (14:09):
So Greg's background
his dad was he's a farmer from
Idaho.
He's also a fabulous flyfisherman.
But you knowreg grew upwatching his father trade wheat
and so selling options aroundfutures.
He came about it from adifferent perspective and greg's
been doing this his whole life,just teaching other people how
(14:30):
to trade options.
I looked what greg calls avanilla caller.
It's really where we start.
People say this is this is acaller to look at now real quick
.
So if you think about whatmakes up a caller, it's a long
put in a short call.
And if this is a, this is acollar to look at now real quick
.
So if you think about whatmakes up a collar, it's a long
put in a short call.
And if you think of a matrix interms of money-ness, so in the
money, at the money, out of themoney.
And then you can think in termsof duration, it could be
(14:51):
short-term, intermediate orlong-term.
So if you put that together,it's it's a nine by you know
it's a nine square matrix, athree by three matrix, so you
can have your put anywhere inthere.
And the same thing with a call,you can have it anywhere in
there.
So technically there's 81different versions of a caller
trade and the first caller thatI mentioned is a caller that
does well.
This NVIDIA structure does well.
(15:13):
If NVIDIA goes up, it's gotprotection to the downside.
Now Greg has taught me and thisis I've been doing this for 22
years, working with him taughtme that if you're around an
earnings event, the type ofcaller you probably want to look
at is a 45 day at the moneylong put and an out of the money
(15:34):
short call.
That's maybe 120 to 90 days,and I've got one set up right
now that the stock.
The worst, the absolute worstthing that could happen is if
the stock went sideways all theway till expiration you would
lose $239, literally $239.
Capital outlay on this trade is23,781.
(15:55):
But I've got a.
I'm looking at a long put at240 in October monthly
expiration.
So October 17th, 240 long putfor 735.
A December 19th, 250 short callfor 747.
So those two just basically payfor each other.
This trade if the stock goesdown, you make $218.
(16:15):
If the stock goes up, you canmake somewhere on the order here
of I think it's $1,200, $1,246.
So this trade it looks, if youlook at it from an option trade
that people are familiar as astraddle.
So a lot of people want totrade a straddle.
You buy a call and a put andthe stock explodes in one
direction or the other.
(16:36):
Anybody that's had experiencewith that knows what happens
when there's volatility crush.
So the stock does move, butimplied volatility goes down and
you probably don't make money.
You need a massive move inorder to make money.
This trade has a 36% probabilityof losing money.
So for a trader who says listen, I know the stock's going to
(16:58):
explode, it's either going to goup or it's going to go down Now
.
So this trade is going to makemoney in either direction.
Now you do have a cap on theprofits and, as Greg mentioned,
this is a dynamic trade.
So after the event, the dayafter the event, I'm adjusting
this trade depending on whichway it goes.
If the stock moves up, Iprobably want to take the put or
maybe roll the put or maybesell a put against it.
There's multiple options and ifthe stock's going down, I'm
(17:21):
just.
I'm probably rolling my shortcalls down.
But in this trade this is thething is all the emotions of
fear and greed are gone.
You are, before you do thistrade, you know exactly how much
money you can make and how muchyou can lose, and all you want
to do, all you want to havehappen, is for the stock move,
stock to move and, as Imentioned, the way that you lose
money on this trade is if itgoes sideways for the next 45
(17:43):
days, and you would be crazy tostay in it for 45 days if it
goes sideways.
Speaker 3 (17:48):
Yeah, because really
you're putting this trade
through the event in a week.
You get through the event in aweek.
If the stock doesn't doanything, you tweak that you
know.
You close the trade down Now,you just own the stock again.
But if the stock's just doingnothing now, you're still in an
equity position that you couldturn into another type of
strategy.
That's really this concept ofadjustments that we teach at
(18:11):
Options Animal is.
You know, so many people userisk management in trading.
They use a stop loss to managerisk and NVIDIA is a perfect
example.
Apple's been one in the past,but this year has been a perfect
example of how stop losses areso hard to use on trading some
of these big market momentumnames, because NVIDIA has had so
(18:34):
many stops and starts this year.
Whether it be the big gap downat the beginning of the year
that we had when DeepSeek wasthat China said we've got this
competitive platform that'sgoing to dethrone NVIDIA, and we
had the 30% or the 20% gap downovernight, a stop loss gets
absolutely blown through in thatyou don't get filled Again.
(18:55):
A mistake I think investors makeabout stops is they think well,
it's going to protect me at 10%.
A stop loss doesn't guarantee afill price.
The only thing in my experiencethat a stop loss guarantees it
guarantees I just lost, and sofor me, a better way to control
risk is this collar trade ideathat I can still play the name.
(19:17):
I don't have to try to pick thetops and bottoms.
Perfect, I don't expose myselfto gap moves.
Yeah, it takes some of theupward explosive move out of the
market.
I'm not going to double mymoney in 30 days doing a collar
trade, but I'm also not going tolose money, and to me that's
what I have figured out over theyears of trading and investing
(19:38):
is that staying in the game,don't trade yourself out of the
game.
So many people use strategies,and great strategies, to make
money in the market and thenthey start to overexpose
themselves to risk and blowtheir account up, and then
they're gone.
Speaker 2 (19:54):
So we're running out
of time quickly, and that was
excellent, but I just want topivot for a minute and talk a
bit about diversification, and alot of investors think that
means owning more tickers.
You say it's really aboutcontrolling outcomes.
What are people getting wrong,then, about inflation, debt and
diversification, and how, howdoes option structure fix that?
Speaker 3 (20:11):
Again, for me,
diversification is still a tool
that can be used and should beconsidered in a portfolio, but
it's not what traditionallydiversification is pitched for.
Again, we're told thatdiversification is to protect
against risk management, and tome, risk management and to me,
(20:38):
most 60-40 portfolios.
If you look at studies, they're98% correlated to the move of
the S&P 500.
It's not really diversificationand I'm going to go back to
what Eric said.
What I would rather do is lookat risk management and
diversification.
I can control risk withinstruments, with options.
The diversification need islike I've been saying about
Apple.
(20:58):
I've been a fanboy of Apple fora long time.
I don't trade it nearly as muchas I used to because it's not
the opportunity that, say, aname like Palantir or NVIDIA is
right now compared to what Appleis.
So I diversify.
I know it doesn't sound a lotlike diversification when I'm
saying go from Nvidia to Appleor from Apple to Nvidia.
(21:19):
Right, they're both still hightech names, but there's a lot of
opportunity in other places too.
Financials are great trades.
Energy is a great trade rightnow.
Particularly, it's tied to theneed for the AI data centers
that are being built out.
Gold is a great opportunityright now All-time highs and
(21:40):
some of the gold miners.
So for me, diversificationisn't about spreading my risk,
because I can control risk withoptions.
For me, it's spreadingopportunity and taking advantage
of other hot sectors in themarket that may be a better
return than Apple is right now.
Speaker 2 (21:56):
Just to finish off,
greg and Eric, this has been a
fantastic session.
For anyone who wants to keeplearning.
Where should they connect withyou to see more about the
approach and get the liveeducation?
Speaker 4 (22:07):
It's optionsanimalcom
backslash LLM Lead Lag
Marketing.
Lead Lag Marketing, llm.
So large language models.
If you remember, so that'sprobably Collins yeah, so
there's a yeah that'll take youto the Options Animal website.
Now let me let me just throw outthere, at Options Animal, we
we're not registered investmentadvisors, although some of us
(22:29):
have registrations and there areplenty of them in our community
.
We actually train a lot of thepeople to either manage their
money or their clients' money,and there is some significant
accounts that we know of.
But, anyways, we use real money.
And just to put things intoperspective, I started sharing
just one account and that I have, you know, full kimono for
certain some of our premiumlevel subscribers.
(22:52):
On January 1st 2023, I had113,000.
Today it's 211.
So it's up over $98,000.
On an annualized basis.
It's 32% and that's the sort ofreturns that I've consistently
been able to generate.
And here's the benefit.
You know you listen to Gregtalking about trading Palantir.
Some of you might be thinking,oh, I can't handle the risk.
(23:14):
The color trade is perfect foryou.
You can still get into thesebig names, these NVIDIA, even
Open, which is getting a lot of.
You know, it's the next memestock.
By using colors, you can reallydampen the risk and not
experience the same sort oflosses that other people will.
No, there's always a tradeoff.
But to put it in a ballpark, Ithink 32% annualized return over
the past three years is prettygood.
Speaker 2 (23:35):
That's amazing.
So everyone can go and checkout that link and thank you for
joining, and Greg and Eric,thank you so much.
Speaker 4 (23:42):
Let's do this again,
Mel.
It was a lot of fun.
I know it was great.
Speaker 1 (23:46):
Can I just say real
quick, when Greg said that he
looks back at the iPods, I waslike so Greg is basically 207
years old, is what is how long,though, the iPod?
Anyway, thank you for watching.