Samwise Quick Reference Handbook
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Thanks for the posting Sam, good stuffs as always.
Can show me how you mentally or logically calculate the contract price given a stock reaching certain price ? How do you even know it’s a good price for the contract at that point ? Is it depends on expiration date relative to contract price ? or maybe the greek ?
So open up any QQQ spread that is just in the money—any expiration you want that’s further out. You’re generally going to see a $4.50-ish price for an in-the-money spread.
For example, I pulled up the November 21 expiration for the $540–$530 put spread, and it’s trading at $4.20/$4.30 bid/ask, fully in the money.
If you go more near-term, that price actually goes up because it’s more likely to play out with the QQQ already in the money. That same exact spread ($540–$530) is trading at $4.36/$4.45 bid/ask with a $4.40 mid-price for September.
That’s $2.00 in the money with 91 calendar days remaining until expiration.
Go to an even more near-term expiration—likely July 18—and it’s at $5.17/$5.35 bid/ask for the $540–$530 put spread.
So now just apply this to the future. We’re not going to see huge deviation from this general framework. I’ve seen this for years. This is the general expectation.
Puts are worth far, far less than calls and call spreads. For example, an in-the-money call spread ($517/$527) is trading at $6.78/$6.89 bid/ask.
That’s due to the asymmetry intrinsic to the market. Call spreads are always more expensive on the indices.
To get a double—or a 100% returning spread—we’d have to be way out of the money on that call spread.
Whereas with the put spread, just being right in the money and we already have a 100% returning spread.
Now, these are just rough estimates. More precise estimates can be made using an options calculator. I don’t often need to use an options calculator—especially when running spreads—because I already know that if we buy the $500–$510 put spread at $1.50 and the QQQ falls to $470–$480, that spread will be worth $4.50 to $8.00–$9.00 depending entirely on time remaining.
For example, right now, next Friday’s $550–$540 put spread, which is trading exactly $13.00 in the money, has a $9.77 mid-price. It’s almost full value. That’s because the market believes there’s an extremely high probability that the QQQ will close under $540 by next Friday.
But if we take that same spread out several weeks, that all changes.
Go out to July 18 (four weeks out), and now the spread is at $7.08. That’s 13 points in the money with four weeks remaining.
Again, this isn’t going to change much from one environment to the next. A QQQ put spread that is $13.00 in the money with four weeks remaining until expiration is likely to trade near $7.00 per contract. In some environments, it could be $6.50, and in others, it might be $7.50. But it’s probably close to $7.00.
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Now how do we know what it’s going to cost us? Using the same logic here—we want to buy the August 15, 2025 $510–$500 put spread when the QQQ is trading at $540, right? So how do we estimate what that will cost?
We just look at what a comparable spread costs today. At $528 a share, the most comparable spread would be the $498–$488 put spread for August. That’s about the same distance away. We don’t have a $498–$488 put spread listed, but the closest thing is the August 15 $500–$490 put spread—a mere $2.00 difference. That spread is currently priced at $1.70.
So we can reasonably expect that, down the line, if we want to buy a put spread that is roughly $30 out of the money with 56 days remaining until expiration, it will probably cost us around $1.70. The extra 2 points might knock it down to $1.65.
With the QQQ rising further, volatility likely drops further, and the spread is probably even cheaper than it is right now for an expiration that’s 56 days out.
I’m quickly estimating comparable spreads. That allows me to evaluate a lot of different situations very efficiently without needing to use an options calculator. I then compare my findings with experience—does it sound right?
We’ll find out in a month whether it costs us $1.70 or thereabouts to buy a $27.00 out-of-the-money $10 spread with 56 days remaining. Chances are it will fall right within that range.
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Now, the “why” behind all of this is the actual analysis. We know that $500 is psychological support. We know there’s a massive gap for the QQQ to fill from $487 to $502. We know the QQQ tends to sustain 10–12% corrections, especially after rallying 34%. We know the market typically corrects between the 80–100 day mark in high-volatility rallies.
We also know that the upside is limited to around $560. A 10% correction from $560 equals $504. At $504, we’re already so close to psychological support that it’s likely to go down to $500.
And if the market is already at $500, it’s likely to fill the gap.
If the QQQ runs to $580 in an outlier event, even from there a 13.7% correction puts it at $500. In that scenario, it’s unlikely the QQQ breaks below $500.
But at $560, we’re no longer buying the $510–$500 put spread anyway. We’re buying the $530-$520 put spread. Remember—we want the spread to be $30-$40 out of the money.
So on a run to $560, we end up with a much safer, higher-probability spread that ends up in the money on correction Even if the QQQ continues to $580, on the eventual correction, that spread ends up in the money anyway.
Hi Sam,
What are your thoughts on allocation size to the put spread strategy? Would we transition only part of our core June 2026 puts into put spreads? Or are we thinking it would be a full hedge replacement? This strategy does feel like it blurs the line between a “trade” vs. not based on the analysis we’ve done on it. Just want to understand how you’re thinking about it in this regard 🙂
Thanks!
It really depends on the overall odds at the time. WE could go half, partial or full. Allocation wise, the total allocation is $25k in Arryn, so it would be around 10%.
We wouldn’t normally consider this strategy at all but for the extreme situation we’re in right now. We’ve seen the QQQ push 30-36% returns before and it’s always a peak in the QQQ.
Add the element of time into the mix and now it’s an extremely high probability trade. If we get both a 35% return + 80-100 days rally, at that point the probability of a correction is as high as it gets. And you don’t get any better advanced warning that that.
Now there are way to drastically reduce risk in the trade.
For example, suppose we get to July 31, the QQQ is now trading at $560 and we’re at day 80 in the rally.
The optimal put-spread would be +20 days to over the remainder of the rally up to 100-days and then add 30-days for the correction. That’s 50-days. We should be looking at an expiration 50-days out. With the QQQ at $560, we could probably move the spread up to $520-$510 and it would be in that $1.50 range.
Yet, that 50-day window carries very high timing related risks. Because we could easily end up with a 110-day rally and with the QQQ much higher and could also end up with a correction that goes for less and takes longer to unfold at 40-days.
So the way to off-set that time-related risk is to maybe move up to 60-70-days for options expiration. The returns will be more limited, but far more likely to play out.
Because you don’t even need the QQQ to fall to $500 at all. Just a 10% drop would skyrocket the spread at almost any intermediate-term expiration date. The minimum return is probably close to 100% on a mere 10% drop in the market regardless of where we land.
So that’s one way to approach it. If we do go further out, we’ll then have to do a comparative analysis at the time to try and determine whether it’s worth making that trade or whether it’s worth simply holding the June contract.
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The key reason for pushing toward doing the trade is that we don’t often get the set-up we’re seeing right now. With the market up 33.4%+ means we’re going to have a substantial correction now. And 36% returns is the record going back 15-years. But we also did just sustain the second largest correction going back 15-years with Covid being the largest.
So there is an expectation that this rally should go a little further than the previous record of 36%. Still, a corrections is almost certain to happen and the QQQ is very likely to peak in that 4-week window.
Because we have such high odds here, we want to capitalize on it. Just need to look at the difference in potential returns between the June $500’s and the $510-$500 put-spread.
And truth be told, at 10%, we can afford it. Even if it all went poorly, we’d be fine. We’d still be up massively across all of the relevant portfolios.
But if it plays out as expected, we push the needle big time. We end up very strongly positions and it would be a game changer for all portfolios involved.
Arryn would be running north of $300-$350k in correction. We’d be able to flip that and go long.
It’s a big opportunity. But we do need things to align first.
Sam, If the US drops the bunker-buster bomb on Iran’s underground nuclear site this weekend, what would you expect QQQ to do next week? I was thinking it would drop for a day or two (maybe 1-2% or slightly more) and then rally. What do you think?
It’s really hard to say how the market will react as it hasn’t yet at all. I mean one would think Israel openly attacking Iran out of left field would have sent the market right into a correction. But it was a yawner. The market didn’t even pull back for a solitary day. We opened downed and closed out flat on the news.
So unless there’s some major shift, I don’t know the market is going to care much. It really feels to me that the market is going through the motions.
Put it this way. We have ZERO historical instances of the market falling in a substantial correction and then rallying all the way back to the highs without making new highs. That has happened ZERO times in the last 15-years. Andi’m pretty sure it hasn’t happened at any point in time between 1987 and 2010. After 1987, the market went straight up into the dot-com collapse. Then after that, we went into a recovery that ended with the financial crisis.
We have the record since then and there has never been a solitary case where we see a big correction (-25%), a rally back to highs (33%) and then the market simply just stops there.
We’ve seen the market fall significantly, rebound to retrace half the losses and then sustain a second or third leg down. But that rebound is typically very fast and it’d doesn’t recover to anywhere close to highs.
For example, if this were a bear market, the QQQ would have peaked at around $467-$480 (maximum). That would be the range. IF it managed to touch $500, then it would spell the end of the bear market in that situation.
Here with the QQQ nearly fully recovering, we’ve only ever seen ONE thing happen. New all-time highs. Sometimes we get another correction roughly 3-4% past all-time highs. Other times the market just runs non-stop. Like after covid, the QQQ would have run to the equivalent of $730 a share after eclipsing highs. And it did this in 114 sessions total.
The feeling I get here is the market wants to do exactly what it did after 2018-2019. Rally to a few percentage points beyond the highs and then sustain a normal 10% correction and then run to $600.
Not sure if anything will derail that. There’s always a first. But as of now, it feels like the market is on that typical track of new highs > peak > correction > substantial new highs in the second rally higher.
What’s the plan for selling out of Apple? is there an update on the target price?
Still balancing that out. The stance I’ve taken right now is this. Until the market reaches a critical point where we can confidently say a correction is for sure coming, we’re sitting on Apple.
Here’s why. Apple is entering its most bullish period of the year. During the months of September – January is where Apple generally produces most of its returns. It’s been like that since the introduction of the iPod. The Holliday shopping season has a major impaction Apple. It releases its new iPhones in the fall. Its biggest sales still happen in fiscal Q1 (Oct – Dec). And so we need to be careful about getting out just before it runs.
So to do this, I think with Apple we’ll look to close it only once the QQQ is clearly at a point where it’s going to roll over.
I’d a lot more comfortable closing if and when the QQQ pushes well past $540. I still think we’re likely to see $560 before a peak in teh market.
So still mulling it over. What we might do instead is sell calls against our position and shore up with a hedge.
Hello Sam, I completely agree with you, your strategy is excellent.
For my part, after calculating, I preferred to sell my NVIDIA x2, x3, x5, x6, and x10 options in two installments on May 13th and May 19th. I had significantly increased my investment on April 16th and April 23rd. I missed out on a bit of performance, but I made a 3x to 11x return on my invested capital. I’m in cash and waiting for a correction to do the same thing, i.e., buy after the sharp decline. I should point out that I also lost 100% of my invested capital on NVIDIA x10 in August 2024, March, and April 2024.
However, I’ve recovered this loss. You have to be careful with this type of leveraged investment, and above all, it’s not necessarily a profitable long-term strategy unless there’s a significant rally during a correction, as with CL2 and LQQ. I also liquidated my Tesla options x5 while waiting for the correction.
The pitfall of these leveraged investments is to increase after a strong rally because the decline is even more pronounced with the capitalization of volatility and the decline. It’s a real blow that can be irreversible
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Karl
Risk management is what allows us to stay in rallies and continue to capitalize on the upside while protecting the portfolio. It is critically important to get risk management right.
That’s the largest issue with trading. Risk management is near impossible when making near-term trades like this.
Which means on a long enough timeline, it’s inevitable to go badly.
The key thing is to devise strategies that contemplate the potential upside and downside risk. If you close a position to avoid downside risk, then you’ve given up the potential upside right?
That’s why we very rarely ever actually close long positions. It would take a recording breaking massive rally for us to close positions in our long-term portoflios.
Yes, I’m giving up the upside potential, but I’m strongly protecting my capital gain and cash to replenish with ample liquidity in the event of a decline, as things can go very quickly with 3x, 5x, 6x, and 10x. To date, I’ve indeed lost part of the upside, but that’s nothing in the event of a decline and the need to buy back heavily in liquid assets. I’ve modeled using Monte Carlo, and this strategy of selling and waiting for the bear market is consistently successful unless the rally persists, reaching $150 for NVIDIA.
So a way around fees is to simply widen the spread. But doing so increase the risk profile and then you have to consider whether avoiding the $220 fee cost which is less than 1% of the position is worth the extra risk.
For example, we can cut those fees in half by simply being in the $510-$490 put-spread. It would mean the QQQ would now need to drop an additional $10. The percentage return would be greater overall but so would the risk.
We’d never change the trade to the SPX because there’s far less volatility. The entire face of the trade completely changes if you’re changing assets. We’re doing QQQ analysis here.
The S&P 500 falls by far lower percentages in corrections. That’s a non-starter. Also we’d need to reconfigure the entire analysis, the strike, all of that. And you’d end up with an inferior trade because the S&P 500 is going to correct by a smaller percentage than will the QQQ.
So the only shift we’d do is to widen the spread. Not sure we’d do that here. It will depend on where the qqq is trading, and the pricing of the spreads at the time.
Because there is a difference between a $490 lower strike and a $500 lower strike. So it just depends.
We may end up in a $520-$500 or a $530-$510 spread. In those cases, it’s not a huge difference.
But keep in mind we’re talking 2% here on transactional fees and we’re shooting for 100-300% returns on the trade.
And we’d be saving 1% overall and potentially increasing our risk to do so right. I’ve found it just isn’t worth it. If I find it not to be roughly equivalent, I just pick up the more narrow spread.
Hi Sam,
Sorry for the late comment, but is there a reason why we’re discounting the August 2015 rally that went for 36.59% over 51 trading days (kinda crazy after typing those numbers out lol) in this statement? Or, if you’re just speaking in majorities that’s totally fine too! Just wanted to make sure I wasn’t missing something here.
Thanks!
Damn, just looked at the daily chart for that correction and rally. That capitulation day trading range was crazy lol.
So we talked about the August 2015 rally a few sessions ago. August 2015 has a huge asterisk to it.
In August 2015, MOSt of the gains happened in a single day. There was a flash crash where the QQQ fell from $100 down to $78 a share and then recovered intraday. Thats’ a massive 22% intraday decline and recovery. So it’s a little weird. Also, the August 2015 rebound was part of a larger bear market. SO not a proper rlly. More of a bear market rally rather than a regular rally to the highs.
After the initial surge up, it barely moved higher after that.
So it’s a very weird rally that doesn’t quite fit into any sound category. See attached chart.
The market ended up retesting those lows and essentially went sideways all the way until June 16. It was a mini bear market lasting 13-months or there about.
What you don’t see in the chart attached is the QQQ then went on a long downtrend backward the lows and bottomed in June 2016.
So it’s hard to count the 2015 rally given the circumstance. Without the intraday flash crash, then what we really have is the QQQ trading as low as $87 (realistically) and then recovering intraday up to 91. That’s where the QQQ closed. The trading that took place between $87 an $78 only lasted mere minutes. I was there. I remember it. I traded it. I went long Apple on that sell-off that very day.
If you count from $87, then the core rally is 23%. If you count form the few minutes flash crash that took the QQQ down to $78 which lasted minutes. Very few people actually traded those prices, then the return is closer to 35%+.
August 24, 2015 was a flash crash event like the May 6, 2010 flash crash. Everyting closed down under 4% that day but we had deep 20% intraday losses that lasted minutes.
So again, really hard to classify it as a true rally and even if we do, it’s realistically closer to 22-23%.
When trying to capture general market behavior 2015 is more outlier than anything else and doesn’t truly represent what’s going on here with this general trend and requirement for the QQQ to rally 80+ sessions when going north of 30%.
This correction is also a bit of an outlier as well. The QQQ did rally from $402 to $444 intraday. THat’s a 10% intraday bounce. But the QQQ also did retest the lows eventually and more importantly there were legitimate fills under $410 and time to fill. The markets were orderly in this correction. If you wanted to buy at $403, $404, $405 you could. Options were filling at those prices for sure. I filled at those prices.
So huge difference between the lows of this correction and what happened on May 6, 2010 or August 24, 2015.
I also there May 6th and I also traded May 6th flash crash day itself.
IN both cases, I couldn’t fill anywhere close to those low prices. It just happened in a flash. And even if you put out an order, the bid/as on options were extremely wide. Unable to fil
Not the case here at all. There were fills at reasonable mid-prices even though we did get a slight widening during the initial opening drop down to $402 on April 7. April 7 was a normal capitulation day.
in stockcharts.com, there’s a selection area called “indicators.” You want click the drop-down on indicators and select “Price.” Price will allow you to input a stock symbol and then give you the ability to overlay that price either as a top indicator at the top of the page, bottom indicator or “behind price.” You want to select “behind.” See attached image.