Last week I mentioned that we may launch another portfolio to take on the $5k to $1M challenge. I’m going to make this post sticky to permit discussion, provide updates and post anything related to the challenge on one dedicated page until I iron out all the details. Feel free to post questions, comments or concerns here and I’ll be sure to eventually answer every question asked.
What is the $5k to $1M Challenge?
The $5k to $1M challenge is a high-risk high-reward trading strategy where an investor attempts to produce high returns on a relatively small amount of money. That is an attempt to take a $5,000 investment and produce 20,000% returns up to $1,000,000.
It is extremely difficult to accomplish for a large number of reasons we’ll be outlining below. The biggest of which is the relationship between return profile (20k% returns and risk of capital loss). Several successive high risk trades must be made in order to accomplish the end goal. Any one of those trades fails and it’s game over. That’s why the a challenge that rarely ever succeeds.
Why do the Challenge at all?
The biggest reason for Sam Weiss to take on the challenge quite frankly is entertainment. Most of the strategies we employ are lower risk, long-term strategies that we feel confident will produce strong results. But those strategies are also very boring and take a lot of time to fully develop.
The other big reason is to illustrate how one can both be invested for the long-term while simultaneously pushing the needle on a small amount of their investment assets. Which is the right balance to strike.
After 25-years of investing, the greatest thing I’ve learned is this. And I’m willing to wager that a lot of veteran investors would agree with me on this. The most successful strategies are the long-term investment strategies that capitalize on broad market rallies over several years as we’ve outlined on this site. Chapters 1-3 of investing basics points that out quite clearly.
And I strongly believe that is the case for all levels of investors. For those that don’t have a lot of capital to invest, there’s a tendency to be drawn toward high risk assets or strategy to sort of “push the needle,” as it were. And I think that is a massive mistake every time. It almost never works out the way an investor believes it will.
There’s nothing wrong with wanting to push the needle with 1-2% of your investment capital. But to produce real, consistent returns over the long-term, it simply requires time, patience and perseverance. That’s the reality. The greatest risk to every investor is a lack of patience. That is the biggest killer by far.
This challenge allows one to “push the needle” without the need of taking on existential levels of risk to their portfolios.
This strategy is a good complement to disciplined long-term investing.
The Core Strategy
Going from $5,000 to $1,000,000 amounts to 20,000% returns. It is literally a 200x return on investment. There are no reasonable strategies that can produce those types of returns in one go. That’d be impossible. So how does one feasibly accomplish that feat? The hint: compounding returns.
We’ll be using the power of compounding returns over a period of 4-years to complete the challenge. Each major trade we put on will attempt to produce 100% returns through the use of vertical call-spreads. In fact, 8 consecutive successful call-spread trades yielding 100% each would produce the return we’re looking for. And if we successfully accomplished one vertical call-spread trade every 6-months, we’d accomplish our end goal. Hence why we choose 4-years for the challenge period.
Here’s how that might look like:
Trade 1: $5000 > $10000
Trade 2: $10,000 > $20,000
Trade 3: $20,000 > $40,000
Trade 4: $40,000 > $80,000
Trade 5: $80,000 to $160,000
Trade 6: $160,000 to $320,000
Trade 7: $320,000 to $640,000
Trade 8: $640,000 to $1,280,000
The next question is, what type of trade would net us a 100% return. For me, I’ve always found vertical call-spread to be the best high yielding instrument at a reasonable risk profile. Let me give an example of how we might succeed using vertical call-spreads.
Take a look at the Nvidia March 2025 call options. Right now, the Nvidia March 2025 $120 call options cost $20.65 per contact with a tight bid/ask spread. The Nvidia March 2025 $130 calls cost $16.20. If we bought to open the March 2025 $120 calls and sold to open the March 2025 $130 calls, it would cost us a net $4.45 per contract. Now if Nvidia closes a single penny above $130 at March 2025 expiration, that vertical call-spread would be worth $10.00 per contract. If we bought 11 contracts of the spread at $4.45, it would cost us $4,895. If they rise to $10 as expected, we’d produce a $6,000 return on the trade. Our portfolio value would rise to $11,105 on that one trade. That’s a yield of 120%.
Now consider this. If we had made that same trade when Nvidia was trading at $103 a share (during a correction), we’d be in the equivalent of the $100-$110 March call-spread. This is why waiting for correction is critically important to the strategy. Nvidia is very unlikely to trade south of $110 a share come March 2025. We’d almost certainly succeeded on Trade #1.
Thus, our plan of attack is to wait for corrections like the one we saw in July 2024, April 2024, July 2023, March 2023 etc. and buy relatively high probability spreads that are highly likely to close in the money and produce 100% returns on each trade.
Furthermore, there will be plenty of opportunities between the major call-spread trades and we’ll go far more conservative trades during those periods to further support the core strategy. For example, we expect the QQQ to fall 2-4% in the upcoming pull-back right? What we would might do during that pull-back is buy some slightly out of the money leaps on the expectation of the QQQ going higher near-term. If we can produce 20% returns on those less aggressive trades, it could get us to our target significantly sooner or help us off-set any bad spread trades that we were forced to prematurely exit.
We could also diversify during corrections by purchasing 3 different spreads in 3 different high probability set-ups. For example, during the July correction, we could have stepped in and bought a spread in Apple, a spread in Nvidia and a spread in Tesla.
Thus in summary we plan to buy intermediate-term call-spreads with a 100% yield during corrections in the market. In doing so, we increase the likelihood that we succeed long-term. We’re likely to see eight big oversold corrections that take place over the next 4-years.
What are the Big risks?
When I first made a post about the plan to do this challenge, someone asked if I had done this before successfully. My answer to that is yes and no. Yes I got the first several trades right. But no in that I wussed out big time by the middle of the challenge . Let me tell you. One big reason this challenge fails is because who in the hell in their right mind would want to risk $500,000 on the final trade? Or even $160,000? Once you get anywhere close to that point, you start to reassess and it’s very easy to want to pull out of the challenge. And chances are we’ll do that here. If we get up to $160,000, you can bet we’ll start being a lot more conservative with our trades. By trade 4-5, we’ll start really thinking things through more carefully and we might increase our time horizon a bit.
The other big risk is getting blind sided by a long consolidation period, deeply oversold conditions or a major crash. In 2018, 2019, 2020 and 2022, we had corrections that turned into something substantially worse than expected.
In 2014, 2016 and 2017, we had long drawn out melt-up rallies that present almost no buying opportunities. If you didn’t plug your nose and simply get long the markets, you had a time producing returns during those years. The market simply went up a boring 0.19% per day on average for a very very long period of time (8-months or greater out of the year). I hate melt ups. It’s been 7-years since the last melt-up, but it could certainly return. And if it does, we’ll have a difficult time producing during the period.
Finally, another big risk is this. Making a spread trade too early during a correction can hurt us a lot. Especially during the in-between periods. Suppose the NASDAQ-100 pulls back 4% in the coming days and we decide to buy some leaps for the in-between trade. And the QQQ ends up sustaining a full correction. If that happens, the leaps probably drop 20-30%. And now we have to sell at a -20 to -30% loss and then we go into the spread trade. A 30% loss requires a 50% return just to break-even. The first spread trade would move us up only 50% overall if successful thereby putting pressure on the time-line.
How to hedge Those risks
One thing we could do to reduce our risk during a correction is this. We can increase the strikes on the spread to a level that produces a 150-200% yield, reduce the initial investment in the spread and use the excess capital (15-20%) to buy puts. I’ve been pretty successful employing that type of strategy in the past. In fact, one of my best years in the market was during a big trade I made using this exact strategy.
SO for example, imagine we’re back in early September with Nvidia trading at around $103 a share. At the time, buying the Nvidia $105-$115 call-spread would only cost us $4.00 per contract. Which is about $0.55 lower than what the $100-$110 March call-spread would cost us.
But here’s the thing. The chances of Nvidia closing north of $115 is pretty much almost the exactly the same as Nvidia closing up above $110 in March. We’re likely to see substantially higher prices well north of $115 by the time we get to March 2025. So we’re not drastically increasing our risk by opting for the $105-$115’s over the $100-$110 in this hypothetical. Either Nvidia will be trading far north of its $130 resistance or it will continue to struggle as it has. Either way, the risk of $110 or $115 is pretty much similar. The circumstances that would keep Nvidia trading near $115 would be the same as Nvidia trading at $110. So there’s no substantial difference between the $105-$115 spread or the $100-$110 spread.
But heres’s what we do get in return. With the contracts only costing us $4.00, we’d only have to allocate $4,000 to that first trade. If it succeeds, that spread is worth $10,000 in March. We effectively produced 100% returns on the entire portfolio if that happens.
What that allows to do in return is to use $1,000 of our capital to purchase near-term puts options on Nvidia (NVDA) as a hedge. That way if we’re wrong about Nvidia bottoming out at $103 on the way down, we make money on the puts which will offset any losses on the call-spread.
To illustrate this in practice, take a look at the Nvidia October $120 puts which trade at $3.70 a contract. Those expire in 18-days. Again, we’re in the middle of a correction in this scenario so we’re not looking for long-term protection here. We’re protecting against near-term downside risk here.
If Nvidia (NVDA) falls $10 from current levels, those options nearly triple in value to $10 a contract. Not quite a triple but we’d offset a good $1,500 to $1,800 in losses. The call-spread won’t drop by that much due to the time value. The puts would more than off-set the losses on the march call-spread. Chances are we’d be net positive on the trade in that event.
What that would allow us to do is to sell the entire trade, go to cash and then buy a different March call-spread with $10 in lower strikes in addition to new puts (hedge). If Nvidia falls $10 further from there, we do the same thing again and fully reposition the trade a third time.
Now obviously there’s no way to completely cover all levels of risk. But what we certainly could do during a correction is hedge against our greatest reasonable risk and that is the risk of us buying too early or buying during a much larger than expected downturn.
For example, during the July correction, a strong case could have been made to buy Nvidia at $110 and it ultimately bottomed at $90 a share. We could easily bought Nvidia at $110 on the $5k-$1M challenge portfolio and been $20 too early. But here’s what hedging would have done for us.
Using the above hedging strategy, we could have bought the $110-$120 January call-spread during the July correction with Nvidia at $110, hedged with the August $110 puts, and then sold the entire position at $100 for a net gain. The gains on the August $110 puts would have off-set the January $110-$120 call-spread. At $100, we’d take our cash and essentially roll to the January $100-$110 call-spread with a longer dated August $100 puts. When Nvidia ultimately rallied up to $130 a share in late August, we could have sold the spread, downgraded to a more conservative position and hedged that position. And then when Nvidia ultimately fell back to $103, we could have then shifted out of the conservative position to a more aggressive spread again hedged by late September puts. Chances are we would have ended up at +100% returns on the entire trade by now given what took place between September 6 and where we are today. In fact, as many of you recall, we bought right at the lows that very sessions. We bought the QQQ a mere $0.50 off the lows and we did buy Nvidia at $101 and $104. As the challenge is concerned, that’s precisely where we would have likely traded Nvidia.
Poor timing to begin the strategy
One thing that is very important to point out here is this. The best timing to have launched the strategy would have been back on September 6 during the preceding correction. In reality, the best time would have been during the 16% correction the NASDAQ-100 sustained from its highs at $503 down to its lows of $423 a share on August 5. That would have been the ideal time.
The problem with beginning the strategy here in late September is that corrections are rare. They only happen once every 6-months on average. The last major correction we had before this recent July to September volatility period was back in April. Before that it was the preceding July. Before that you have to go all the way back to February of 2023.
So there aren’t a lot of big opportunities make these spread trades. That being said, there will be a lot of smaller opportunities between now and the next big correction to make the more conservative trades off of near-term sell-offs.
Depending on how Nvidia (NVDA) and Alphabet (GOOGL) trade on this upcoming pullback on the QQQ, there may be an opportunity to make a full spread trade then. But we’ll talk about that when the time comes.
Are planning on posting the trades as you go along? Would be interesting in following along as you go through this journey.
Yeah of course. I’ll be posting each trade live as it happens.
Hi I am a learner & would like to follow your challenge in a more conservative way.
I can follow your trades & updates for this challenge here in this sticky page?
It’ll be posted in our daily briefing live when they happen. I’ll also publish a separate post in our under “daily analysis” tab. You’ll be able to sign up for notification to get an e-mail alert whenever we publish a post or make a trade.
I’m interested in participating with the challenge. Sounds like a great learning opportunity. And fun too!
I have never traded Options (cover call, puts, call, and so forth). Am I out of luck to follow this learning experience/opportunity?
It’d be very difficult to produce the type of returns in this particular strategy without the use of options.
But the strategy can be followed more conservatively by using leveraged ETFS like NVDL
why dont you play synthetic long on nvda ?
Can you loose more than $5k in the worstcase scenario, following this strategy?
Also, are you planing to implement a better notification mechanism for your “pro” subscribers?
Thanks you!
So as of right now, the notification system we’ll use is e-mail. If you sign up for our e-mail list here or elsewhere on the site, when we make a trade, it will be sent out in a separate e-mail. With push notifications, that should work relatively well.
But we’re already working on an iPhone/Android app which will make it significantly easier to send out notifications.
We’re also looking into text notifications.
Let me add one thing. The good news is that the type of stuff we’re doing won’t require perfect timing at all. There might be situations like August 5 when Nvidia dropped to $90 and rebounded to $100 very quickly. IN those scenarios, timing would be pretty significant. But in most cases, it shouldn’t be like that at all.
In most cases, trades will be good for hours or even days at times.
Also, you can’t lose more than $5k in a strategy like this.
When the student is ready, the teacher appears. After months upon months of personal research, bouncing questions off reliable authors of analysis content on REDDIT, which by and large can be a cesspool of misinformation if one is not careful with the engagement, I can say I’ve developed a decent swing trade rule set and experienced very modest gains. I’m thrilled with it so far because I haven’t lost …yet. Since finding you weeks ago, reading and digesting your analysis, I’ve realized what I know versus what I don’t know and I don’t know I don’t know it. I literally have been butt-lucky. That’s the best can be said.
The only risk I have at this time is 4 calls for Mar 21, 2025 for $125 strike. Premium was $12 for a total $4800, which I opened mid August. Otherwise, I’m long holding 1,000 shares. Reading this paper gave me pause to relax, to let some anxiety melt away. I at least feel as though, going forward, your tutelage will guide me on a much better path.
I’m so very glad I found this community. Looking forward to the engagement!
Are there target deltas and/or DTEs for the long vertical credit spreads and near term put hedges?
Are you taking here in the challenge or generally? For the $5k to $1M challenge, we’re never going to use credit spreads. In fact, we’ll rarely use credit spreads at all. We’ll mostly be trading vertical debit spreads.
In terms of expirations for the $5k to $1M challenge, we’re probably looking at 4-6 months. As we’ve outline above, the strategy will be to produce a near 100% return on each trade (every 6-months) leading to the overall compounding interest effect.
As the hedge is concerned, we’ll probably look to buy more near-term hedges of 4-6 weeks as we’re mostly going to be concerned about the ultra near-term.
For example, during this recently July to August correction where the QQQ dropped from an all-time high of $503.50 down to a low $423.50, we could have made a case to go long near $450 with the QQQ being down 12% at the time. A case could have been made to go long Nvidia at $115-$118.
But as you saw, both fell significantly further from those levels in the near-term. It’s a risk you take buying in corrections. So the idea would be to hedge out the near-term risk of further downside similar to what we saw in late July and early August. That way if the market rolls over, we can exit our entire trade roll it down.
In terms of deltas for the puts, there’s no specific target. It will all be dependent on the circumstances and expected downside risk at the time we make the trade.
Sorry, that was a typo; I meant to just say vertical spreads. Thank you for this explanation.
I’m very interested in the hedging approach. It’s looking like a decent time to consider entry. I have orders ready to activate with an ATM $116 put and 5 slightly OTM $120/$130 vertical spreads on NVDA. Too soon? When do you expect to make the first trade in this challenge?
I want to see the QQQ push down into oversold territory and drop for a total of 4% from its peak. That would be a good set up and could happen as early as tomorrow. But it needs to happen.
Ideally, we wait for corrections. The problem is that we just finished a correction. So if we wait for the next one, it won’t be for another 6-months.
With the pullback seemingly done, are we going to pass on beginning the challenge and wait for better conditions?
Not sure yet if we’re passing. When the QQQ does bottom, it’s going to run hard for another 3-4 weeks. Until the QQQ actually surpasses the high $480’s, it’s at risk for another leg lower. Like if it doesn’t catch a bit here at $482 and start to move toward the $487-$488 zone, we could see another push to downside.
If that happens, we’ll probably put on the first trade in the sequence.
Sweet, i’ll be matching your trades on this!
For the vertical call spreads, what would your plan to exit the position? Is it simply taking profit at a pre-planned 150-200% or would there also be indicators to consider for an early exit?
Looking forward to this. Too bad Tesla didn’t sell off today on earnings. I was hoping to see a trade happen on this portfolio.
^
Me too. We were almost there. Another day or two of selling. A pull-back on earnings would have been ideal.