Samwise Model Portfolios
The portfolios below are separated by launch dates. Each portfolio is entirely independent and has no bearing on any other model portfolio. We launch entirely new portfolios during each market correction as an illustrative tool for new subscribers who weren't present during...
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Appreciate the heads up ????
Pun intended?:)
Hey Sam, appreciate all your insights as well!
I was wondering: how do you prevent yourself from selling the puts too early before the market bottoms for real? I mean if we get a correction to 450 in the qqq, how would you be confident that after a rebound to 470 for example it would not just continue going up instead of a further drop to 400?
So if the QQQ fell to $450, we wouldn’t sell the hedge. It wouldn’t be worth it. Let’s play out some scenarios.
Let’s suppose right now the QQQ begins to roll over after the election. It pushes oversold on the hourly chart but neither the $VIX nor $VXN rises much. The QQQ never reaches oversold conditions on the daily. Neither the $NYMO or $NAMO fall to any sort of extreme level.
If that happens, we just hold the hedge. The insurance is not for regular corrections right? We’re not going to sell our puts on a minor correction. It’s our protection against a crash. We’ll just hold them through a rebound at that point.
Why? Because the market will have neither reached (1) extremely oversold conditions on the daily nor have fallen to our target price.
But let’s suppose the QQQ does fall to extremely oversold conditions on the daily chart. It hits a 25-26 RSI on the daily, the $VIX pushes overbought, the $VXN goes north of 40 and the $NYMO pushes down to -100 to -120.
With $VXN north of 40, our puts will have skyrocketed in value. Like absolutely skyrocketed. At that point, we can sell the puts — even if we felt the market was headed lower — because they will have already produced thier main return by virtue of the sharp rise in volatility. The $VXN plays a critical role in how the options are valued. Open up an options calculator and input a 25 volatility number and with everything else being exactly the same do so with a 40 vol number. You’ll get a much much higher option value.
Take that together with the RSI reaching sub-30, the $VIX reaching overbought and the $NYMO reaching -100, and you have a very likely bottom in the market. After that, the VIX and VXN will likely collapse leading to a massive drop in the value of the put option so that even if the QQQ goes lower days later, the option actually will go down in value.
We have very very strong indicators telling us when the market will likely have bottomed. Remember august 5 when we forecasted a bottom. That wasn’t an accident or a guess. All the indicators screamed bottom for the market.
(1) We had the QQQ reaching 30-RSI + a massive intraday reversal. That huge hollow red bar = bottom almost for sure.
(2) The VIX skyrocketed to 66 and reached a 90-RSI on the daily. That is unheard of. At that point, it doesn’t even matter if the market continues lower, such a high volatility skyrocket the value of put options to the extreme. Anyone who held on to puts after that day doesn’t understand the role volatile plays in option pricing. We’d dump our puts on that day no matter what. We’d also reposition to a longer dated call-option and then wait for a rebound to repurchase our puts at a much lower volatility premium.
(3) the $NAMO (QQQ’s version of the NYMO) pushed to extremely oversold conditions.
We’ll get to this whole thing in Chapter 5 of investing basics. But to answer your question more directly. I’ll say this. We’ll have very strong indicators and very very high confidence levels in corrections. Corrections are the most predictable periods in the market. I can say that. There are no periods that are more predictable than when the markets push oversold in a correction. So we’ll have a lot of guidance on when to make certain moves.
What’s the difference between this and buying VIX? If market drops a lot, the VIX will surge up, and if it doesn’t the VIX stays flat right?
The $VIX and $VXN are tied directly to volatility futures and buying options on them generally require higher approval levels. They’re also far more complicated and a lot more nuanced than QQQ puts which simply trade on inverse correlation to the ETF with volatility being one single component.
$VIX/$VXN can offer a lot more protection in high volatility events like a crash where the options can absolutely skyrocket. We benefit more indirectly with QQQ options by hedging price.
But traders certainly can hedge using $VIX/$VXN options.
Let me add this. Your question gave me a good idea. I think one of the chapters in Chapter 5 will exclusively cover all of the major corrections of the past. We’ll dissect each past correction and illustrate how they followed a predictable path. Even the financial crisis followed a well defined path believe it or not. When we reached extremes on the market did rebound during the financial crisis. So we’ll go through and dissect each past correction and explain how we could use our model to forecast bottoms pretty reliably.
Corrections give us the best opportunities in the market bar none. If we’re hedged going on, it means we’ll have “cash” to deploy on the sideline. We get the best of both worlds with a hedge. We can participate on the market rally and also have cash to buy during major sell-offs (by selling our puts and using the capital to go long).
Thank you for your detailed answer!
No problem. Feel free to ask questions anytime you need.
Hi Sam! Do you plan to hedge the Tarly portfolio when the time is right?
Yes. With the Tarly & Arryn Portfolio’s, we’re going to sell covered calls and use the capital to hedge. We may even need to sell a small portion of the portfolios as we were heavily invested given the last correction.
I’m currently writing my chapter on Corrections even though we’re not done with the content on options yet. I like to write on different topics. And we’ll soon be publishing the first few chapters on corrections.
What you’ll find is that we tend to hold off on hedging until we’ve seen a hard rebound off of corrections. We’ve gotten that and then some with Tarly and Arryn. So we’ll hedge those soon.