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Any potential trade action on Microsoft (MSFT)?
Not yet. What we’re waiting for on Microsoft is the up cycle. It has been on a down cycle since before earnings. When it rebounds, we’ll exit the position then. Eventually, we’re going to see an updraft like this. See attachment.
When it rebounds, it will push overbought on the hourly. That’s when we’ll trade out of it. Both from a time and price perspective, it’s due. We should see a short-term move up like this fairly soon:
Let me add. If Microsoft pushes oversold again, we may add to our position. we’d need to see a second instance of oversold conditions for that.
I see, thank you Sam.
Sam – I have a trading related question, not based on today’s condition.
How do you manage to hold your options / stock when you see them moving violently green or red?
I struggle and panic quite a bit and either sell too early thus cutting my profits short.
How do I build the conviction to commit and stay.
You’re describing the disposition effect. The way to resist the urge is to have set parameters. For trading, it’s overbought/oversold cycle and sticking to those parameters.
Every time frame can be impacted by the disposition effect. Short, intermediate and long-term positions. There’s a psychological bias to secure gains too early and cut losses to late. But if one sticks to a set of rules and parameters, then they’re less likely to be impacted.
For example, as we showed yesterday, anytime Tesla falls around 30%, we typically get a 10-15% hard rebound. Especially if it’s oversold AND it drops 30%+. So we wait for that 30% gain or for the stock to push into deeply overbought territory such that a sharp pull-back is likely to follow. Then we might trade it around those overbought conditions.
But the key is to wait for the full bounce. Our target is 10-12% from low to high point. So $325 x 12% = $364. We’re waiting for our lower strike to reach just into the money. That’s where we’d start to secure profits.
With that parameter in mind, we’re just going to wait until it reaches that point.
The disposition effect will lead to net losses (if not put in check) because of the asymmetry of the effect. If you take gains too early and allow losses to expand, then you’ll end up negative.
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For long-term positions, the mentality should be to simply hold the position into perpetuity and then use hedging strategies to protect the position over time. The gaol should be to essentially allow your capital to grow to massive heights. Keeping it invested long-term is a sure way to produce true generational wealth.
Think about it like this. After the 2008 financial crisis, if anyone took that point of view on things i.e. I’m going to buy all of these high quality socks, hold them for 10-years and hedge out any downside risk along the way, they’d be up like 100,000%. Especially if done with leaps.
The strategy we’re doing in Arryn/Stark/Lannister would be up massively if applied to 2009 to 2025.
Apple split adjusted traded at $2.35 at the lows and traded between $2 and $3 for months during the October 2008 to March 2009 period. Apple, Amazon, Google et al did the same thing at varying levels. They’re all up about 100x each.
If one had bought leaps in those stock or a lot of other similar tech stock, and then rolled those leaps forward while hedging their positions — the way we do in Arryn/Lannister/Stark — and continued to do so year in and year out, a $10k position is probably worth $20-40m today. Done with common stock alone, a $10k position would be potentially worth $2M today. This due to a few bear markets likely leading to massive gains derived from the hedges.
Just wanted to say, last week you posted after hours (the night before) when it looked like we were going to have an open sharply lower. Things had relaxed by the morning, and you gave this as the reason why you don’t usually post after hours or pre-market, but I have to say, reading your post allowed me to sleep that night. Briefly outlining a reminder to attack the sell off really really helped me. Thank you.
Thanks Sam, appreciate the response and long term perspective.
I bought 1 TSLA spread yesterday for $5.75. Then bought 2 more as TSLA went down further and brought my CB down to $5.5.
Today at open, I paper handed and sold all 3 for $6.
Sure, made some profits but potentially could have made much more.
Need to learn to be patient and believe in the thesis.
Thanks for the response though.
Sam.,
What would be the move if the Nvda 4/17 covered call @135 gets called away?
So you have to think about what that means for our total position. It’s all a bunch of math. Let’s play this out in Baratheon Portfolio.
We sold the 1 contract of the Nvidia $135 calls against our 1 contract of Nvidia $125 calls. We bought the $125 calls at $11.95 and sold the $135 calls short at $9.85. This gave us the $125-$135 call-spread in Nvidia at $2.10. The maximum profit we can make is $790 on the spread. we basically only have $210 at risk right now. if Nvidia closed below $125 at expiration, that is our total maximum loss potential. $210. Our maximum gain potential is $790. That’s not going to change.
So let’s think about exercise.
By selling the $135 calls, it means we’ve sold someone out there the right to buy 100 shares of Nvidia from us at $135 at any point in time between now and April 17. No one will exercise that right if Nviida is trading well north of $135. Why? Because there’s no point with the hassle. If it’s at $135 exactly, they’ll just buy the shares in the open market and be done with it. If it’s at $136, they might exercise. but there’s risk that it drops below $135 by the time the shares are delivered.
If a buyer does exercise the right, then different brokers handle it in different ways, but the impact is largely the same (or should be). I don’t know how crappy brokers do it. I know there are a whole bunch of new weird free brokers and I don’t know much about that. I just know how the regular non-prime discount brokers like Schwab (previously Ameritrade) would handle it.
In Baratheon, we do not own 100 shares of Nvidia. So what happens if someone exercises? Well the broker is going to facilitate the exercise automatically. They’ll give us a -100 share (short position) in Nvidia at $135 since we sold shares and didn’t own them. Basically, we’d be short Nvidia at $135 a share.
We’d no longer have an option obligation though. So when we sold the $135 calls for $9.85 or $985, that goes away. We keep the entire $985 dollar. That was the money we get for the person to have the right to exercise. You can add that to our short position cost-basis. basically, we’d be short Nvidia x 100 shares at $135 + $9.85 = $144.85.
Suppose we had executed this trade with 10 contracts instead and now had 1000 shares short at $144.85 ($144,850).
Obviously, we’d be in a margin call as Baratheon has only $12.5k worth of capital in it. In such situations, the broker would either simply close out the trade for us instantly before the market even opens. We basically get a $135 short position immediately covered or they’d ask us to close the position depending on our standing with the broker.
Each broker handles the situation differently, but the impact should be the same across the board.
here’s why. We’re also LONG the $125 calls meaning we’re fully hedged out. It doesn’t matter how much Nvidia rises, our April calls and the short position rise in lock-step. The gains in the $125 calls would off-set any loss in the Nvidia short position at $135.
Suppose for example, Nvidia reports earnings and something major comes out and Nvidia gaps up to $207 a share the next day. The seller of our $135 exercises his contract giving us a short position at $135 x 100 shares while the stock is at $207. Suppose that happens. So what?
We’d be down $72 x 100 = $7,200. That would be our loss on the short position. but as we mention before, we’d also have a $985 gain from the option premium we collected.
but more importantly, our $125 April calls would be worth $83.00 x 1 contract = $8,300. We paid $12.95 for that position. The profit would be $70.05 or $7,005.
So what does that mean in the end? we’d simply close out all legs.
-We’d sell our 1 contract for $8,300 giving us a $7,005 profit.
-We’d close our 100 shares short at $207 giving us a $7,200 loss
Our total loss would be $195.
but we collected $985 on the sale of the $135 calls.
$985 – $195 = $790 GAIN overall.
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Remember what we said above. The maximum gain no matter what is $790. What this means is this. If someone exercises early, it typically means we get our full return immediately. That’s because an exercise WIPES out the short option. We no longer have an obligation on the short option anymore.
For example, right now the $135 calls is worth $10.55. That $10.55 obligation disappears if the option is exercised.
An exercising of the short leg typically accelerates the process for us. It’s a good end result for us.
It means the trade is over. It’s as if we’ve been transported to April 17. That’s what it effectively means.
Do the math at $140. suppose Nvidia is sitting at $140 the day after earnings. They exercise.
We’re now short Nvidia at $135. We cover the short exactly at $140. We lost $5.00 x 100 = -$500. That’s our loss.
We close out the $125 calls. Let’s assume they’re at $17 ($15 intrinsic + $2.00 premium). That’s $17 – $12.95 = $405 gain. Our total loss on the spread is $95.
We made $985 by selling the $135’s that we get to keep.
$985 – $95 = $795. We made a few bucks extra.
In term of fundamental, is Tesla still going strong ? I think Elon is too busy playing with politics and isn’t caring about the company at all now.
So that’s the sentiment. Whether that is reality is another thing entirely. All stocks go through bull/bear sentiment shifts and have coinciding rally/sell-off responses.
But none of that is a permanent. The sentiment will always swing violently in each direction. A few months ago, Tesla can do no wrong. The stock rallied from $200 to $488 in a few weeks time.
Don’t get too caught up in the sentiment or in what the press is saying. The press is always going to sell a story to match what’s happening in the stock. But in most cases — with the exception of a few really exceptional journalists — they have no idea. They try and match a story with what they see happening with the stock.
Right now the sentiment is Musk is playing politics and not spending enough time at the office Hence, Tesla is now going to be worth $0.00. That sentiment will shift again and when it does it will happen long after the stock has already rallied big time.
For now, we’re not so much concerned with the fundamentals or sentiment but more focused on the oversold aspect of things. The up/down cycle. The sentiment shift will follow the trend-change in the stock.
There’s two sides to every bet and with the stock down 30%, we’re going to see the bulls step up soon.
Financial press will follow with a new story as to why Tesla is higher.
Hey Sam,
What are your thoughts on closing out the NVDA April 17, 2025 $135 Calls we sold in Baratheon if NVDA has a small leg lower (128-130)? Looks like NVDA is showing quite resilience to downward pressure from overbought conditions. Maybe that suggests NVDA is primed to take the run we’ve been waiting for?
I’ve got the exact same question. Is it ok to buy calls at strong support level even though not oversold?
I was just thinking about this. It is showing resilience and it does look like it’s forming a bull flag. We might very well remove the call we sold as the risk isn’t as high anymore for a roll over. And if we do see a roll over, we’ll simply add to our position. We don’t have a big position as it is. we’ve taken it down to $200 or 2% for baratheon. So yea, we’ll probably cover that today before the close.
Is there justification or reasoning on buying GOOGL call ? The daily RSI is still around 40.
Hey Sam did say 6 days ago in comments that “ We’d like to see it (google) get a lot more oversold and then form a base like Microsoft did”… so it did get pretty oversold since then on the hourly and did form a base. So that would be my guess
Hey Sam did say 6 days ago in comments that “ We’d like to see it (google) get a lot more oversold and then form a base like Microsoft did”… so it did get pretty oversold since then on the hourly and did form a base. So that would be my guess.
Hi Joey — so we got something a little differnet. what we got instead was three separate push downs into oversold territory with small bounces in-between. We should see a larger rebound soon in Google as a result.
Ok thanks! Feeling good about that trade!
TSLA is having a nice rebound, should we close our spreads once it reaches $360?
Hopefully I’ve answered this with the daily briefing today. On the upside, we’ll sell in parts. IF it pulls back, we’ll buy back our positions.
Reddit is a little different. It’s. more of a momentum play. So we’d trade it a little differently than we do the larger stocks. With larger bluechips, they tend to respond well to the contrarian side of the trade. With Reddit, it’s not always clear whether it will necessarily rebound off of oversold conditions.
Where we’d play Reddit is during an intermediate-term rally cycle and it would be on momentum. We’d buy, ride momentum, move stops up etc. We’d trade it based more on broad market parameters — is the QQQ topping or bottoming.