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For the Targaryan spread trade in NVDA 140-145 May, do I understand that you would like to wait for NVDA to be in the 131 $ ?
That’s about right. I’d like to see Nvidia test $130 again. The point of the trade would be to not worry much about near-term uncertainty and focus on the eventual end result. Nvidia might travel to any number of destination between now and mid-February, but after that, it likely runs to $150 and the later it happens; the better it is for the spread.
Why wait until 130-131 instead to taking it here? The spread would still be good for 220% – 230% after all.
yes I was thinking if there is a risk of breakout with difficulty in timing it, could we allocate 80 or 90% into that position and buy puts now for the rest. I get that it’s best to buy the puts in stark or frey after a run up but if we are okay with a less than optimal entry and with puts in case of catastrophic events it might work. Thoughts on this Sam?
The puts only work if we buy them at a higher level than where we make the purchase on the calls. You get very little relative protection if you buy teh spread at the same price level that you buy the puts.
It’s unfortunate, but you have to take risk somewhere in this set-up. What we choose to do is reduce that risk by making the long purchase when the stock is deeply oversold — because the probability of a bounce skyrockets — and then when the bounce occurs, we buy the puts.
The difference in entries is where the protection lies. If we buy the spread at $130 and then buy the puts at $139 for example, we’re very well insulated at that point.
And Nvidia just recently did this. It was at $130 a few days ago and has gotten as high as $139 on this rebound so far.
I’m not trying to push either way, I just want to understand because there must be something to learn here.
So I think buying a partial position might make sense. But there are three big reasons for waiting until $130 until fully allocating.
First, we have the downside risk which is lower at $130 than it is at $135. If Nvidia breaks down below $130, it might fall $5-6. That would be a $5-6 drawdown compared to a $10 drawdown from $135. So there’s that issue.
Second, by purchasing the spread at a lower entry, it means a higher return on the rally itself. Forget the waiting until expiration part of the equation. I’m talking just the move up from $130 to $150 produces a big return. A much larger return than $135 to $150.
At $150 a share, that spread likely moves up to around $2.65. From a $1.50 entry, that’s a 77% return on just the rally without waiting until expiration. From $1.70, the return is around 55%.
At $1.70, we could buy 32 contracts. At $1.50, we could buy 37 contracts. At $2.65, the portfolio rises to $9850. At 32 contracts, we’re at $8,480. So it’s about a $1400 different on the rally.
Not a massive difference, but that compounds in the future. If we’re putting on our next trade at $8480 instead of $9850, we’re making a lot less on the next trade. So it might not be meaningful in whole dollar terms, but it is meaningful in percentage terms. the difference there on the next trade is $19,700 versus $16,960. It compounds on the way up.
But I do think it makes sense to buy a partial position. Not a large one, but partial.
Third, it’s a larger return as we get closer to expiration. if we decide to hold until expiration, it’s much much larger. It’s a $2,500 difference. $18.5k versus $16k at expiration on the same contracts.
nvm asked chatgpt and it answered my question
The May 145-150$ spread is currently at $1.70, and you’ve mentioned that a good entry point would be around $1.50-$1.60. Does Nvidia absolutely need to hit $130 to buy that spread, or can we just buy the spread when it reaches $1.50-$1.60 (assuming it gets there)?
No. You should be eyeing Nvidia. When Nvidia gets back down to $130, that’s where we buy. I’m just guessing that’s where the spread price will be at the time. If it’s lower, great.
Gotcha, thanks!
So I have a question about buying into positions in general. It is possible we are midway or mostly all the way into a correction. We still have very positive earnings on TSM and it leads me to believe NVIDIA is going to go higher. If we are midway on the RSI heading down does it make sense to keep adding slowly into a position for Stark, Frey until we see an eventual run up?
So the way we’re thinking about Stark and Frey is like so. We’ll add whenever the NASDAQ-100 falls to oversold conditions. this happens all the time. Not just during corrections but all the time. It happens after segmented rallies or during these down legs.
Our plan is to add incrementally on the next near-term oversold conditions. But in Stark/Frey, we’re never going to reach a high allocation if we don’t get a full correction. We’ll just add on the next correction or in other situations where opportunities arise.
There are times when individual stocks might underperform or reach correction levels during a rally cycle. we could also add those position to Stark/Frey at that time.
What do you think about buying Bitcoin before the inauguration? Or is the strategic reserve plan (which can still fall through) already priced in?