Samwise Quick Reference Handbook
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Hi Sam, unrelated to today’s briefing but I wanted to ask about how the long term options portfolios should fit into a broader investment portfolio. Based on the risks involved, how much of one’s investment capital should be deployed in a long-term options portfolio like ones we have here and how much should be diversified out of stocks altogether (i.e bonds, real estate, gold, crypto, etc)?
Check out Chapter 3.7 for a bit more insight on this regarding Sam’s strategy over diversification. In short, we prefer traditional hedging over diversification.
https://sam-weiss.com/investing-basics/risk-management-7/
I’ve read the chapter and it does make a convincing argument. However, I would still find it hard to belive that the best investment strategy is to put all of one’s investment capital towards a long-term options strategy given the inherent risks presented. I guess my main issue stems from the fact that a target of 100% returns simply seems to good to be true as over 10 years that would be a 1000x return, potentially turning 1 million into 1 billion dollars. In any case, shouldn’t we have some kind of way to hedge out the risk of our strategies going catastrophically wrong due to completely unforseen circumstances?
100% returns for 10 years is 1000%, which is 10x, not 1000x, unless I’m reading your comment wrong. Our catastrophic scenario that isn’t covered with hedging is the market going flat for the 2 years we usually cover. That would destroy our hedges while stagnating our gains.
What kind of catastrophe did you have in mind?
100% gain doubles your initial investment. So if you 2x for 10 times that is 2^10 = 1024 so a precise return of 1024x over 10 years.
In terms of the risk, I don’t have any particular scenarios in mind, I think that the biggest risks would be execution risk as the timing of when we buy in and then wait to hedge or when we take off hedges after calling a bottom are when we have huge exposure to risk.
I knew my math wasn’t adding up, and had a feeling you are more correct with that 1000x after the fact.
No Jason is right. 100% returns over 10-years would be absolutely insane. And to be honest, it’s nearly impossible to accomplish that feat. Notice we’re about to reach September and the Lannister Portfolio is only up 70% as of right now. It’s probably ot going to get to 100%.
Arryn is north of 100% this year, but it has been a year of near flawless precision. Think about the shit we pulled off to get there.
First, we got long at the July – August 2024 correct. We then bought hedges on the huge rebound up to $480. WE bought more hedge exactly right on time near $530-$540. That’s right near the highs.
The QQQ crashed 25%. And we only TOOK action to close out hedges and go long on the final 2 days of the crash. Think about that. We waiting until the final days when the portfolio was more NET SHORT than long due to our puts skyrocketing in value to close out the puts an then go long.
These actions are nearly flawless. It would be impossible to have that impeccable timing for 10-years.
If we did have 10-years of action like that, it would be more than 1000k.
Let’s think about it.
$100k > $200k (year 1: 100%)
$200k > $400k (year 2: 100%)
$400k > $800k (year 3: 100%)
$800k > $1.6M (year 4: 100%)
$1.6M > $3.2M (year 5: 100%)
$3.2M > $6.4M (year 6: 100%)
$6.4M to $12.8M (year 7: 100%)
$12.8 to $25.6M (year 8: 100%)
$25.6M to $51.2M (year 9: 100%)
$51.2M to $102.4M (year 10: 100%)
10 years of 100% returning years would take a $100k portfolio up to $100 million amounting to 10,000% returns.
The compounding impact is significant. SO let’s make sure we’re all on the same page of what 100% returns looks like.
The problem is it’s very difficult to accomplish that feat without excellent timing and appropriate hedges. And the hedges will eat into profits. And even when we get it all right, you get Lannister which is up 70% in 11-months.
Arryn will very likely meet its target. We only got a few weeks to go. So it’s going to reach its target.
Thanks Sam. I only had the ‘oh wait, he’s right’ after I pushed the button. I swear I was sharper years ago, when I still argued in random internet forums.
It might be more helpful to talk about the investment objectives. The objective is 100% returns, yet you’re acknowledging it’s near impossible.
The question then becomes, what’s bear, base, and bull case for the strategy?
Digging deeper than, “investment could go to zero”
It would be helpful to hear why investors might choose to execute this strategy? Again, going deeper than outsized returns. That’s all obvious.
If the strategy is nearly impossible to meet the stated objective then either the objective needs to be restated or serious question about executing the strategy to begin with needs to be considered?
So in any given single year, not impossible. We just accomplished it. It’s a question of whether it can accomplish consistently for 10-years straight.
Lannister is probably going to fall just shy. But it’s still relatively successful yeah?
The objection is something we feel we can reasonably reach. WE did it with Arryn by a very significant margin. We got close with Lannister.
The objection is reasonably in any given year. Just not reasonable to expect it to work every year. It is subject to the volatility of the year.
We had a massive 14% correction in July – August 2024 followed by an 8% correction in September and another 8% correction in December followed by a huge swing back up and finally a 25% crash in April followed by a 40% rally.
^this is what helped the strategy meet its mark. A lack of that type of volatility would make it significantly more difficult as we have fewer times to sell premium, buy puts, transition etc.
So as to the question of “allocation,” I cannot get into it. It’s one area I’m not really permitted to discuss at all. That’s because different people have different goals, are in different positions in life, have different risk tolerances. There’s no way to give individually tailored advice on how one shoudl allocate their assets without having a very intimate knowledge of each person’s life goals and financial position.
What I can say is there is Asset Class Diversification and that’s the area you’re touching here. I’d spend timing reading about asset class diversification and what it is intended to do.
There are all types of risks that can be devastating to an asset class as a whole. For example, setting aside catastrophic market events, you can a broker that goes under or an entire platform that fails. You can be right about the asset itself and still take heavy losses if a brokerage you’re invested with fails.
I’d say this is a question worth posing to a financial planner or financial advisor. All we can do here is outline how one specific strategy works through model portfolios.
So the Arryn/Lannister/Stark is just one strategy. There are countless ways to approach the market.
Strict asset allocation issues are strictly outside the scope of the publication.
Are you able to speak on what your personal allocations approximately look like or is even that out of scope?
Also for Asset Class Diversification, do you have any recommended readings?
So I don’t have any specific references. My take is that you should seek advice from a financial planner or advisor. We talk about it a little here in 3.7.
So here’s why I’m extremely apprehensive to speak on my allocations. Really think about this.
Suppose you have a young professional athlete making $6 million a year and who is set to inherit $100 million from his hall of fame athlete father.
Then you have a father of five who works as a hard working attorney in private prating pulling in $234,000 a year and little by way of savings.
You have a single recently divorced mom who is a teacher bringing in $45,000 year and 10-years shy of retirement.
An unmarreid young nurse bringing in $80k a year.
Do you see how these are all very very different people each requiring different types of advice.
There’s no catch all or one size fits all here at all. Suppose the athlete is very risk average, puts all of his money in bonds and real estate, sets aside $500k to invest. He tells you his allocations without yo knowing anting about his personal circumstances. To him, a $500k is no big deal. To a teacher with no saving, a $50k loss to her is far more devastating. No other assets or major income to recover.
There’s just no one size fits all type advice here.
—
What’s more, it just isn’t our focus. The focus of the publication is to outline a strategy that we believe works and to outline the basis of our strategy.
We strive to answer the question: how can one stay invested in the stock market through the QQQ/SPY or other market-based ETFs while hedging out risks of a bear market or crash like 2000/2008.
Those who got long after the financial crisis and remained long from 2009 to today have made obscene amounts of money. And we’ve seen this to be the case during multiple decades.
It seems the best strategy overall going back 40-50 years is getting long and staying long the stock market ultra long-term.
So how does one do this while hedging out systemic risk and potential collapses in the stock market? That’s what the publication is focused on.
Like consider the dot-com collapse. The QQQ fell 80% during the dot-com collapse.
Even if you have an ultra long-term Time horizon, it is extremely difficult to eat that large of a sell-off right? And it took the NASDAQ nearly a decade to recovery that entire crash.
So our goal fundamentally is to have a strategy in place that allows us to capitalize on the upside while hedging out the downside risk of a massive crash like 2000, 2008 or even 2022.
That’s our focus. We do’t really focus on what individuals should do with their capital. That’s something that is entirely within the purview of a financial advisor.
Our goal is to show how at least one strategy can be utilized to remain long the stock market while hedging out system risk.
For example, take any model portfolio. Frey for example. If the QQQ fell 80% like it did in the dot-com collapse, how would Frey fare and why?
Well Frey owns 1 contract in the January 2026 QQQ $450 puts and 110 share in the QQQ bought at $490 a share. IF the QQQ fell 80% from here, those puts would go up to $337 per contract and be worth $33,700.00. Our QQQ long position would be worth $12,430. The total together is $46,130. We generated $2,740 from leveraging our long position and then closing it out on the rally giving us a total of $48,870. Our originally QQQ long position is $53,944. That is the cost-basis. We’d lose about $5,074 or 10% in our original investment on an 80% collapse. We sold $519 in covered calls that would help off-set that even further.
The point is we’re hedged for an 80% collapse in Frey and if it happened, we’d largely be golden. Why? because we’d then be able to go long and benefit on the upside with a only having had experienced a 10% drawdown in our investment despite the 80% collapse.
^This right here is the whole focus of the publication. And it’s simplifying things really because an 80% collapse doesn’t unfold overnight. It doesn’t go straight down. We’d have numerous trading opportunities along the way.
For example, in the 25% correction in Feb – April, we treated it like it was a crash. We transitioned long at capitulation, Then bought DOUBLE our normal put position on the rebound. The market decided to continue rallying. But if it didn’t, we were positioned to capitalize on an ongoing bear market.
Anyway, the point is our focus is strategy and getting the model portfolio right. Individual investment decisions and allocation decisions is not within the scope of what we do at all.
A few things Sam:
1) rally running to late August would set up really nice for the historically shitty September
2) I can’t stop thinking about your hedge comments. It is so true — the hedge allows you to be indifferent, ride the correction down and the more extreme it is the better the hedge performs and in turn if you transition hedge off to go long at that point, it’s accomplishing so many thing. The bigger the drop, the better the hedge performs, the more cash you have to buy at discounted prices to ride up the inevitable rally, also effectively reducing your basis on long positions that suffered.
3) Can you talk about why we sold the NVDA 125/135 spreads? I know it was a different environment then, but I know you’re not surprised NVDA is at $170. I’m not. Really just looking for a learning opportunity here as to the reasoning, not at all suggesting it wasn’t the right call with the info we had at the time.
4) If NVDA drops to $150 or lower in short order wouldn’t it make more sense to close the position rather than ride out given theta?
So we traded out of the $125/$135 because Nvidia had become very overbought near-term and had at that point gone through multiple similar cycles of overbought/oversold. So we were trading it based on a pattern that simply didn’t continue. It happens with trades all the time.
Remember, Nvidia had rallied some 40% by that time and was deeply overbought. Every previous similar overbought set-up like it lead to a sharp sell-off. Nvidia did sell-off, but it wasn’t quite enough.
So we got caught out of the trade.
It seems to me that no matter what the markets gonna do, there’s statistics and precedents to make a case for it. Whether the markets corrected a month ago or whether it will rally for another 2.
I don’t really know how much predictive value there is outside of us assuming it would peak within the next 3 months.
Well it’s all by probability right. If you look at the rally/correction table, what you find is that most rallies end between 70-100 days. Average at 66 days. Some rallies are going to end closer to 70 or below. Others will end closer to 100 days.
Where we decided to sell covered calls makes the most sense as we’ve illustrated in yesterday’s daily breifing. By selling the $540’s at $19.55, we are essentialy positioned to capitalize regardless of the circumstances. If it goes to 100-days and we’re fored out of our position at $560, then we’ll be able to buy back on the correction anyway. if the correction happens sooner, the covered calls we sold expire worthless.
The key is to be set up to capitalize regardless of what occurred based on what we know to be likely true (rally to end at day 70-100). QQQ at $560 is a good exit regardless of outcome. Those are extremely high probability forecasts.
Market sentiment right now
Sam, thank you for the daily analysis. I just wanted to add this to the comments because it really piques my curiosity.
I am currently seeing the exact same movement between crypto market and the stock market at the moment. Reasons behind seems to be that all of these stablecoins and Bitcoin ETFs are backed by U.S. Treasuries, which is driving significant inflows into the stock market as well.
What concerns me is that we may be in the “bubble” phase of this rally—meaning we only see 1–2% pullbacks until it finally pops. That would explain why we haven’t had any meaningful 3–4% corrections since April.
Normally, as you’ve pointed out in previous posts, there’s no such thing as “this time is different.” But given the unique bubble dynamics created by coin‑related products, it makes me wonder if we really could see an extended rally lasting 120+ days.
I’m fine with the market charging straight upward until it really pops, but I wanted to know if you had this on your radar. What are your thoughts?
NVDA $150 puts are under $3 9/19 exp
Trade Watch? Either add, or buy some with more time?
How about doubling down on the NVDA put today?