Samwise Quick Reference Handbook
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Is the target of early-september ideal for a time based investment into the third leg of the put spread trade? Or shall we simply wait on that until end of September?
3rd trade seems unlikely, remember it’s waiting for absolute extremes, that seem increasingly low likelihood now.
I’m not quite sure you mean by end of September. Do you mean wait until the end of September to put on a trade? Because we will never make it to the end of September the probability of that happening is really really low probably less than one percent.
If you mean by an option that expires at the end of September, depending on where the QQQ is that actually could make sense. But we wouldn’t do it with 3%.
If we bought something that expires at the end of September, at this point, it would be with a one percent position
So for example, imagine the situation where the QQQ rallies to $603.40 a share on Aug 25. We might buy a September 29 expiration spread with a 1% position on the idea of timing, our expiration with the lows of the correction
With a QQQ at $603 on August 25. We’d have both time and price pointing to an imminent top with a high likelihood. It would be worth the one percent risk.
Also, with buying a spread that expires in 25 days we can buy a spread that is closer to the money
If we’re right and this plays out the same way, 2023 in 2024 did, what we can end up seeing is a spread that closes in the money just as we approach expiration
We might be able to buy a one percent position that produces 8-10% portfolio returns.
Let me give an example. The $553 – $543 put spread expiring Sep 19 trades under $1.00 right now. If the QQQ peaked today at 583 it would only take a 6.4% correction to put the QQQ at $543. September 19 is 27 trading days away. That’s a full correction amount of time.
If we were confident that we were at a top right now and we bought that spread at $1.00 and suppose to QQQ Falls to 540 in the next 22 days, that spread would be worth $9.00. We would make 8x on the trade.
In the Arryn portfolio that has $250,000 in AUM we can buy a 1% or $2,500 position that would have no negative impact on the portfolio, even if it expired worthless
But that one percent position could potentially end up being worth $22,500 to $25,000 and that is very impactful.
So that’s how we might put on a final trade in a situation where the QQQ basically telegraphs to us that we’re at a top.
One of the ways that is going to happen is if the QQQ visits the 600 level
If it gets up there, then it’s a very high probability that we’re at a top
In that case, we might buy a 25 day expiring option with a 1% position. That would be on top of our regular 3% more conservative position #3.
For position number three we would be looking at mid October to late October.
The goal there being to produce 200% to 300% returns on the correction. Generating a 6 to 10% portfolio return on a 3% position.
Sorry, yes I mean question about expiry. Another question is about use of leveraged ETF on the short side say NVDS to avoid the time component of this trade. Maybe there will be some decay from holding in choppy price action but would it produce similar results with higher capital but lower yield?
$140 still leaves a nice exit for the NVDA $150P, time dependent obviously.
Is the plan to get out right at $160 though?
Hey Sam, when would you purchase NVDL again?
Hey Sam, how high do you consider the probability of a consolidation period like we had at the start of the year? After the rally last year the markets basically consolidated for 2,5 months straight before finally going into the correction. Is that a rare occurrence?
this is why I asked the question about NVDL. Also interested in this
Hello Sam, Could you clarify whether the scenarios and probabilities are clearer and more modified on QQQ and NVIDIA than they were several weeks ago, and in particular:
1) 8% correction of QQQ: was 66%
2) 12% correction of QQQ: was 16%
3) correction of more than 14% of QQQ: was 16%
Thanks for your insight.
Karl
Hello Sam,
Did you see it?
Best
Karl
Gap down!