He Earned a Million Dollars Trading This Option Strategy

You're listening to Two Sides of Fy, a podcast that follows two lifelong friends as they seek financial independence and to retire early. I'm Eric and I'm joined by my friend Jason, who reached Fy in 2020. And this is our story. Hey, this is Jason with Two Sides of Fy. Today I'm talking with Karsten Jeska, who has a PhD in economics and a CFA, and is perhaps best known as the creator of the early retirement now blog. And he has written extensively on safe withdrawal rates, something Eric and I have talked with him about here on the show. Now, in this episode, I'm talking about options trading with him and how Karsten has used a specific strategy to generate nearly a million dollars in revenue with only minutes of day of effort. And I know that that sounds too good to be true, but I've been paper trading this strategy for several weeks now. And you'll see that there is merit to this idea. Now, if you're new to options, there's going to be some terminology here you'll want to understand better. Go to the show notes at TwoSidesofFy.com/options for all those details as well as links to the relevant blog posts that Karsten has written that will give you even further background than what we talk about here today. As always, this content does not constitute investment advice and is being presented for informational and educational purposes only. Thanks. Welcome back to the show, Karsten. It's really great to have you here, and especially given that I know you're taking time when you're abroad. Yeah, thanks. Thanks for having me on the show again. It's our pleasure. So maybe at a high level, what is this strategy involved that you're trading on the SPX? Right. So, first of all, the big picture is getting a little bit of extra return is immensely useful. So imagine that you could just increase your expected return by maybe just a percentage point during your accumulation phase. So you could either reach your goal faster, or you could build a bigger nest egg, and then in retirement, so suppose you could increase your safe withdrawal rate from 4% to 5%, right? It's not a 1% increase, and it's a 25% increase in your retirement budget. So that's hugely important and hugely useful, and you can't really do that with anything else. I mean, you can't stockpick your way to an extra 1% return, maybe some people try, and maybe they got lucky, right? And they bought Nvidia and Tesla at the right time. Or they sold Tesla at the right time and then bought Nvidia. But I mean, for the most part, we're not good at stockpicking. So the nice thing is that this is a strategy that you can do on top of an existing portfolio, and you don't really have to sell any of the existing assets, and then you just simply use your existing assets and squeeze out a little bit of extra return. So what I'm doing is I'm selling options on the S&P 500. People have tried different underlying indexes, but the S&P 500 index options are obviously the most liquid ones. And so I'm selling options, and the idea here is the people that buy options, right? So they put options and call options. People who buy put options are people that want to buy downside insurance. People who buy call options are people who basically want to have this lottery style payoff, right? They want to have the potential for some really big payoff on the upside, but also have very limited downside. You have a relatively small wager, but then also a very sweet payoff if the market actually rallies. And there's been a lot of research done, and both of these buyers of options are really just doing a sucker bet, right? So people are overpaying both for the downside insurance, and they're also overpaying for this lottery style payoff. And so it's actually more, there's a little bit like the people are in the casino, right? Would you want to be in the casino? Would you want to be the casino, not the player? And so a little bit like that is going on in the options market too, so people tend to overpay for options. And so the right thing to do then is to sell the options and serve this market, and basically provide liquidity and provide a supply of options that people apparently demand. And doing that is just like in the casino, right? So you make everyone's in a while, you pay out a large sum, but you hope and cross your fingers that over time you are the good days outweigh the bad days. And this is, I mean, at least in my experience, and I've been doing this since 2011, it has always worked out. I mean, certainly every single calendar, you know, I've made money with a strategy, but yeah, I mean, obviously there's some bad days and bad weeks, but I think the worst return was that, yeah, I potentially wiped out maybe two months of option premiums, and it took me two weeks to sorry, two months to dig out of that hole, but yeah, I mean, most of the most of the time you have a pretty consistent and reliable payoff from that. It's not every month, but it's certainly averaging out over a calendar years. Right. So Carson, I think one of the things that I'd like to get out there kind of early is that once you have this in place, this is relatively quick and can be done from, can be traded from almost anywhere. And so this, you know, you talk about this idea of, you know, how much you can earn as an hourly rate. Can you give me some sense of what it actually takes, you know, in terms of your effort to trade this and what the return on that has been in the previous year? Right. Right. Yeah. So I've made close to a million dollars trading this strategy. And so the, actually, just the purely the trading part is not really the time constraint. Right. I mean, you could do a few trades. I mean, I always joke, I've traded this on a ski lift. Right. So I've traded my, I've traded my daily trading requirement on one ski lift ride. Right. Which is something like three minutes to four minutes. Yeah. So I mean, my plan is to make somewhere around maybe $80,000 a year extra with this kind of strategy. And yeah. So it takes me, takes me a few minutes in the morning, a few minutes in the afternoon. This is something I can vouch for. I've been paper trading the strategy for about three weeks now. And I, once I got into the kind of routine of things, I find for me, it's about 10 minutes at market open, you know, to, you know, put the stop orders in for the one DTEs from the previous day and the new zero DTEs and at the end of the day, kind of same thing 10 minutes at most. It's a nice idea for somebody who's retired and doesn't really mind that little commitment if you're in front of the computer in the morning for a little while anyway or on your phone because it's certainly easy enough to trade remotely. I've done it from the passenger seat when we were on a road trip. Yeah, it is, it is pretty fast. So I think, I think that element of is certainly very true. Maybe a good place to, to go from here is just describe the particulars of the strategy and what it looks like to execute. And there's a lot to that. So maybe just start at kind of first principles and we can go from there. So my philosophy is that I would like to have as much diversification over time as possible. So what that means is I want to sell the put options with the shortest possible expiration time. So the shortest possible expiration time has only recently, I think in 2022, became one day because we used to have, back way back, we used to have only one monthly expiration for options every third Friday of the month. Then it became every Friday of the month. And then they added the Monday and the Wednesday expiration. And then in 2022, we now have expiration every single trading day of the week. And then there's even a special situation where we have six explorations. During the third Friday, if you have the third Friday of the month, there's a morning Friday and an afternoon Friday expiration. So you have actually six expiration times that week, Monday through Thursday and then two on Friday. So my philosophy there is that I would like to have as little correlation between different option contracts. So because some people say they, well, I'm writing options something like 60 days out. Right. And then they do 60 days out. And then they wait another week. And then they do another 60 weeks as 60 days out. The problem with that is that you have a lot of overlapping contracts. So if they have a particularly bad day in between, potentially all of your contracts go sour. Whereas I like to have as many different independent bets as possible. So just like in the casino, right? The more people play and you have independent plays like a rollet wheel or a blackjack table. So the more independent bets you have, if the odds are in your favor, I prefer to have as many independent bets as possible. So I prefer to have one day to expiration and zero day to expiration contracts. So I'm selling end of the trading day for the next trading day. And in the morning for the current trading day. You're talking about the last 15 minutes. And then after the market closes, there's a window of time. What are those one, what is carrying out those one DTE puts look like? Right. So ideally, I would like to do all my trades before the New York Stock Exchange closed. Right. Just four PM on the East Coast, one PM on the West Coast, one little constraint. Right. And that's margin. Right. So imagine you have a lot of contracts that are expiring that time. My margin is maxed out. And I have to wait until a few minutes. Sometimes it's as little as 20 seconds. Sometimes it's as much as maybe a minute or a minute and a half until the margin comes back. So because the the current day contracts they expire, the margin comes back within maybe anywhere between 20 and 90 seconds. And then I have to trade the new contracts for the next day, a little bit after the New York Stock Exchange market closed, which is no problem because the options market trades for another 15 minutes after the NYSE market close. So I mean, it's usually definitely the first five minutes after market closed, there's still a lot of activity and a lot of liquidity and activity that you should still be able to trade everything you need to trade for that day. Right. Now margin is a topic worth getting into because that is an important element of this because of the potential downside risk and we'll get to stop orders later. You are required to carry a certain amount of margin by your broker. Right. And then you, in addition, carry beyond that. Can you talk a little bit about the margin constraints on the one DTE trades? Right. So you have to have enough margin and underlying capital. Otherwise, the exchange will not allow you to short a contract, right? Because if for some reason the option goes in the money and for some reason you don't have the money, it's basically the exchange is on the hook because the option buyer will demand that money if I can't come up with it, the exchange would actually have to come up with it. So for example, to sell a put option, you need to have somewhere around between 50 to 55 thousand dollars in margin in your account. And so basically take your account value, you're divided by about 55 thousand dollars. So that's the total maximum number of put options that you can that you can short. And then obviously depending on what the strike price is and what how many days there could be some variation. So puts that a further out of the money require maybe a little bit less margin, but not much less. So sometimes it's, I mean, even so right now, S and P500 is at five thousand four hundred points. Even the five thousand strike or the four thousand eight hundred strike for a one day put right is what are the odds that the market drops by five hundred points or seven hundred points. So it's quite remote. So even those puts require almost as much margin as a put a very close to the to the money. So yeah, so you need to have some underlying capital and you have to show that you have that. And if you don't, you can trade. And so and again, it goes back to the to the question, when can I trade these? If I'm already maxed out and I have zero additional money left over to sell, I have to wait until the options expire to sell more. Hey, Eric here with two sides of fight. If you've been listening to Jason and I on the podcast, you may not be aware that we also have a YouTube channel. And quite often we have supporting graphics, charts, information, and even a few outtakes that don't fit well in an audio format. So if you're into that kind of thing, you can find us on YouTube at two sides of five. So that's that's the that's a little bit of a constraint. So usually what I do is I have my options expiring that day. I may have a little bit of extra capacity. So I already trade maybe a third or a half of the of the puts for the next day. And then the remaining ones I have to wait until maybe one minute after market close after New York Stock Exchange market calls. Okay. So so a natural question is then for these one DTE put contracts, how are you choosing your strike prices and how does that translate to a percent out of the money or our Delta or other metrics that we'll might be thinking about as they hear this. Right. So a lot of people they target something like a fixed Delta. I don't. And I so question is do I ever want to automate this right? So write some kind of a computer program and complete the automate that it's going to be hard because I definitely like to see the entire list of strikes and see where's the sweet spot and that changes. And so I have I mean obviously I want to make something like at least 10 cents premium on the put and I also want to be a certain percentage out of the money but then out of the money percentage. It's also relative, right? So something like 4% out of the money right now is really seems to be relatively safe. In March 2020 4% out of the money was nothing right? You could have sold for relatively rich premium something like 50% 20% out of the money. And so that's also basically guided by where the market is, what's the implied volatility, how much are people willing to pay for insurance right now? Right. So I know that and certainly the particulars of it are part of your approach to this but you're making some sort of risk-based assessment to help guide where you should be picking strikes. Right. Right. So yeah. So in that sense I mean the market is your guide right? So in that sense the market is efficient in that sense I think again as I said before I think I have an edge and I make money on average with every contract but then as obviously how far you sell out of money depends on where we are in the market cycle right? And then by the way even even in relatively calm market if there's an FOMC meeting that day right? And everybody is wondering and especially in FOMC meeting where there's a little bit of uncertainty about what might come out of it is their announcement about either a Fed rate cut that meeting or signaling a rate cut at a future meeting. So that's usually a very volatile day and you can already sense that you can already see that the day before how far you can sell out of the money and other important dates would be CPI releases, payroll employment releases, PC inflation releases. So that's and the market prices are improperly but again I still make an edge on every contract but you can definitely see that the out of money that changes from day to day and from week to week because that's for sure. Now one of the things I've seen you mention on your blog and it'd be good to hear if your advice has changed on this and obviously we are not telling anyone how to invest here everybody should do their own assessment and do what makes sense for them. But if somebody doesn't have a more sophisticated risk model and yes they're using market conditions like we all should to determine what to do is targeting something like a fixed amount of premium a reasonable place to start in looking at a strategy like this. Yes. Yeah, I think so. I think that's that's what I did. And I have some models I run some Python program every morning and gives me some some guidance on where my strikes should be but yeah I mean something like a fixed premium and so obviously say everything fixed premium that gives you a certain range and then a certain percentage out of the money where what was the worst one day move over the last three to four weeks that gives you some guidance. So yeah so I think I think yeah target a premium and I think that's that's the first that that would be the first thing I will try. I'm sure that somebody watching this who has a little bit even of options experience is saying put writing is great for income but when you're talking about this type of trade where you're selling naked puts against the SPX the analogy always comes up of picking up pennies in front of a steamroller because you know the premium you're going to receive is known and is relatively small but the potential downside risk is very high so why isn't it picking up pennies in front of a steamroller. Yeah I mean in some way it is right so the question is how big is the damage if the steamroller gets to you. Well in the case of the steamroller well I mean you might be dead if the steamroller runs over you so maybe the steamroller is not really is not really a good analogy so I think that as long as in expected terms you do better. So I think that we are literally selling insurance right and just like in the insurance business there are sometimes some very severe payouts but the premiums you collect from all of your insured population should more than cover all of those payouts everywhere you go right you see selling insurance is it extremely profitable business now there's there's one crucial difference between insurance the way I sell it and insurance say the way Geico sells it right they average over a lot of people and so pretty much every year they should make a profit whereas I sell and I diversify over each single trading day right so I have a little bit less diversification than Geico because you would think that Geico every single year and every single day they collect more premium that the payout maybe there's a there's a big a thunderstorm or a hurricane where homeowners insurance kicks in you might get a little bit of that but obviously I yeah I certainly have more bad days than Geico potentially so I but but in the spectrum between steam roller and selling insurance like an insurance company I'm definitely much closer to the insurance company than then that steam roller example okay perfect and one of the posts I'll link to in the show notes is you went back and looked at the worst one-day drops and then those within a few percent range and then looked at what the VIX was you know the volatility index the day prior when you'd be making these decisions and I think that's a very informative way to look at how assessments of market volatility could potentially guide someone to think about how far out of the money to be right because this is really the common question like where people say that so you imagine you do something like maybe a three times leverage where you sell puts and you calculate well what is the notion of your of your basically what's your strike price and then your total exposure is what if below that strike the mark the index goes down to zero right this there's the maximum you could lose and you look at what if the market went to zero how much would you lose as a multiple of your account value right so this is the way I calculate leverage and so that could be somewhere in the region it could be as low as two it could be as high as five and then somebody says oh my goodness what if we have a repeat of of that day in I think October 1987 right where the market drop by 21 percent right oh you have 5x leverage and the market goes down by 21 percent yeah okay I mean you're not paying out the 21 percent right is the 21 percent maybe you have 5 percent up to your strike and then but you still drop 16 percent well times five would you lose 80 percent of your account value I said well that's that's not really a fair comparison right because in 1987 you had already this little bit of the volatility cluster yes there was already a lot of volatility the day before and so it's in my personal view it would be highly unlikely that we have another 21 percent drop tomorrow right so so usually all of the big drops and even in a relatively fast moving bear market like March 2020 the volatility builds right and then you you don't have these really big moves completely out of left field usually volatility already builds up this was the case in 2020 during the global financial crisis too so when Lehman Brothers failed right there was already extreme market uncertainty building up for actually more than a year right it was in September 2008 thinking in in even in March 2007 there was already some rumblings and I mean in August 2007 some some really bad news and finance so it's building up and so the the probability that you have a something like 10 percent or greater loss in the stock market in one day is extremely highly correlated with how the volatility the implied volatility was the day before so that's that's that's a given yeah thinking about those those one day drops whether you can see them coming or not I know that one thing that did change over the course of your blog posts on your option strategy is the use of stop orders and their use with options is always a controversial topic among the options community but but typically that's about longer DTE strategies so can you explain why you decided to start implementing them and and how are you using stop orders these days uh yes I have evolved on this issue so I think in the beginning I never used stops and I said well you know if something goes in the money just goes in the money um you take a loss and you move on and most of the time was actually right where you know the market drops at the open and it looks like always going to be a really bad day and you just sit it out and in the end you had what I was called at a point landing you know where the index comes in maybe five points above my my worst my highest strike price and so so I've done that for a while I'm now doing stop up stop orders on on all my puts so both the overnight and the intraday and um the reason is so so twofold um actually this year I have used stops I think the stops got triggered nine times and eight times the stop loss lost lost me money because the the market then recovered and in fact the the market never even got close to the strike right so for example if if within the first hour uh of trading the market drops by a percent or a percent and a half uh you already get uh even though you don't even hit the strike just that the the time value of the option is so high that it knocked out my my stop and uh so the so market never even got close to my uh to my strike and I still got stopped out and I lost money and so it was about eight times this year and but that one ninth time uh the stop executed and it saved me more money than I then I lost with the other eight uh so this year it was actually and so I also tracked that so I tracked and I called that what is my what is my active return from the stop orders right so the I compare uh what if I had just uh set on my hands uh do nothing and uh so this year I would have not lost anything on those eight uh different days uh but on the ninth day I would have lost so much that uh it compensated for everything but then uh in in other years I uh I actually lost money net with the stops so um I must say it was a little bit stressful sometimes when uh when I was doing this without the stop orders right so for example imagine you sell something for 25 cents and then you put a stop loss at say two dollars and then uh the stop loss and then the the the quote of that option goes to about two two dollars which is not a lot of money right is 175 dollars but it's per one contract so you multiply that by several contracts so you could very easily get into um yeah maybe multiple times your food budget for that month and uh so and then now you are a two and you say well you know what I'm I'm just gonna let this run because uh I'm not even close to the strike right so it's the that two dollars is not it's not intrinsic value of the option it's just pure time value especially if the drop happens early during the day but then the question is when do you pull the plug right what if the market keeps deteriorating and it goes from two dollars to five dollars to ten dollars to twelve dollars to fifteen dollars and now you do the math and you say wow I've lost so much money now that uh uh this has wiped out multiple months of uh of option premium hey Eric here with two sides of fight checking in with a quick request Jason I love making this show and sharing our conversations but we need your help spreading the word the best way to do that is to give us a quick rating and review on your podcast app of choice and if you know someone on the fire path please hit that share button on your favorite episode every little bit helps thanks it's it's rational to just pull the plug at a fixed amount whether it's a dollar 50 or two dollars or two dollar 50 um you um you have occasional losses and it might actually be I mean this year it's it's uh we have already had nine uh losses but they were all for the uh for the zero days to exploration I think five times on the put side and four times on the call side and uh so it's more than one a month but uh yeah I mean we still made a ton of money on uh the strategy overall and I would rather have it this way than um uh yeah be right most of the time and then then just one bad trade uh just wipes out your your entire uh years work there so uh so that's that's that's why we settle on these stop losses okay a few few questions that that naturally come from now give you the easier one first I'll give you both of them um the easier one is for those one DTE puts are you setting those and letting them run overnight the stop orders or are you setting a stop order at the start of the next trading day right so I set this the stop at the start of the next trading day which has the little bit of the risk right what if the gap down uh the next morning is so bad that uh it's already above the stop uh so that's uh that's a that's a concern has never been has never materialized uh for as long as we've been using stop so um because we're selling really far out and then the stop would also be high enough that uh I mean it would have to be a really substantive or something like a five or six standard deviation down move overnight um so um it has never uh materials it came close a few times but uh it's never materialized um but um so so that's that's uh it's it's a concern is on my radar screen what would we do is say we have a stop of five and then they open the next morning as well as the option is already at 12 so I mean in that case yeah I mean we would we would buy it back at 12 and uh just uh they go wounds there yes and you know I know there's some secret sauce involved in this topic as well but how should or or how can people think about setting uh stop loss prices because of course here we are doing it as you've alluded to on the option itself it's not on the underlying um so how should they think about stop loss prices right so I mean make up your mind how how much are you willing to lose on the stop as as a multiple of of a day's premium right so so in that sense if you um lose on the stop maybe 10 days worth of option premium income um and uh so right now on the overnight we have never had a loss um on the put option we've had five out of seven months so so in that sense we still made more money than than we lost with the with the stops uh so I mean that's that's how that's the way I would think about the sizing how how many times um daily option income are you going to forego in the in the stop loss right and one of the ideas I've seen come up to to readers of your blog is this idea of uh two weeks to two months something in there is a range in which people might consider looking right right that's that's what I would recommend yeah okay let's let's transition from those 1dT puts to zero day so same day puts and then also calls you just mentioned so great transition you introduced to those at some point tell me about the role of those and how you think about those either similarly or differently from the the one data expiration puts right so um so my philosophy was that um so I sell the the one dT puts and I would not sell everything that I have as margin so because there's especially if you use interactive brokers there is this dreaded exposure fee I don't know if you've encountered that so I mean basically at interactive brokers um you can be completely within margin requirements for the exchange but interactive broker still hits you with this exposure fee which is so their own risk model determines well what do we have a overnight drop of 30% of everything right so what what would happen and would you have any exposure in the sense that would it would wipe out your account and would there be any losses left over that somebody has to cover in in that case probably interactive brokers and or the exchange so they charge you an an additional fee form of an exposure fee so and so that kind of sort of eats into your option premiums so I want to avoid that so it's basically overnight I sell only as much as I can get away with in terms of this exposure fee math and the nice thing is for intraday options there is no exposure fee so they only calculate the exposure fee for the overnight contracts then what you do intraday because everything has expired by the end of the day when they calculate this exposure fee so so I always thought there well this is a nice way of getting a little bit of yeah basically supplemental income and in the sense that most of the premium you you make from selling the one DTE puts really comes from overnight right so from 1 p.m. west coast time to 6.30 a.m. market open basically you you lose the buyer of the option loses the entire premium almost and there's there's really nothing left in terms of premium so that means I have both so basically just from the from the delta exposure for the option and then also in terms of margin money I have some I have something left over right and anything that makes money on average right if I don't trade anything I leave money on the table so I would like to max out these intraday options and so basically I will then at the open sell as many puts as I can get away with now there would be one exception where if the market is down so much that my one DTE options are at risk of going in the money then I'll probably take a step back and maybe watch what happens but if it's a normal day and this is 99% of the time I will definitely max out the intraday puts so the zero DTEs and so that's where that idea came from it would be more efficient to do everything as one DTE because premiums are richer and you can be further out of the money but just the way this exposure fee math works out I prefer to do the split it into one DTE and zero DTE options I got it now that makes perfect sense so if someone were at a different brokerage that didn't have exposure fees right wouldn't have that could be the whole strategy yeah maybe maybe you just do the whole one one DTE okay how did the call selling get introduced into it obviously as you just mentioned right right right right and yeah it's a good question people have been bugging me about this for the longest time and I always said oh I find it unpatriotic to bay to bet against the market and but it's totally irrational to not do the call options right and so so far I don't do the call options overnight okay because there's not really that much premium for the one DTE and but I do the the zero DTEs the nice thing about the zero DTE call options is that it doesn't mess with my margin so for example you imagine you max out all of your put option margin pool right so you can no longer sell any more puts but you can sell more call options so the nice thing is I mean the obviously interactive brokers and the exchanges and everybody they're pretty smart right they say well these the two risks are negatively correlated yes so you should be able to sell more call options even if you're maxed out your your put option pool so that's that's that's the first thing that that struck me yeah I mean maybe I should sell the call options because there's actually some money to be made yeah and I mean I and I must also say that and again I don't have enough data to support this but so in terms of the the premium capture rates this is what what I call how much money do I keep as a net premium after I pay out all the all the expenses for the stop losses the premium capture rate was actually higher for the call options and for the put options for as long as I've traded them so in some sense the the call options are pretty good pretty good business and then the other thing is that it took me no I knew about it but it took me it took me a while to pull the trigger and that obviously if you lose money on the calls that it means that the market rallied right so it means that I have so much equity exposure in all my other accounts and my retirement accounts in the underlying assets that I have at interactive brokers if I if I lose a thousand or two thousand dollars on the on the stop loss on the call well I would have made ten thousand dollars exactly if the market rallied just in the interactive brokers and maybe another five digits in all my other accounts so why do I worry about losing money on the stop loss on the call options and yes so finally I relented I think late last year I think fourth quarter last year I finally started the the call options but I mean it is true that obviously you can't you don't go as far out of the money on the call side right because the upside volatility seems to be a little bit a little bit less but yeah I mean this that's just just the skewedness of of the market right you have more potential for downside big movements than than on the upside so it's so sometimes it feels a little bit scary right so you imagine there's right now a market is at 5500 points so sometimes you sell maybe on the put side hundred points out of the money and on the call side maybe only 65 to 70 points out of the money feels a little bit scary but yeah I mean the the numbers don't lie it's definitely I've made more money on the call side and then on the put side so yeah it's a and it's it's just a little bit of extra money it's not really a big money-making business as really the bread and butter business is still the the one DTE puts right now now you bring up an interesting point about the equity gains in the your basically your collateral which is your your your true buy and hold portfolio so does that mean that given that you know theoretically lower risk because sizing is always a question right how do you think about the volume of those calls to sell they are at lower premiums typically but right yeah so I sell less calls than the zero DTE and one DTE puts combined got it but yeah I mean it's it's it's up there it's maybe two thirds of the put volume okay and yeah so every I've I've seen cases where I've sold so many calls that actually now the margin constraint was more on the call side and I noticed that when I then sold puts for the next day yeah right before market closed oh it didn't even impact my margin much because it's actually the call side was was the constraining side but yeah I mean normally it's it's the put side that's the that's the the that's the constraint got it something that I didn't ask when we were talking about stops is if you do get stopped out there's still opportunity on the table are you selling additional puts at lower strikes when you get stopped out yes yes yeah I usually try to do that in fact not doing that is is really leaving money on the table right so because that's usually that's a good time to to go in again and as market is pricing the market is demanding a lot of a lot of premium for that volatility and yeah so I try to do that if I get stopped out to just go in right away and at least recover a little bit of the loss right a different question on risk so you know you can have I think there's tons of merit to this idea of keeping emotions out of trading right we need to be systematic and and you do an excellent job of conveying that and not as a price given your background that that would be precisely how you would trade and have a rule set to follow but there is still the reality and one of the things I can imagine somebody saying when they're thinking about this is you know it's all well and good to set stop orders but there's no guarantee they execute at that price because of course a stop turns into a market order and if it gaps way past it but you know so I guess what I'm asking is in the years you have been trading this you know how has that actually gone have you had big gaps down and resulted in much more substantial losses due to with the way a stop executed or what does that look like uh yeah I mean obviously so if I set a stop at say 150 I mean usually then it executes at 160 right so that because it needs to wait until it hits that uh that that stop um and yeah so there's no guarantee how far it will fall so obviously the concern would be some sort of a flash crash right and uh so in in all the years I've been doing this uh so I've actually never experienced a true flash crash the the latest true flash crash was in 2010 which is a year before I started the strategy and um I mean obviously we had a lot of volatility um especially intraday in March 2020 that was the last time but uh I mean the nice thing was that in 2020 in March I had sold so far out of the money puts uh that uh even that intraday volatility didn't really uh didn't really ding my uh my returns actually March 2020 was the best month uh best single month ever for the strategy so um yeah so I I agree so I it's in the back of my mind uh that what happens if there is something like like a like a fat finger mistake uh again I think is it the the one I think it was in May 2010 that that was a fat finger mistake where somebody sent out the the wrong order um and um so but uh yeah I mean it's it's it's on my radar screen um but um uh I still prefer the the the the uh to have a rules based yes uh uh approach to losses and I'm I'm wanting to take that uh to take that risk so yeah it'll be an interesting transition moving from paper trading this to trading for real for me and I actually don't know I I think I may start with a smaller position because of course in paper trading I'm trading right up to the margin of it all the time and you know I've had this conversation with my wife about how stops work and what the reality could be but then I've also had this you know kind of thought that well given that in nearly all cases you know these the volatility clusters it's not a single event like that you would be so far out of the money that you'd hit the first circuit breaker on the SPY and still be below it in terms of out of the money so that's a part of the how do you sleep at night I think is thinking through those scenarios uh and see what makes sense for you finally I'm thinking about strategy it's pretty common to kind of you know limit your downside risk which of course is the real risk here with spreads um and so yeah from from your perspective why is spreads not in a feasible option for you because if they were surely you would you would use them I don't do spreads for the one DTE because yeah sometimes you get only 10 cent if I were to buy back another one at five cents uh just the transaction cost would be so expensive you almost wipe out the entire profit opportunity if you just make 10 cent overnight so you already spend you only get eight dollar eight dollar eighty so mine so uh dollar 20 is a commission then you have to pay five dollars and another one dollar and five so everything that's five cents is one dollar and five yeah so from so eight eighty you subtract another six or five so that's almost everything is gone and um yeah so I um for the one DTE it doesn't really seem like it's uh it's it's it's really that worthwhile so okay um one thing on taxes you know certainly in the fire community it's full of do it yourselfers and for many people that includes their taxes um one of the benefits of this I believe is that it's a very simple kind of accounting for this in taxes could you just describe that right so uh so if you think about how many thousands of contracts I trade every year and do I have to itemize them uh on that tax form uh on um uh so this is for us uh yes a tax pay is obviously so do I have to itemize them right uh every single contract when you bought it when you sold it uh would that be a line no uh fortunately you don't so this is nice thing is that uh all of these contracts are covered under section twelve fifty six of the IRS code and the nice thing is that you get only one number at the end of the year which is the net profit or loss most of the time and all of the time for me uh it's the profit and uh that goes on form I think it's form sixty seven eighty one so you just put that one number in there and then sixty percent of that becomes long-term capital gains and forty percent of that becomes short-term capital gains and that goes into the uh appropriate forms on your tax return so it's extremely easy it's nothing to itemize just get one single number and um you you just you just fill out that one extra form and it's is extremely it's extremely easy to to file your taxes yeah no that's perfect all right while Carson I have to thank you once again from taking a time away from your vacation it sounds like a great one uh I think this has been very informative and and people will benefit from it and uh wish me luck because uh I'm setting out on this myself yeah good luck very uh it's very exciting and uh I think this topic doesn't get enough uh publicity in the fire community and uh I I'm trying and um uh obviously people know me for my work on the same withdrawal rates but I'm not a one trick pony so I have a lot of other things on my mind uh this fits really well into uh into fire right so we we have some extra time and I mean I wouldn't want to do this when I'm when I'm eighty years old uh but uh you know we we're early retired right we have a little bit of extra time and um it gives you some excitement right it's it's almost sometimes you you watch the S&P 500 towards the market close and it's almost like watching a basketball game yeah so it is yeah and then I enjoy it so so it gives you some some some stimulus um and some some intellectual uh and and mental stimulus I think I think it fits really well into the fire lifestyle so I think uh um I'm very happy that other people are picking this up so yeah good luck thanks join us as the conversation continues next time on two sides of fire if you've enjoyed the show please consider rating it at apple podcasts or wherever you listen for show notes resources and links to the video version please check out our website at twosidesoffi.com (gentle music)