3 ms·
Answering the question most directly, of what strategy would you want given a thesis that we are at peak AI. I do like thinking about the greeks [1] when desig
by seadan83 2y ago
Answering the question most directly, of what strategy would you want given a thesis that we are at peak AI.
I do like thinking about the greeks [1] when designing a position. First, let's clarify, we want to take advantage of price drop over a time period of approx 6 to 12 months. Let's say we're thinking a price drop of perhaps 30%. With these parameters, we want a strategy that has high delta & gamma values, but minimal theta & vega values. (any stock position has values for each of the greeks. For example, in the case of long or short stock, delta is 1, theta is 0, gamma is 0, and vega is 0)
Low theta - That is to say, we want a position that will not lose value as time goes by.
Low vega - if volatility drops, we do not want to lose money.
Really if volatility changes at all - we do not want to lose money.
High Delta/Gamma - we do want the position to be responsive to price change, notably to decreases in price.
Long puts potentially have high theta, high delta, high vega. Long puts are not a good match because of high theta (and a drop in volatility hurts us, but if the price crashes, vega will help us. But, if the price crashes, then delta dominates, so we actually really don't want vega - delta is where we are making money, we are directional!)
Short stocks have delta of 1, gamma 0, theta 0, vega 0. That matches the greeks. Though, short stocks have both a maintenance requirement and an unlimited loss potential - the unlimited loss potential does not match our parameters.
Though, if we both sell and buy some puts (ie: a spread), then the overall position is the difference of the greeks. If we choose strikes that are close together, then theta & vega will be pretty close and would therefore nearly cancel. (EG: Theta of a put at $90 might be 0.35, theta at $85 might be 0.32, the overall theta of selling one and buying another is 0.03)
The difference in delta will also nearly cancel too. But, we are looking to take advantage of the difference in intrinsic value, when time has played out and there is no longer any extrinsic (AKA time) value on the contract left. Which is to say, this type of play only pays out (win or loss) near the time of expiry.
So, a narrow put spread has: low theta, low vega, low'ish delta. This is kinda the best you can do for the greeks perhaps. Very high delta positions are not very favorable unless we think the price change is happening starting from tomorrow (and in which case, we are also screwed by short term stuff, short-term, the market is totally and completely and utterly irrational). Very high delta positions are things like shorting, long puts, or buying very wide bear spreads. In all cases those are not great, either unlimited losses, or high exposure to theta (which is another way to say, they are dependent upon timing even more so than you being directionally correct)
Bottom line: a {"narrow" bear put spread} fits the parameters best (to the best of my knowledge).
The total loss/profit of buying a narrow bear put spread would be:
(A) The max loss for any long position is the cost to enter that position. Anytime you "buy", that is a long position. In this case we are buying bear put spreads, max loss is therefore the full cost of the spreads.
(B) The max profit is the price difference of the spreads minus the purchase price (for strikes that are 30% below current price, it's probably a very good return, perhaps 3x or better; that is a good return because it is extremely high risk - I would rather be the one selling that spread than the one buying them)
At this point though.. we are almost literally saying: "3 to 1 odds that NVDA will be at X price on date Y" << and that is gambling. I can't emphasize enough how that is gambling.
[1] https://www.investopedia.com/terms/g/greeks.asp https://www.investopedia.com/terms/g/greeks.asp
*Disclosure* I am currently long NVDA stock, a position of less than $5000.
- seadan83 2y agoFor anyone with Chat GPT - I would be curious what it would say if asked: - I want a bearish trade strategy with bounded max loss and a profit or loss realization time frame of approximately 6 to 12 months. Do not consider stop losses as a way to bound either max profits or max losses. - I want a bearish trade strategy with high delta and low theta and vega risk, that also has bounded max losses (without using stop losses to create a bounded max loss).
- mmarian 2y agothe 1st one it says a bear put spread; 2nd one also the same or a synthetic short (long put + short call). https://chatgpt.com/share/d999aa46-e2f4-4bdf-b8e7-dfbc50dddb4f https://chatgpt.com/share/d999aa46-e2f4-4bdf-b8e7-dfbc50dddb...
- seadan83 2y agoInteresting! First response from Chat GPT is not bad. The decision of a long leg that is ATM or ITM and short leg OTM is interesting. Both strikes could easily be chosen to be OTM, the location of the strikes is really based on personal conviction and investment thesis. Illustrating this, let's look at an example two spreads of NVDA, which is at $128.70 right now: Spread #1 - ITM long leg, OTM short leg - A $130 put costs $13.90 and has a delta of -0.43 - A $126 put can be sold for $11.75 and has a delta of -0.39 Effective delta is 0.04, cost to enter is $215 (which is max loss), max revenue is $400 (max profit is $400 - $215 = $185) Spread #2 - OTM long & short legs - A $110 put costs $5.50 (delta of -0.23) - A $106 put can be sold for $4.30 (delta of -0.20) Effective delta is 0.03, cost to enter is $120 and max profit is $280 in this case. Spread #2 is more risky as it requires more price movement, though the payout is more than 200%, while the payout on the first spread is roughly 80% (both are VERY solid payouts. The catch is how many times in a row can a person do this? These trades require a person to be correct at least 30% of the time). It does not seem like the Chat GPT is considering delta exposure in case your market thesis is correct. Perhaps that is a fault of the prompt, and we should have simply asked for a positive delta value. Though, for this first Chat GPT response, there are few things that are kinda wrong. > "Complexity: Requires understanding of options and managing multiple legs of the trade." - both legs are typically managed at the same time. The overall complexity is a fair point, and not mentioned is that expiry requires more active attention compared to positions that do not have an expiry. > Considerations - Volatility: Be aware of the implied volatility of the options, as it can affect the premium. This is not important for us. We are choosing a narrow strike range in order to offset volatility changes between short and long legs. The overall value of a spread does not change that much when volatility changes. When selling single leg options, knowing how the premium can change is super important, much less so for put spreads. > Considerations - Market Conditions: Ensure the market sentiment and fundamentals support a bearish outlook. This is a bit odd. If your investment thesis is a bearish outlook, then that should be treated as an assumption. I suppose a better consideration is "be sure to consider that your investment thesis could be incorrect, in which case you will be looking at a 100% loss. Do not invest money you cannot afford to lose, and this money has a high chance to be completely lost" -------------------------- Second response from Chat GPT is again really interesting. Though, it's straight up wrong when it comes to synthetic short. Synthetic short have unlimited loss potential [1] - that comes from the short call. If price increases by a lot, the price of the long put goes to zero and the price of the short call increases without bound. [1] https://www.optionseducation.org/strategies/all-strategies/synthetic-short-stock https://www.optionseducation.org/strategies/all-strategies/s...