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The Best Trader on Planet Earth and his Method


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The Best Trader on Planet Earth and his Method

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  #1 (permalink)
 gregrnoe 
Denver, Colorado
 
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Hi FIO community. I am a longtime lurker of the forums and zealotous fanboy/supporter of FIO.
I want to first comment on how incredible and valuable the FIO community is. I have not been
very active on the forums as a poster, but have read, appreciated, and benefited from plenty of community members' posts.

I am writing this post with a fairly alluring/intrigueing, albeit perhaps slightly arrogant appearing subject title..."The Best Trader on Planet Earth and his Method". However, I want to make a concession - I am NOT, and perhaps I will never be the greatest trader on planet earth.

I have several different strategies that I use, but my bread and butter strategy will be described here. I trade primarily S and P 500 e-mini futures, and my default bias is long (this is subject to change during extended bear markets, or extended short-term sell offs i.e. march 2020). For this example, I will use an account size of 100,000 USD to demonstrate the example of what kind of size I take relative to the total account value. Note that this can be done with a 10,000 account (or even less) using the micro futures contracts and their recent addition of options. The trade backbone starts with opening the quantity of long ES contracts and long ES futures put options
(ATM or near to at the money-slightly OTM) that will cap my downside risk at 10%. So for this example, I would need to see a max loss of 10,000 USD no matter how much the market
drops. Would I ever truly risk 10% of my account on a single trade? No, this would be absolutely foolish risk management and would lead to unsustainable losses over time. This is where
the trade gets complex (and interesting). For the example I am using, I have 90,000 in unused buying power with the single-handed goal of setting up a logical contingency. "If you go up market, you will pay me handsomely; if you go down, I will reduce my cost basis; if you go down enough I will reduce my cost basis to zero." This is the logic of this trade, and to reduce cost basis I do a combination of gamma scalping using correlated futures (NQ/YM) and selling naked calls when I first open the trade. Selling naked calls can lower cost basis by up to 33%. Don't dedicate your entire buying power to doing so, but by all means do so. Now, selling naked calls at the onset of this trade is usually my go to move. However, at times I may wait to see if price increases first, then I can enter even further up at the strike ladder at the same delta. This is a form of gamma scalping, as it sets up the scenario *if price returns to the level at which I first enter the trade*, my short naked calls will have profited some. This also introduces a favorable theta component to the strategy. So, what if price starts to crash, or just go down some? Well, if the delta gives me a favorable early exit on my naked calls, I can buy them back, wait
to see if price returns to the "setpoint" where I first entered the trade, then re-sell the calls. So, I have delta, gamma, an theta all working in my favor. Also, during a selloff, I can choose a pullback point in the correlated /NQ or /YM and enter a short trade at or above VWAP-remember, alls I need is 10,000 dollars to reduce my cost basis to zero, and have a "Free trade". Thats only about 350 NQ points if trading 1 contract+the profits from my short calls. Of course the size of whatever correlated future you short to reduce your cost basis as price moves against your longs, must be appropriately calibrated such that your longs will still profit in an upward moving market (although your breakeven point is now a little higher). Let me especially emphasize this-there is no good reason to not sell naked calls. Some of you are nervous at the idea of selling
naked calls. Hell, it made me nervous at first. Keep in mind you can set stop losses on futures options that will trigger after hours. So, the main risk (which is low to begin with), of an
extreme upside "gap up" move overnight is lowered some due to the nature of the trading hours of futures options. Usually this trade will be put on and set to "expire" in 2 weeks, meaning
that price either goes up, or I have 10 trading days to reduce my cost basis to zero, or even into positive territory. If price really crashes and IV spikes I sell put options expiring 3
-4 weeks from the current date, that would cover about 1/3rd to 1/2 of the cost of this trade extrapolated out to 4 weeks. If price drops enough I can enter long in a futures contract that I have at least half the notional value of (unless we are in a recession environment)- and I usually choose a back month and I may leave the long on for 3 months, leading the long by .15 delta /ES call options at a 2:1 ratio of call options to futures contracts. For example if I am long 1 ES contract, I will sell the closest .15 delta OTM strike 30 DTE, 2 short call options. Sometimes, I accompany this by short puts if IV is sufficiently high (90th+ percentile), essentially setting up a short strangle. Lastly, I use kurtosis/distribution skew characteristics of the "normal" distribution of options pricing ladders to GREATLY reduce my risk when putting on uncovered calls or puts. These end up being "partially covered", by placing additional "tail of the ditribution trades", but this is a minor aspect to my strategy that is simply for risk reduction purposes (at a small cost). So yes, I place a trade or make an adjustment to this strategy nearly every day, however I do not consider myself a "daytrader". Well thats all folks. For those who read the entire thing, thank you for your attention and time. I am open to mentoring/helping anyone who needs the help or would like to chat (for free of course). Like I said, I have introduced the basic components of my most winning trade. Its execution is far more tricky and intellectually rigorous, with a lot of
nuance and adjustment along the way.

I have invested so much time into becoming a master of setting up a trade that is severely tilted in my favor. In fact, in theory if price stands perfectly still for 2 weeks straight, without even a 10 point deviation up or down, I will be exposed to some loss. It simply hasn't happened yet in 4 years. One thing never fails me, the market moves, at least a little. Make no mistake, I'm a fool- I cannot predict which direction price will move, how it will move, or on which day it will move in any particular way- and its a good think I don't have to.

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  #2 (permalink)
 tr8er 
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ouch, this hurts

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  #3 (permalink)
 cdnftrstdr   is a Vendor
 
 
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I need a TLDR version of this

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  #4 (permalink)
 gregrnoe 
Denver, Colorado
 
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cdnftrstdr View Post
I need a TLDR version of this

Sorry for the length. The TLDR i guess would be the last 3 paragraphs or so. Thanks for your feedback.

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 MNSTrading 
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What about the naked calls during a fat tails event?

Coming, they can't be denied. Going, they can't be detained.
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  #6 (permalink)
 gregrnoe 
Denver, Colorado
 
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MNSTrading View Post
What about the naked calls during a fat tails event?

You are correct in your analysis that tail events pose risk with the naked calls. A significant portion of this risk can be eliminated/hedged with complex options orders (think double diagonals/ broken wing butterflies/ standard butterflies).

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 MNSTrading 
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Thanks. You've really thought this shit through. Bravo.

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 Sandpaddict 
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gregrnoe View Post
Hi FIO community. I am a longtime lurker of the forums and zealotous fanboy/supporter of FIO.
I want to first comment on how incredible and valuable the FIO community is. I have not been
very active on the forums as a poster, but have read, appreciated, and benefited from plenty of community members' posts. I may reflect a somewhat negative GENERAL opinion of selling systems and trading indicators/tools, which I know FIO benefits from relationships with (i have no issue with this). However, these opinions are just that, an educated professional
opinion, and I will make no specific reference to any SPECIFIC company's indicator/platform/tool/system.

I am writing this post with a fairly alluring/intrigueing, albeit perhaps slightly arrogant appearing subject title..."The Best Trader on Planet Earth and his Method". However, I want to make a concession - I am NOT, and perhaps I will never be the greatest trader on planet earth, but I sincerely believe I am in the top 10 best traders on the planet at this time (i have reasons for this including a special relationship with my broker secondary to my performance).
Since I trade futures and love this community, I endeavor to share my journey, advice, perspectives, and (most useful of all perhaps) my methods, techniques, and philosophy of trading. So without further delay, I will begin.

I started trading in the year 2013, and yes, I started with forex (as many of us did). Promises of fast leveraged riches, the big house, the exotic car, and the unlimited lobster tail and kobe beef hooked me from the beginning. Of course I will be trading on the beach from my laptop in no time, cocktail in hand, surrounded by a gaggle of women!I was 25 at that time, and I am now 33. It would be an understatement to say that I started my trading journey failing miserably...
and so like all traders, I moved on to bigger and better products b/c success surely lies in futures/options/the next indicator/the next super special trading system for sale for
a low price today only! So my evolution looked something like this-- Forex (failed), simple directional futures "day trading" (failed), selling option premium/verticle spreads and naked (failed), simple equities trading/buying discounted growth stocks (modest success).
However, modest success wasn't going to make me rich, and if someone could generate 7-10% returns consistently per month, then they would do it, right? Not only would that individual eventually be the richest human on earth (thats correct, go play with a compound
interest calculator), but if that individual chose to manage money they may be the most successful money manager in history. I was hardstuck on the idea of 5-10 percent a month. I want to be a 100 millionare by age 50, and that return rate would achieve it. Then I amended my goals to 3.5 percent per month, an easier and more realistic target that would still make me
quite wealthy. My journey has spanned a (relatively short) duration of 8 years, I am approaching the 10,000 hours of time invested mark (which is the standard for mastery of anything), and I have stumbled over and upon many of the common pitfalls of the new and intermediate trader along the way. Some may be critical of the timeframe over which I have experienced success (only 4 years of truely amazing and consistent returns), however my strategy holds up even during the early 2000's, and during the 08-09 great recession (according to sophistocated testing). So, more detail about the evolution of my trading and where it ultimately led me.

As a beginner trader, I was focused on my fingers being a surgical instrument, a scalpel of sorts, that could gloriously scalp the forex and futures markets, clicking buy at the absolute temporary low, and sell at the absolute temporary high. Right? Timing those little highs and lows that are so clearly nonrandomly displayed in the HISTORICAL bars on my chart is the key to success...it has to be, no? Short term unidirectional scalping as a retail trader, and trying to "time" highs
and lows using sophisticated bar types (renko etc.) is quite simply the most unsophistocated way to trade that exists. I would almost call it foolish or gambling, and I was a guilty fool. You have a 99.999% chance of failure doing this type of trading, and the shorter duration time frame
of your forex/futures trades, the greater your probability of failure. I promise. I'm dead serious, I have inside de-identified data from a major/large US broker that I personally paid for and have used for research purposes in conjunction with an academic institution. Zero individuals are
having success at that brokerage using the aforementioned methods. If you have proof of overwhelming success doing so, please illuminate the world with your glory. Im open minded, and will courteously and attentively listen, I promise.

So, next I shifted my focus to indicators and systems. If I'm not good enough to time the market based on its "price action" (one of the most nefarious and arbitrarily ambiguous phrases used in the trading world), then surely the magic indicator/chart tool/trading system will illuminate the way for me. Of course, i just needed to find the fabled holy grail of trading that everyone talks about-- you know, that thing that pulls you out of a figurative pool of your own excrement that you have been wallowing in as your trading account dwindles with each passing swipe of the trading "scalpel" (we are a very unskilled surgeon in this analogy). It took me a while to realize
that there is a lot more easy money in "selling pans and shovels" than in actually mining/panning for gold. Folks, it makes zero sense that anyone would sell you a system/tool/indicator/chart setup that has any edge whatsoever. Please, take my honest word for it. It turns out I sell nothing, b/c successful traders have no great reason to sell trading indicators/tools. With all that being said, i'm not totally against indicators, and if they prove useful for you personally in some clearly verifiable way (measured in profits), then who am I
judge?

A brief aside and a reflection of a common bias in the trading world requires mentioning -- the survivorship bias. Lets say I hire 1 million monkeys to flip a coin 10 times, looking for the monkey that is best at flipping heads. If one of the million monkeys flips heads 10 times in a row, can I reliably conclude that the monkey is good at coin flipping heads accurately? Better than the other monkeys? This same logic can be applied to many trading "systems" or
indicators that people have used and experienced success with. Always ask yourself if the success is directly as a result of the system/indicator. Could random chance be a large contributor to the success of the individual? Keep in mind that systems can be successful for months, even years, and be highlighted as miracle systems simply due to the often overlooked survivorship bias. However, for now, let us drive the last nail in the coffin with my final and most important words on trading indicators.

Many of you are in the phase that I once was, where there is a search for "edge" through indicators, with the latest and greatest tools being the pet favorite indicator/flavor of the month/year-- of course im referring to all the "order flow" and bid ask delta tools. Without
naming any specific entities, I shall be completely transparent in saying that I have thoroughly explored and tested many indicators, including all the most modern order flow tools. Should I remind you again? No one is going to sell you an edge. No one is going take
an extremely useful/predictive tool, that does so reliably and repeatedly, and give it to you for free/or a even a price. Last way I will phrase this-no one is going to give you free money or sell you an alpha generating product. Some of you may say this is hypocritical- as I am sharing my methods, yet claiming that no one will give you a successful method for free. Partially valid point. Executing my strategy is really hard folks (more simple to describe than do), if anyone
can duplicate it, they will deserve the profits and will earn my respect. So what do I use? Okay the only indicators I ever have on my charts are VWAP and Volume Profile, both of which are absolutely USELESS in predicting the direction that price will go. No, really. There is a HFT firm that pays around 25 million dollars each year in salaries to a team of very smart scientists that have tested VWAP and Volume profile in addition to other indicators. Neither are useful at all for directional predictions. However, these tools can be useful in determining the "relative value" of a new opening position. Particularly VWAP. However, an expansion in volatility often can eliminate even this useful advantage that VWAP possesses. So yes, I use VWAP and Volume profile, but I could easily execute my strategy without it! So, why is another FIO poster's excellent question of "Is order flow outdated?" so purposely answered with a resounding "YES!" (although it never was really that useful)? Because beginner and intermediate traders always assume an order is an endorsement/prediction of direction specifically made by that market participant. IT IS NOT.
You have NO IDEA why an individual/institution places a trade, and a good chunk of volume on the /ES is institutional hedging or gamma scalping by algorithms. So yes, that gigantic 100 lot
trade right on the BID was a sell order indeed, but it could very well be a trade that the opening participant HOPES TO LOSE, so their primary trade in the opposite direction realizes profit. This should illuminate how random and arbitrary, and wholely unusable time and sales data/order flow tools really can be. On top of this, you are capturing a ton of order flow from algorithms, some of which are designed to counteract other algorithms on a short term basis. Should
I say it again- the shorter duration your trading is, the higher the probility of failure (stop trying to compete with HFT firms, you won't win). This is partially due to algos arbing out any kind of inefficiency that may have existed in these futures markets. I will close this paragraph with a diatribe about volume profile. I developed quite the fascination with this indicator for several reasons. I specifically came to realize that the most useful component of volume profile is the LVN's or low volume nodes-- the areas that show the least transaction volume at a given price level. I use to try to "fade" these levels back to the "point of control" (most traded level by volume), realizing that this is a strategy with zero edge in the long term. The truth about LVN's is that price will do one of two things at the LVN--quickly move through that level and rip through the resting orders, or stall at the LVN and quickly auction away from the level. How is this useful, you might ask. I am basically saying that price will either go up or go down at an LVN (what a rediculous statement, of course it will, it has to do one or the other). Yes, but it tends to
do so quickly and decisively. LVN's are excellent areas to enter a gamma scalping trade. I will expound on this concept more to come, I simply needed to
introduce the idea now.

By this point, I've taken the ride upon the rediculous merrygoround of excitement, indicator/systems implementation, and failure that all traders experience. I've been a "futures day trader", been a forex trader, moved on to equities and options, and gone through the indicators/systems phase (one of the most damaging aspects of the trading world). Truth is, the
indicators and systems can hold you back significantly, preventing you from the real hard work and the type of thinking you need to engage in to ever realize positive alpha gains over the SnP500 average annual rate of return. What changed it all for me? Thousands of hours in a special tab within my brokerage platform called the "analyze tab", where I could visualize how certain multipart futures and options trades looked like together. Yes, I started to expand my thinking. I discarded unidirectional trading. But the more non-directional/delta neutral one gets, the more profits dwindle, correct? Technically yes, but when doing this with leveraged instruments like futures/futures options, the profits can still hit incredible numbers. Wealth building numbers, in fact. And you don't have to be right about direction. So what exactly do I do for a living?

I have several different strategies that I use, but my bread and butter strategy will be described here. I trade primarily S and P 500 e-mini futures, and my default bias is long (this is subject to change during extended bear markets, or extended short-term sell offs i.e. march 2020). For this example, I will use an account size of 100,000 USD to demonstrate the example of what kind of size I take relative to the total account value. Note that this can be done with a 10,000 account (or even less) using the micro futures contracts and their recent addition of options. The trade backbone starts with opening the quantity of long ES contracts and long ES futures put options
(ATM or near to at the money-slightly OTM) that will cap my downside risk at 10%. So for this example, I would need to see a max loss of 10,000 USD no matter how much the market
drops. Would I ever truly risk 10% of my account on a single trade? No, this would be absolutely foolish risk management and would lead to unsustainable losses over time. This is where
the trade gets complex (and interesting). For the example I am using, I have 90,000 in unused buying power with the single-handed goal of setting up a logical contingency. "If you go up market, you will pay me handsomely; if you go down, I will reduce my cost basis; if you go down enough I will reduce my cost basis to zero." This is the logic of this trade, and to reduce cost basis I do a combination of gamma scalping using correlated futures (NQ/YM) and selling naked calls when I first open the trade. Selling naked calls can lower cost basis by up to 33%. Don't dedicate your entire buying power to doing so, but by all means do so. Now, selling naked calls at the onset of this trade is usually my go to move. However, at times I may wait to see if price increases first, then I can enter even further up at the strike ladder at the same delta. This is a form of gamma scalping, as it sets up the scenario *if price returns to the level at which I first enter the trade*, my short naked calls will have profited some. This also introduces a favorable theta component to the strategy. So, what if price starts to crash, or just go down some? Well, if the delta gives me a favorable early exit on my naked calls, I can buy them back, wait
to see if price returns to the "setpoint" where I first entered the trade, then re-sell the calls. So, I have delta, gamma, an theta all working in my favor. Also, during a selloff, I can choose a pullback point in the correlated /NQ or /YM and enter a short trade at or above VWAP-remember, alls I need is 10,000 dollars to reduce my cost basis to zero, and have a "Free trade". Thats only about 350 NQ points if trading 1 contract+the profits from my short calls. Of course the size of whatever correlated future you short to reduce your cost basis as price moves against your longs, must be appropriately calibrated such that your longs will still profit in an upward moving market (although your breakeven point is now a little higher). Let me especially emphasize this-there is no good reason to not sell naked calls. Some of you are nervous at the idea of selling
naked calls. Hell, it made me nervous at first. Keep in mind you can set stop losses on futures options that will trigger after hours. So, the main risk (which is low to begin with), of an
extreme upside "gap up" move overnight is lowered some due to the nature of the trading hours of futures options. Usually this trade will be put on and set to "expire" in 2 weeks, meaning
that price either goes up, or I have 10 trading days to reduce my cost basis to zero, or even into positive territory. If price really crashes and IV spikes I sell put options expiring 3
-4 weeks from the current date, that would cover about 1/3rd to 1/2 of the cost of this trade extrapolated out to 4 weeks. If price drops enough I can enter long in a futures contract that I have at least half the notional value of (unless we are in a recession environment)- and I usually choose a back month and I may leave the long on for 3 months, leading the long by .15 delta /ES call options at a 2:1 ratio of call options to futures contracts. For example if I am long 1 ES contract, I will sell the closest .15 delta OTM strike 30 DTE, 2 short call options. Sometimes, I accompany this by short puts if IV is sufficiently high (90th+ percentile), essentially setting up a short strangle. Lastly, I use kurtosis/distribution skew characteristics of the "normal" distribution of options pricing ladders to GREATLY reduce my risk when putting on uncovered calls or puts. These end up being "partially covered", by placing additional "tail of the ditribution trades", but this is a minor aspect to my strategy that is simply for risk reduction purposes (at a small cost). So yes, I place a trade or make an adjustment to this strategy nearly every day, however I do not consider myself a "daytrader". Well thats all folks. For those who read the entire thing, thank you for your attention and time. I am open to mentoring/helping anyone who needs the help or would like to chat (for free of course). Like I said, I have introduced the basic components of my most winning trade. Its execution is far more tricky and intellectually rigorous, with a lot of
nuance and adjustment along the way.

I have invested so much time into becoming a master of setting up a trade that is severely tilted in my favor. In fact, in theory if price stands perfectly still for 2 weeks straight, without even a 10 point deviation up or down, I will be exposed to some loss. It simply hasn't happened yet in 4 years. One thing never fails me, the market moves, at least a little. Make no mistake, I'm a fool- I cannot predict which direction price will move, how it will move, or on which day it will move in any particular way- and its a good think I don't have to.

Wow... wow... wow...

I feel like I've spent all day arguing the same points!

You CAN'T predict price. You can strategize yourself and your trading around it but you cannot predict anything about the future of the market in enough detail to ever call it a prediction.

My strategy as I have laid it out is ultimately be at the largest position size relative to my MAX risk at the point of maximum excursion.

Thats the idea. The theory part. Reality is of course much different.

I want to be able to average my position as it goes against me simply because I want to be at the highest position possible at the maximum excursion having the most contracts when it does go in my direction.

If I ever perfectly achieve that it will only be luck but never the less that is the goal.

I am going to sit down and do some testing on the additions. Say my limit is 5 contracts. So I have 5 discret contracts to add or subtract.

Now my first contract sets the stage for the rest of the trade. If it goes in my favor I wait for a retacment and add. If it goes against me I add as well.

But... do I add at two times the difference of the last add? Do I add at support levels? Do I add at fixed intervals... at ATR extremes?

If it continues against me is it better to stop out at fixed dollar amount? Scale out according to other risk parameters ect?

These are questions only I can answer.

I get this is extremely amateurish compared to what you are doing but the objective seems to be the same.

And as I also mentioned nobody seems to talk about TIME and EXPOSURE.

Well that's where you, @gregrnoe come in.

I have never actually traded options but have read alot about them and understand them generally vaguely I would say. I dont really know what I dont really know about options. Which is alot.

I do understand what you are saying and believe that we are trading the unknowable and that's the beauty of options.

They can offer an asymmetric risk/reward hedge. It's just beautiful. Your protected against downside risk but still get the upside POTENTIAL.

Minutes before reading this I almost went down the "Cumulative Delta Train" on YouTube. (Thank you for saving me hours and hours)

I know this is me looking for the next indicator. I don't even use indicators anymore. I ways end up abandoning them as a distraction. Just three uncorrelated charts of the market I'm trading.

But YOU my friend have ignited something in me.

OPTIONS. This is not me looking to jump ship or start trading options in the least bit but the addition of additional knowledge is at the root of it. And of course to hopefully gain enough confidence and knowledge to add it to the arsenal.

Could you suggest to someone at a fairly advanced level of the trading landscape but never even traded a single option should go.

In the mean time I think I have a for dummies book on it. (NOT even kidding. Some of those books are fantastic!)

I'm trading the MNQ currently.

I've copied your post to a word processor so I can have as a PDF. Hope you don't mind. (I wont share). The reason is I now have a foundation to focus attention on. Trying to understand what you are doing and learning in the process. Not to copy but to learn.

Thank so much @gregrnoe!

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 Sandpaddict 
Langley
 
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cdnftrstdr View Post
I need a TLDR version of this

My understanding, very simply put, is he uses options to create an asymmetric risk reward situation where he hedges and uses the profits from the options to offset the losses of the main position.

Then as the main position comes back in his favor he is, for simplicity sake, out of options with a profit and now has his main position coming back into profits AND his cost average is down. Win/win.

Of course this is ridiculously over simplified but maybe someone can correct me if I'm wrong?

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 Sandpaddict 
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MNSTrading View Post
What about the naked calls during a fat tails event?

Curious myself.

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