In this educational session of From Theory to Practice, Jim Schultz breaks down undefined risk strategies like short puts, short strangles, ratio spreads, and jade lizards. While these approaches offer superior probabilities and easier adjustments compared to defined risk strategies, they come with the significant tradeoff of unlimited risk exposure and greater complexity.
In today's From Theory to Practice, Jim Schultz explored defined risk strategies for beginner traders, highlighting vertical spreads and iron condors as popular starting points. He emphasized that defined risk's primary advantage is knowing maximum loss at entry, though these strategies offer lower Greek exposure and less flexibility than undefined risk alternatives.
In today's From Theory to Practice, Dr. Jim looks to adjust his PANW Strangle into a Straddle to help improve the break-even point on the upside. With earnings coming up before November expiration, the objective for this position is still to manage it prior to that earnings release.
In today's From Theory to Practice, Dr. Jim continues his deep dive into delta, with a look at using Delta as a measure of directional bias. Arguably, using Delta in this way, either at the individual position level or the overall portfolio level, is the most common way that active traders use Delta. This is likely because Delta can help quickly gauge the approximate directional bias of an individual position or total portfolio at a glance.
In this educational session of From Theory to Practice, Jim Schultz continues his deep dive into Delta by explaining how traders can use it as a probability gauge - the second most common application beyond the textbook definition of measuring option price movement. Delta serves as an excellent probability approximator in two key ways: 1. **Probability of expiring in-the-money**: This explains why traders typically select 30-35 delta strikes for short options strategies. The inverse (1 minus delta) indicates the probability of expiring out-of-the-money - crucial for premium sellers. 2. **Probability of touch**: Calculated as two times the delta, this measures the likelihood that a price level will be reached at some point before expiration, helping traders assess potential market movements.
In today's From Theory to Practice, Dr. Jim launches a three-part series exploring Delta, beginning with its textbook definition as a measurement of option price movements. While this is how Delta is taught academically, it's actually the least common application for active traders. Delta represents how much an option's price will move for every $1 movement in the underlying stock. Though often presented as a decimal (0.30), traders typically reference it as a whole number (30 Delta), meaning a $1 stock move leads to a $0.30 option price change. Long puts and short calls have negative Delta (bearish positions), while long calls and short puts have positive Delta (bullish positions). Understanding these relationships is fundamental for tracking option P&L and making position adjustments.
In today's From Theory to Practice, Jim Schultz analyzes market conditions as gold reaches new highs, suggesting a potential reversal. He executes a downside butterfly spread on gold futures (GC) with strikes at 3855/3820/3785 for a $5 debit, positioning for a possible pullback. Despite gold's strong uptrend, Dr. Jim points to morning price action showing a $50 dip as a potential "chink in the armor." He also restructures an existing GDX position by rolling a put from the 62 to 70 strike, creating a straddle and collecting $1.39 additional credit. For earnings, he places a bearish ATM Vertical Spread on Nike (NKE) ahead of after-hours results tonight, buying the 71 put and selling the 67 put for $2.13.
In this episode of From Theory to Practice, Jim Schultz leads off with an announcement that FTTP is moving to five days a week - a gimme to some, but a gotcha to others, for sure. Then he highlights the potential ramifications of an impending government shutdown and the mixed market signals, such as rising volatility despite a bullish S&P 500. In his portfolio, several trades are reviewed, including Chipotle (CMG) and Costco (COST), alongside a new position in SoFi (SOFI). Dr. Jim then hops on the soapbox to wax poetic about position sizing and flexibility.
In today’s From Theory to Practice, the discussion centered on the negative aspects of Theta in options trading. When buying options, traders incur negative Theta, as time decay impacts their positions adversely. It emphasizes the importance of direction and volatility in generating profits, as time works against option buyers. Additionally, Theta increases as expiration approaches, heightening the costs associated with holding options. The session reinforced the preference for selling over buying options due to these time-related disadvantages.
In today's From Theory to Practice, Jim Schultz discussed the positive side of theta in options trading, emphasizing how option sellers benefit from time decay. When selling options, positive theta creates natural downward pressure on extrinsic value as expiration approaches, improving probability of profit for out-of-the-money positions.
In today's From Theory to Practice, Dr. Jim notes that Fed Funds futures currently price a 96% probability of a 25-basis-point cut and 4% chance of a 50-basis-point reduction. Of course, the market's reaction remains uncertain regardless of outcome, as the anticipated 25-point cut has largely been priced in. To play the FOMC meeting, Dr. Jim initiated a bearish SPY put spread (buying 663/selling 657) for $3.03, anticipating downside potential following the Fed decision, despite acknowledging his uncanny ability to light stacks of cash on fire for binary events.
On today’s From Theory to Practice, the market prepares for the upcoming FOMC meeting this Wednesday, where The Fed is expected to cut interest rates by 25bps. In preparation for lower rates, stocks, bonds, and metals are all rallying. In his portfolio, Dr. Jim adjusts his PANW Short Strangle, and he adds a new trade in PEP, which has a surprisingly high IVR - with earnings nearly a month away.
The market measure segment addressed strategy for breached option strikes, showing that rolling untested sides outperforms both closing positions immediately (36% win rate) or holding to expiration (73% win rate). Rolling can increase win rates to 78% while reducing delta exposure and adding credit, though at the cost of maximum profit potential.
Dr. Jim presents Hilbert's Hotel, a mathematical paradox demonstrating the abstract concept of infinity through a thought experiment about accommodating guests in a hotel with infinite rooms. The paradox illustrates solutions for accommodating new guests by moving existing guests according to mathematical formulas - from simple room reassignment to using prime number powers for multiple infinite busloads of guests. The segment connects this concept to options trading, specifically undefined risk strategies that theoretically carry "infinite risk." While theoretical infinite losses exist with short calls or strangles, traders typically quantify risk through practical measures like buying power effect or CVAR rather than worrying about truly infinite losses.
Hosts Tom and Tony welcomed researcher Kai to discuss a week where markets ignored mixed economic news and continued rallying toward new highs, highlighted by Oracle's historic 36% earnings surge that ranks as the 4th largest single-day gain in stock market history. The move added $244 billion in market cap, surpassing Google's entire previous week gains and pushing Oracle near $1 trillion valuation. Friday's SPX intraday range compressed to just 0.3% (roughly 20-27 points), occurring less than 1% of the time historically and making zero-day trades extremely difficult to execute. Tom emphasized that volatility represents the "cheapest thing in the world" with everything else expensive, though he avoids direct volatility products preferring to get short the S&P instead. The upcoming week features Fed rate decision Wednesday and triple witching Friday, with expected moves continuing to shrink (only 60 SPX points expected) as the market enters an extremely low volatility regime reminiscent of 2017.