Temporary Traders & The Wheel
When I was young, I was told that if I couldn’t say anything nice about someone then don’t say anything at all. Good advice in social situations – but with investment advice? Not so much.
A lot of readers are committed to the Wheel options strategy that we looked at last week, so I decided to investigate it a bit more. I knew the theory, of course, and had tried several times to put it into practice, but as I wrote last week, it just didn’t seem to be a viable strategy to make money. I thought maybe I am missing something so decided to investigate further. I went down the wheel strategy rabbit hole. One name kept coming up: Jake Broe. He had a lot of videos (50) and followers (423k) on YouTube.
88k views? 423k subscribers? That made my blog look positively puny! Clearly, he knew something I didn’t. So, I watched some of his videos where he explained the Wheel strategy.
Then, as there were 50 videos and I didn’t have that much time, I thought I would watch the most recent one. It was made on 22nd June 2022. It started with him giving his view that the market was going to keep going down, he had the charts to prove it, and so he had liquidated all his positions so that he could short the Nasdaq.
He showed a screen shot of his account showing that he had made $1k overnight, which he had, but naturally my attention went to his YTD performance. Here it is:
Yes, he made $1k overnight – but check out the YTD. In 5 months, he lost 57% of his capital! That got my attention. Are people really following someone who loses that much money? I started to listen attentively.
He had cashed up so that he could use all his money to short (buy puts on) QQQ, ATM, short dated (3 months, September expiry). Being ‘safe’, he was going to buy one third this week, another third the next week and the rest the week after, and then sell them all 30 days before expiry in mid August.
Here are some of the quotes from the video:
I’m using all available cash to short the Nasdaq . . . How can I lose money on this trade? I’ll only lose money if this is the bottom and there is a V-shaped recovery – but there are a lot of miracles that need to happen in the next 2-3 months for me to lose money on this trade! . . . I am 100% willing to lose all my money if I am wrong on my investment thesis.”
Brave words. Here’s the chart with his entries and exit:
Well, it was the last video he ever made. Obviously, he was completely wiped out. Fair enough, he was ‘100% willing to lose’. But this is a guy with tens of thousands of people following his advice – what about them? Did he care that they were wiped out too?
I have hesitated about writing this blog post. Schadenfreude is an unattractive trait – but if I keep people from being sucked into losing their money by following bad advice then I am willing to wear it.
To the markets . . .
Well, good news for a change! All 3 major indices are finally making new all-time highs. All have now exceeded the highs of Dec 21 / Jan 22. Excellent news! “Let joy be unconfin’d!”
SPY closed at a new high of $487.41, and has been trading over the resistance line for 6 days now. After the initial long green candle, the rest have been relatively small candles but heading upwards which I think is a good sign. Doesn’t look like ‘irrational exuberance’ to me, more a slow, steady ascent. However, a retracement to test support at 480 would be entirely normal behavior. We’ll just have to keep watching to see what it is going to do.
Since we entered the trade in November, SPY is now up 12.4%. If you are using a strike of 50% your position is up 25%, and if you are slightly riskier at 60% then you will be up 30%. In just over 2 months? I can live with that. About time we had a good trade! And keeping things in perspective:
Similar to SPY, other than it is not making new all-time highs. We got into the trade in late March and have not had an OUT signal so we are still in the same trade (although we may have rolled our options it is still essentially the same trade). SPYG is now up 24.6% so your positions will be up 50% if you used a 50% strike and up 60% if you used a 60% strike. Nice. But remember that we have been in this trade 9 months, whereas the SPY trade has only been going just over 2 months.
In perspective we see that it has a way to go but is heading in the right direction.
I don’t usually comment on individual stocks, but in view of the effect this one had on the Nasdaq on Friday, and in the idea of selling naked puts in the wheel strategy. This is a chart of Intel Corp (INTC) a blue chip stock, that reported last week. It exceeded analyst expectations:
In the fourth quarter, Intel reported adjusted earnings per share of $0.54 on revenue of $15.4 billion. This performance exceeded the average analyst estimates, which predicted earnings of $0.45 per share on sales of $15.15 billion.
Sounds pretty good – wouldn’t you have expected it to go up? Instead, it dropped:
The drop was large: 12%. In one day! Why did it drop even though it had good results? Because its estimate of earnings for the first quarter was below analyst expectations.
Intel & the Wheel Strategy
Intel is a blue chip stock, a supposedly ‘safe’ stock that you could use in the Wheel strategy. If you had sold puts 1 week to expiry at 4% under the current price you would have made approx. $18 premium per contract. You would have been exercised of course; anyone holding INTC stock would much rather sell them to you for $48 than sell them on market for $43.62. You would have had to buy 100 INTC shares for $4,800 but they would only be worth $4,362. You would have made a loss of $438, minus, of course, the $18 premium you get to keep.
Was it worth the risk? I find it strange (or not) that proponents of the Wheel never show examples like this!
But onto QQQ. Clearly Intel dragged the Nasdaq down, as did KLA (-6.6%, also in the semi-conductor industry). But lets keep it in perspective; INTC has a weighting of 1.41% in QQQ. However, the sentiment weighed on the market.
As yet QQQ hasn’t made a new resistance level, and is in ‘blue sky territory’.
The VIX continues at its post-covid lows.
The week ahead . . .
It’s my birthday tomorrow; what I would like as a birthday present from the universe is a lovely bullish week! Wouldn’t that be nice?
The futures are looking pretty neutral right now, 12 hours to market open.
Fingers crossed for a lovely week with new all-time highs!
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Top Photo by Guy Kawasaki