What you missed this week:
SMCI reversed -$190 in one day (more on that below)
Crude finished above $77s which I wrote about in the Sunday report. It’s a boring trade but that’s most of what good investing is.
Long/Short Equity webinar is next weekend here
Disclaimer; if you are an NPC or a retail r3tard skip this weekly update!
SMCI Move - I posted on Twitter the day before this idea.
That stock was on my radar just like NVDA 0.00%↑ has been.
I care about parabolic situations for two reasons:
Idiots flood in with relentless call buying - 90% of it is OTM. You can see it on the order flow stats. There's always a rug pull to balance out that relentless call buying, even a morning blip.
When it lets off it creates opportunity - people rush for the exits after their monkey brains realize it’s not in fact different this time. You can make money off those fast reversals - like SMCI 0.00%↑ and others.
6/7 years ago, I would short a lot of equity and use dated OTM puts to bet on larger short ideas - fundamental ones (like Carvana) and technically driven ones, like this SMCI.
But the rise of retail R3ta$ds the last 3-4 years has changed the dynamics of the options market and overall market structure.
Moves drop then they get bid up, even on the worst fundamentally driven stocks. For those around when I was shorting Carvana loudly in 2022 citing fraud and balance sheet issues (being out of money) people would still email into me saying all sorts of crazy shit.
Unconscious incompetence. And that’s the worst kind because it’s dangerous.
But in this business, you have to be able to adjust. If that means re-structuring how you express trade ideas, then so be it.
Last year, in one of my PA (short-term strat book) I had to adjust DOWN the trade window from 20-30 days to 1-20 days because of how market structure changed.
It was still good for +80% but there were some noticeable differences in the moves in certain momentum strats that I run.
The problem is that all of this messes with market structure - retail NPC options trading I mean.
If you’re reading this it might not matter to you, but I do this full time - for real. Not as a hobby dicking around to make $10K a month but full time to run my capital and clients - so it matters to me.
Market structure is a few things to those new:
a) It can be how the options work/trade - that is structure that affects the underlying stock. You can have a stock/company that is effectively bankrupt on paper still rally because of OTM call buying - Yes, it is crazy, but that is what happens.
b) It can be such things at ETFS - the passive inflow of ETFs the last decade changes the market structure. The more people/advisors just buy the SPY 0.00%↑ XLF 0.00%↑ QQQ 0.00%↑ etc. etc. the more it just drives the prices of the companies those ETFs hold - that’ affects market structure.
And that makes shorting parabolic moves, the old way, harder.
Again, I’m not a day trader - I don’t size up for 5% gains and call those wins - nothing wrong with that just not my gig.
The old way was spotting a short (fundamental like Carvana) or technical and shorting the equity and buying a lot of puts with different expirations. You size up, you put the trade on and you let it work - easier to do if you were running a lot of money harder to do if you’re reading this and just managing your own cash.
However, it’s been hard to do that anymore because of retail r3tards who rush in with call buying on anything that sells off dramatically.
This was sent to me (I guess from one of your gurus who tracks call flow to generate ideas) that was a trade on SMCI today.
That is a $175,000 bet on options that expire in a week when the IV on those calls were north of +300%. If you’re not sure why that matters, or should matter, and trading equity options you’re operating from a point of unconscious incompetence.
The CBOE 0.00%↑ equity has never been higher the past few years mainly due to that influx of short-term options trading. That same options trading that affects market structure.
And it’s not just retail options traders jumping in its managers chasing the benchmark as well - riding it until it stops.
The entire experience watching it unfold the last 6 weeks has been surreal. I didn’t participate in any of it mainly because it didn’t fit my process/approach to get long and stay long and I am okay with that. I did short some of NVDA 0.00%↑ and SMCI 0.00%↑ with intraday moves the past month and got out - for me, that’s enough.
There have been other positions that have driven returns, less crowded ones, ones where you can throw money at and be okay holding without fear of watching every 5-minute candle wondering if you should sell. That’s the portfolio I prefer to run with a mix of day trades here and there.
And you can get lucky a few times in the markets but doing this without knowing why or how is like playing Russian Roulette; sooner or later you’re going to blow your brains out.
I’d rather not blow my brains out. I’ve seen this stuff hundreds of times in my +15 years of doing this so very little of it is new aside from how the structure of the trades have changed and market structure giving the influx of Robinhood and Discord traders globally.
So, top, or no top, that doesn’t matter to me anymore. What matters is using situations like this in a way that provide utility to capture P&L and that’s it.
The rest of these managers and your local guru can host their live trading (adult babysitting) sessions and talk hypotheticals —I’ve got money to make.
I’m off to Rincon to surf and sip on some Heineken this weekend. See you Monday for issue 8 of the report.
Dan
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