| The Options Zoo |

Lizards, condors, butterflies. Options trading sounds exciting, doesn’t it?

But underneath the exotic names, these strategies are usually nothing more than combinations of calls and puts.

(BTW: the video is really good this week. Have a look.)

Video

The Wheel

This sounds so logical and comforting. And so easy:

sell puts on stocks you want to ownsell covered calls for income.

Podcast

That is, until you realise:

in bull markets you cap upsidein bear markets you still own collapsing sharesthe premiums are tiny relative to capitallong-term compounding suffers badly In Real Time

We saw this in action last week – the bit I didn’t mention was that I did the other side of the wheel. I sold my shares so that I could do cash-secured puts. Which I did. I sold 3 contracts each of SPY and QQQ.

And collected the magnificent sum of $1,191 against $435,411 in cash securing the positions – a return of just 0.27%.

And look what I gave up!

At the time SPY was trading at $739.83, QQQ at $711.54. They are now $756.48 and $738.31, a total of $448,437. I gave up $13,026 to collect $1,191.

Seriously??

For a strategy marketed as “income”, that’s a remarkably expensive way to generate it.

(OK I could have redone the puts last week, but I have been moving house, so trading is taking a back seat. But even if I had done it twice more it would still be $3K Vs $13k. Whichever way you look at it, a losing strategy.

And yes, I am kicking myself. I like to prove a point – but at the same time I hate losing money! $10k? That’s 20 nights in a very decent hotel in France I’ve just given up.)

Old Dogs . . New Names

But the animals sound so cool! Who wouldn’t want to trade a ‘broken wing butterfly’? Sounds so elegant and intelligent. ‘Short naked convexity with asymmetric tail exposure’ doesn’t have quite the same ring to it

Somewhere along the way, options traders decided that “short put with a call spread” wasn’t exciting enough. So they started naming strategies after animals. Butterflies. Condors. Lizards.

One day someone apparently looked at a green Mexican lizard and thought, “That’s it. That’s my options strategy.”

Many newer traders genuinely think these strategies are new discoveries or institutional secrets when in reality they are just variations on selling optionality.

But . . . why??

Why are so many modern option strategies variations of collecting tiny premiums while quietly selling away upside or taking hidden tail risk?

The strategies are often marketed as “safe income”. Frequent small wins are psychologically seductive and complexity creates an illusion of sophistication.

Many newer traders don’t understand the real risk/reward profile – and the branding is top notch!

How did we get here?

1970s

1980s

Originally, in the 1970s and 1980s, options were used mainly by professionals and institutions for hedging and inventory management. Straddles, strangles & spreads were their tools.

1990s

In the1990s, retail education started to grow – and that was the time I started to get interested in the stock market, learning all about covered calls and spreads, and the odd condor and butterfly if you were being really sophisticated (!).

2000s

The possibility of massive windfalls drew many traders into the market. Unfortunately, massive windfalls turned out to be much rarer than the YouTube thumbnails suggested.

So, attention shifted toward income generation.

2010s

The 2010s, saw the emergence of trading as entertainment. TastyTrade, Robinhood – and above all YouTube – saw options become mainstream. The possibility of the massive windfalls drove many traders into the market – but they quickly realised that they didn’t happen very often (if ever). So, another strategy had to be devised: income generation.

2020s

Now we are in the social-media / gamified era. Strategies such as covered calls, Jade Lizards, Wheels, 0DTE, premium harvesting, daily income culture made the appeal of the market irresistible to many, often young, traders.

The emphasis shifted toward:

incometheta“high probability”frequent winnersactive management

Not that old-fashioned notion of long-term capital growth!

ITM Strips
Away
Complexity

(and effort!)

The ITM strategy focusses on:

trendleveragelong-term compoundingstaying with the move

The long-term results speak for themselves. We capture major market trends, use controlled leverage to magnify the results, and step aside during reversals. whereas many modern retail option systems evolved toward:

harvesting noiseconstant managementcapped upsideshort-term reinforcement Where are we now?

Somewhere along the way, options trading shifted from participating in major market moves to trying to harvest tiny pieces of them.

Has it made more successful traders?

Looking around social media, I’m not convinced. Somewhere along the way, options trading stopped being about participating in major market trends and became obsessed with collecting tiny premiums from them.

The animals became more exotic.  The returns didn’t.

To the Markets . .

Rather a nice week – slow and steady gains. I can live with that.

SPY Charts

Nothing remarkable. Slow and steady gain heading back to the trend line.

Longer term it is still heading out of the trading channel.

SPYG Charts

SPYG making new highs, twice last week. Nice.

And longer term, bumping up against the top bound of the trading channel.

QQQ Charts

This is the kind of chart bulls dream about! 3? 4? new highs this week.

And longer term . . .well you can see for yourself!

VIX Chart (Volatility)

Still low volatility.

ITMeter The week ahead . . .

Monday 1 June
• US ISM Manufacturing PMI (May)
• Construction Spending
• Markets will be watching for signs that manufacturing activity is stabilising after a soft start to the year.

Tuesday 2 June
• JOLTS Job Openings (April)
• Factory Orders
• CrowdStrike earnings
• Job openings remain one of the Fed’s preferred measures of labour market strength. CrowdStrike will provide another read on cybersecurity spending, one of the strongest areas of corporate technology investment.

Wednesday 3 June
• ADP Private Payrolls (May)
• US ISM Services PMI (May)
• Dollar Tree earnings
• Services remain the largest part of the US economy, making this one of the week’s more important reports. Dollar Tree offers insight into lower-income consumer spending trends.

Thursday 4 June
• Initial Jobless Claims
• US Trade Balance
• Broadcom earnings
• Lululemon Athletica earnings
• Labour market data remains under close scrutiny as investors look for signs of either resilience or weakness. Broadcom will be watched closely for evidence that AI-related spending remains strong beyond Nvidia.

Friday 5 June
• Non-Farm Payrolls (May)
• Unemployment Rate
• Average Hourly Earnings
• The most important economic report of the month. Markets will be looking for clues on employment growth, wage pressures and the likely path of interest rates.

AI Watch

After Nvidia’s strong results last week, attention shifts to Broadcom. Investors will be looking for signs that demand for AI networking equipment and custom AI chips remains strong. The broader question facing the market remains unchanged: will the enormous AI infrastructure spending now underway ultimately generate sufficient returns to justify the capital being deployed?

The futures

Looking rather jolly, but still 11 hours to market open.

What a week . .

I know that you don’t read this blog to find out what’s going on in my life, but indulge me this one. Last week I moved house, and as you know it is ranked among life’s top stressors, and exacerbated by not having a date for the new place to be ready.

Finally moved in, with lots of lovely big plants for my new ‘sky terrace’ – only to hit the worst storm for years, 2 days of damaging winds that have shredded all of my beautiful trees. Then, of course, the electricity went out. No PC, no internet. And how do you get out of a garage with an electric door?

This is by way of apologizing for my lack of answers to questions last week. I am sorry. I will do them in the next couple of days.

Today – the wind has died down, the sun is struggling through the clouds, the ocean looks remarkably calm . . . so life will soon be back to normal.

Sunset last night. Not exactly tropical.

Let’s hope it’s another great week!

Heather

Trade the tide – not the waves!

Q & A

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