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Feb 11, 2016

Are You a Driver or a Passenger? | Truth or Skepticism

By:Josh Fabian

The debate continues, at least for Dylan. As far as we here at tastytrade are concerned, the winner is clear. When it comes to active versus passive management, no one can provide better returns than the individual active investor.

This debate ended faster than Marco Rubio could say, “Obama knows…” three times. Tom [Sosnoff] landed the knockout blow early on with the following analogy. If you had to drive somewhere and you knew the roads were really bad, who would you want driving; you or someone else? Most people would prefer to maintain control of their own fate.

Most passive indexing funds are down nearly 15% since the beginning of the year. For the passive investor, that means the market needs to rebound 15% just to get back to break-even. Individual active investors who stay small, stick to non-correlated, liquid underlyings and trade often stand a far better chance of surviving and making money in this market.

Here at tastytrade, we know with certainty volatility is mean reverting. But that gives us a leg up because we understand selling premium eventually pays. It make take time, patience, and Advil, but for premium sellers, when volatility contracts premium comes. Markets do not need to rally 15% for us to get back to even. We aren’t dependent on something as uncertain as price.

Dylan posed a fair question asking, what if you were selling premium by getting long oil, bonds or S&P futures? Tom’s answer was honest and simple. Getting long or short anything usually comes from an opinion. Taking sides can cost money. Selling premium on both sides, calls and puts, is far less likely to get hurt and far more likely to be profitable. Opinions, like hope, are not a strategy.

At tastytrade, we are big proponents of delta neutral trading. If we sell calls and take on short delta, we also need to sell puts or take on some long delta. Expected moves in the market for a given period of time can be calculated (it’s why we keep Tom “TP” Preston around). That move may be up, down or sideways. We don’t care.

We’re looking to sell premium around the outside of an expected move. Picking winners and losers isn’t where money is made. The results come from selling premium outside probabilistic outcomes. Generally speaking, our wheelhouse is found in those 30 delta puts and calls with approximately 45 days to expiration.

As for direction in the market, blame the Fed, blame Punksatony Phil, blame Dylan, blame whomever. Markets go up and down. It’s what they’re supposed to do. Why they go up and down isn’t because a groundhog did or didn’t see his shadow. It’s not because incompetent people are running the Fed. It’s because sometimes there are more sellers than buyers, and other times there are more buyers than sellers. It’s that simple. We’re here to make money, not place blame.

Sticking to mechanics in this type of market and waiting on premium to come in is the best play on the board. We’re product agnostic. We don’t care what the underlying is just so long as it’s liquid and implied volatility is high.  

Josh Fabian has been trading futures and derivatives for more than 25 years.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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