Tony B: We're back you knucklehead. Best Practices.
Tom: Jules is back from L.A.
Tony B: Jules is back from L.A.
Tom: Anything from L.A. can take you down.
Tony B: Oh, he came back. He was acting so kind.
Tom: Oh, I know.
Tony B: And gentle.
Tom: Like, a week in L.A. will mess you up. Yeah, I wasn't in L.A. but I was in a place where people go to find themselves spiritually, and all this stuff, you know?
Tony B: Did you find your … You can't find your bicep? Are you having a hard time there? Did you find yourself spiritually?
Tom: No.
Tony B: Did you find your feet? Were you able to see?
Tom: I would have found myself spiritually if the NASDAQ was down 150 points last week, but unfortunately …
Tony B: I could of found myself spiritually in [inaudible 00:00:53] if the NASDAQ was down there, it would have been just fine.
Tom: I do need to be on some mountain, but whatever.
Tony B: Nobody pushed you. God gives them show a lot of restraint.
Tom: You ever done that drive before?
Tony B: No. No, down the coast or something?
Tom: Down the coast. It's kind of cool.
Tony B: Is it?
Tom: Yeah, I mean …
Tony B: Okay, what has happened to you? "Kind of cool"? What is it three hours? Two hours? How many hours?
Tom: It's four.
Tony B: Four … Okay, it's cool for what? Ten minutes? Twenty minutes? Three hours? Nothing is cool for three hours.
Tom: That's true. You get a solid hour, it's cool for a solid hour. Then that's it.
Tony B: Okay, Dave, welcome back. I'm glad you're back. Is this going to soften you up a little bit? What happened?
Tom: No, no, no. I'm a tough guy.
Tony B: You all right?
Tom: No it's okay.
Tony B: Nobody pushed you when you went hiking? That's good. They showed a lot of restraint, got to give them a lot of credit. I appreciate them bringing you back safe.
Tom: I didn't actually go hiking.
Tony B: You never went hiking?
Tom: Huh?
Tony B: Do you want me to … Do you need a Q-tip?
Tom: I had to walk to the …
Tony B: Pool?
Tom: Kitchen.
Tony B: You had to walk to the kitchen?
Tom: Restaurant.
Tony B: You had to walk to the restaurant?
Tom: It was like a mile.
Tony B: That was your hike?
Tom: That was my hike.
Tony B: I can appreciate that. I can appreciate that.
Tom: Yeah.
Tony B: That was further than I did.
Tom: Yeah, you know, it's good to be back. That's all I can say. I don't really understand the whole "Time off" thing. I'm not good with it. I really am not good with it. I have so much that I think we've got to do.
Tony B: Hold on a second. Did you fly into … Where did you fly into in California? How far did you drive?
Tom: Three hours.
Tony B: It was just three hours?
Tom: Yeah.
Tony B: It wasn't more than that?
Tom: No.
Tony B: Okay.
Tom: I flew from … I went to Las Vegas to do a show.
Tony B: Yes, I remember. How was the show, by the way?
Tom: It was good.
Tony B: Good.
Tom: Actually I really liked doing the show in Las Vegas. I went to Las Vegas to do the show, and then I went from Las Vegas to San Francisco, from San Francisco I drove to Big Sur. Which is like three hours away.
Tony B: Okay.
Tom: Then from Big Sur I drove back to San Francisco.
Tony B: Okay.
Tom: Then flew home. That's it.
Tony B: And now you're here.
Tom: Now I'm here.
Tony B: Just in time to make dinner.
Tom: Huh?
Tony B: Just in time to make dinner.
Tom: I made dinner yesterday. Yeah, you know, whatever. All right, SMP is down seven fifty, first time I've said it today. NASDAQ is down eleven fifty … twelve, right around there. This is the first time I've been able to put a negative number. Gold is up six and a half dollars after being down and getting crushed last night. It's so funny because if you read all the crazy blogs and everything last night, I was like "Oh my God, gold is going to zero"
Tony B: Sure.
Tom: Same with silver.
Tony B: Silver had a bigger move percentage wise.
Tom: Oh my God, I wanted to … Well I couldn't pull the trigger. Crude oil is up fifty-four cents, it's two dollars higher than I bought it last night.
Tony B: Yeah, we bought it at sixty-four, sixty-six?
Tom: I made a dollar on it, but we'll take it up. Even up fifty-five cents it's a good number for us. Also, the yen's up a little bit, the dollar's down a little bit, the Euro's up a little bit, all those are good. If it wasn't for the notes, I'm getting killed in notes.
Tony B: Yeah anything NASDAQ notes, NASDAQ bonds, any of it.
Tom: NASDAQ notes has been the worst trade in the world. I thought they were rich a week ago, now they're like two dollars higher. They suck.
Tony B: Yeah, they're trading under sixty-one twenty-six, now they're one twenty-seven and a half.
Tom: I know, it's just brutal moves. But I think all that stuff comes to a nasty hold, hopefully sooner than later. Hey, let's do Best Practices, and if we have time we will do the oil thing, if not we'll do it right afterwards.
Tony B: Okay.
Tom: What the guys put together for today, Best Practices is something called "Tradable Futures". The reason that we think … The reason that we want to point this out, is that we haven't covered this topic in a while. About what should be on your watch list? What should you follow? It doesn't even mean that you have to trade it, it's just nice to know what we're talking about. What we decided to do like "Hey, let's throw up there the … Let's throw up the underlyings that we trade the most and have the most positions in right now.
GC is gold, ES is the SMP's. We should have put these in order of actual trading value. ES trumps everything, just so you know. ES trumps everything. So that's the SMP five hundred. Then there's the Russel, the DOW, bonds, notes, NASDAQ. This all just came in … Well, it's not even in alphabetical order, so who knows? NASDAQ, natural gas, the VIX which is the cash, which is not necessarily the future we want to see … Or is that the future in there?
Tony B: No, it's V - I - X.
Tom: The reason being is maybe doe doesn't pick up the VIX future. I'm not sure yet, we'll check. CL, 6E, and 6J, which is the Yen, the Euro, and obviously crude oil.
A lot of times people ask us, "Hey, give us the ones that are lines that you follow, so we can kind of look at the same stuff." That's what this is designed to be. Hey, what do follow? What do we trade?
I currently have positions in almost … Well, I can tell you, 6E, 6J, CL, multiple CL's …
Tony B: Yes the [inaudible 00:06:15] DX doesn't have any options, it doesn't pick up.
Tom: DX which is the dollar index, ES, NQ, VX, and ZN. So, two, four, six, eight different futures right now. Which is probably a lot for us, probably usually keep between five and eight, probably average.
Why would somebody watch futures? Because they drive the market. Why would somebody trade futures? Just for leverage. Just for leverage and the uniqueness of product. If you want to trade Yen, you can't really do it without using futures. If you want to trade Euros, you can't really do it without using futures. If you want to trade notes, you can't do it without using futures. Bonds are hard, but you can do it. You know volatility is hard to trade without using the futures. Natural gas is almost impossible to trade without using futures. To a certain extent the SMP's and everything else. It's just the leverage factor, it's nothing else.
Tony B: It really just comes down to leverage?
Tom: Yeah, it's just leverage. You got to be careful based on size and everything else. Once you start to understand the products, you'll see, they're all the same.
Tony B: It's six of one, half dozen of the other.
Tom: Everything is six of one, half dozen of the other. That's what's so weird about the whole industry, it's like "Oh, we don't do that. We don't allow that. That's not safe" but you allow buying the under line. What's the difference?
Tony B: Right, right.
Tom: Some of these never made sense to me about this whole … So what are the tradable futures on TOS? I think it's important to throw this out there, so in your inventory, DS obviously, the NASDAQ, crude oil, the gold, and Euro, are probably the ones that we trade the most, that have decent liquidity.
Then you start going down to the next level, which is corn, soy beans, wheat, thirty year, ten year, five year, two year. I think the thirty year is really the only bond options you can trade. Soybeans and corn, we trade them occasionally. Occasionally. Once or twice a year at price extremes. Mostly [inaudible 00:08:11] some crude oil options, maybe some gold options, maybe Euro options. We have some Euro options on right now.
Tony B: Yep.
Tom: So it's reasonable. These are tradable futures options on TOS. I think it's good to have that.
What hours can these options on futures be traded? What we do is put the following table together so you can see the trading times that are available. We took this right from the CME site, what we tried to do was just put it all together so it makes the most sense. You can see, kind of, the times.
I think this is really good because I think it's hard for people.
Tony B: You would think it would be standardized, right?
Tom: It's not. It's so weird too. It's weird that it's not … I've never understood that, but again it's not when you start to understand, kind of, these are members changes, and the members of the exchanges don't care that much about the customers, believe it or not. You just don't know who the customers are.
Tony B: They certainly care about the customers second, they care about themselves first.
Tom: What's so funny to me, is that it's a publicly traded company, and the publicly traded company should respect the customers more than they kind of do.
Tony B: Before anything.
Tom: Everything should be standardized, but it's not. Part of the problem is that you can't have somebody work to make markets four hours after their not used to making markets anymore, I guess.
Anyway, take a look at the open interest there, and you'll get a really clear picture of why what trades the most. Natural gas trades on a ratio spread between natural gas and crude oil. Which is why natural gas and crude oil have so much volume in there. Same thing for corn, it has some huge volume, open interest, because it'll trade different spreads against soy beans and wheat. If you look at the …
Tony B: So they feed on each other for more volume?
Tom: For more volume. If you look at the options on the thirty year, ten year, five year most people trade the options on the ten year, but they also trade in ratio spread with the thirty year.
From this open interest picture, you get kind of a clear view.
It's so funny that the Euro we talk about has a five trillion dollar market, and yet it only trades a total open interest of three hundred thousand contracts. When you look at the NASDAQ's one hundred and six hundred and sixty-six thousand versus the four million of the SMP's, now you know why we don't trade the NASDAQ's options.
Tony B: Correct. Or as frequently.
Tom: That gives you an idea kind of where things tend to trade.
Does volatility in commodity products act in a similar fashion as to equitys? So typically we see implied volatility as to equities move more inversely to the under line. However, the idea of commodities can move together, or inverse as the perceived risk can be priced in both directions. So commodities can be very different than stocks. That's all we're trying to point out. Don't get hung up as much on commodity options with respect to, "Why is this priced this way?" But just understand that relative to itself, that is still the same level of importance.
High implied volatility commodity options is just as important as is in equity options. But don't try to figure out "Hey, why is this month here? And that month there?"
Tony B: Correct, you're just saying the volatility as a number is something to watch, not necessarily why it's at that price. Is that what you're saying?
Tom: Well, what you see here is GLD, which is the closing price, which is gold versus gold volatility. You can see that there's a relationship between those two is very different than an inverse relationship that you may see in some other equity.
Tony B: I understand. So like you're saying is like if volatility is going higher as the product goes lower.
Tom: Like in an equity for example, if SMP's go higher, you'll see the volatility go lower. If the SMP's go lower, you'll see volatility go higher. You don't see that here. That's all the guys are trying to point out is the volatility commodity products it doesn't … It's not the same as broad based index products.
Tony B: Understood.
Tom: Okay, and then lastly: How many equivalent options are necessary to get to similar notional value?
What we put up here was just the number of shares. Like in SPY five hundred, eight hundred, a thousand, twenty-six hundred.
Tony B: We've talked about this before, but it's really nice to know now. So you know when you're trading one russel future, how many shares of IWM it equates out to. If you're typically trading IWM and you're as a stock for argument’s sakes and you're only trading two, three hundred shares … You look at a future and you're going to be having a much larger position than you expect, one contract does not necessarily equal all one hundred shares of stock.
Tom: A guy writes me the other day and says "Hey, Tom, I'm short a six or seven, let's say seven, I’m short seven puts in USO. I think he said he was short either the thirty puts, or the twenty-eight puts. I don't remember which ones, I'm sure it was the thirty puts or the twenty-eight puts I sold him when the stock was over thirty, and I'm short a seven lot. Would I have been better off trading CL futures options?"
I'm like "No, you wouldn't have been. Because your actually CL futures options.."
Tony B: One contract would have been larger than the seven puts you have.
Tom: That's right. And depending on what the delta is of those options, you're talking about forty-two [inaudible 00:13:33] so your options are in the money now, so it's like twenty-one. It's like twenty-one let's say one, it's a very different animal. You really have to understand the size of all the futures options. It's like, I just don't think people realize how big they are sometimes.
Tony B: I don't think they realize it at all.
Tom: What I want to do, because I want to go through that quickly so that …
Tony B: Kind of on oil there for a moment. I'm sure that's where you wanted to go.
Tom: I've got a lot of discussions about oil. Let's start, let's at least get the ball rolling.
Tony B: Okay.
Tom: A lot of people, including myself, and I'll go to my own positions because it's easier for me to talk about my own stuff than it is to talk about somebody else's stuff.
I'll look at my USO position, for example, and I'm short just in December … I'm short the, let's say on average, my average put is a thirty put.
Tony B: With the stock at twenty-five and change?
Tom: Yeah. I'm short some thirty-one puts, some thirty and a half puts, some twenty-nine puts. Okay, my average is, if I average everything together, I'm short thirty puts in December.
Tony B: Okay.
Tom: There you go, they're like four dollars and fifty cents.
Now, the stock is trading for twenty-five thirty-one. All right, close up that second line, will you?
Tony B: Close up? Sorry.
Tom: Just to make it cleaner. Here I am short the thirty puts, and this is one of my positions that's oil related. This is a pure, this is a physical under line. Do I really think …
Tony B: By physical under line you mean it is oil?
Tom: Yeah. Do I really think that oil is going to go back and USO is going to rally up to thirty dollars by December expiration, which is eighteen days from now? Of course not.
Tony B: I hope not. You would be delusional, right?
Tom: No, it's not going to happen. But do I want to pute the position there … Can you go to IV rank for a second?
Tony B: Sorry.
Tom: You just scroll down. So the IV rank in here is ninety-five. If I was looking at this objectively, and again, you have to take a step back, and look at it objectively here.
If I was looking at USO and had no position on here at all, I would say with a ninety-five … with a twelve percent price change in just the last week, and ninety-five percent IVR … Obviously what I consider this to be huge price extreme. Okay I would look at this and say "Hey, this is an opportunity."
Now let's go back to the trade page for just a second. Now I'm going to look at this screen here, and I'm going to say "Okay, well I'm effectively low on the stock. You can call December thirty puts and stock virtually the same thing."
How do I defend this position now, going out into the future? The first thing we're going to do is, we're going to close up December for a second, and we have to understand something, we need to understand that it's going to take a while to get back into the ball game.
We're going to need to buy some … Here, close up January too. Close up the months. We're going to need to buy some time. We have ninety-five percent IVR. If you look out into the future months, you're going to see it's going to go back to normal as we get towards some time in the middle of next year.
We've got to just kind of figure out, Hey, how far out can we go, the volatility is still rich enough. Yet I've got to buy myself some duration because there's nothing I can do really near term. I mean, this is going to require multiple months, I want to take advantage of high implied volatility. We know the volatility here is usually going to sit around in the twenties, it’s currently like …
Tony B: Thirty-six.
Tom: Thirty-six, thirty-seven. Maybe we can go out to like, I don't know, just for starters February. Maybe even March. I mean thirty-six, I'm sorry, thirty-four volatility, thirty-three volatility, I mean maybe there's something. I'm just trying to find a way that we can extend duration, just because what we're trying to do right now is get back into the ball game.
Tony B: I have a question for you. If you were going to go to February and you're basically long stock, right?
Tom: Yeah, basically long stock.
Tony B: You long stock somewhere around thirty, and you sold them, let's say you sold them for a dollar …
Tom: I'm long stock at twenty-nine.
Tony B: Okay, so do you roll down to the twenty-nine puts? Then maybe sell the twenty-nine coals also? It's not going to cost you anymore buying power if you do it one to one, I mean if you don't want to add anymore buying power to the position … Taking stock is going to take more buying power.
Tom: We don't want to add anymore buying power. We've already established the fact that we're short to thirty puts they’re equivalent to stock. We don't necessarily want to take the stock because it's going to add more buying power, we know that there's implied volatility all the way out to February, March, we want to keep this position on because we're being opportunistic. Tt seems like one of the better, if we had no position on it, we would put something out in the air. Now, but we're troubled because we don't really like our choices of place, and we don't want to double down and add more money to this trade.
Tony B: That's correct. And if we were going to add anymore money it would be buy selling the money calls like selling two of those money calls against one of those puts.
Tom: But at this point I'm not even ready to add more money to this.
Tony B: I agree.
Tom: I have a break even of about twenty-nine. The question is: How far out do I have to go, and what do I have to sell, and where do I have to roll to, to get myself to a point where I could possibly get close to breaking even.
We'll come back after the break, and we'll finish up when the market, you know.
Tony B: We'll take a quick break. We've got the opening bell next, you're listening to tastylive live.