Tony: Thomas! We're back, my friend - best practices. Understanding TT studies? We have to do a study on understanding our studies? Then, our studies are in trouble, I think.
Tom: We get a lot of … We get a ton of questions about how do we do our studies, things like that. Yeah. I had a fun seminar on Saturday morning. Sorry, I didn't-
Tony: You weren't too stressed, you were able to do it? You're okay, because the flight over was tough?
Tom: No, it was great. I got there early so I was able to talk to some people and do whatever. I couldn't stay afterwards because I had promised to do things. Look at the Fall leaves.
Tony: It was your anniversary weekend!
Tom: I know.
Tony: Actually, today is your anniversary, right?
Tom: I was doing nice things, so-
Tony: Is today your anniversary?
Tom: Yeah.
Tony: Happy anniversary to you.
Tom: Thanks.
Tony: 30 years, amazing.
Tom: Yeah.
Tony: It's beautiful.
Tom: I don't know.
Tony: It's a good thing. It's a good thing!
Tom: I'm really not sure how anybody could be with either of us for 30 years. Both of us have, our own-
Tony: I've done it.
Tom: What?
Tony: I've done it.
Tom: I know, it's just the weirdest thing because it's …
Tony: Oh believe me, it takes work.
Tom: I don't even know how our kids can hang in there.
Tony: Oh, believe them, it took work.
Tom: It's really kind of funny because, it was such a really nice weekend. It was cool, mellow.
Tony: Good, I'm glad.
Tom: Just relaxing. The seminar itself was fun because it was all … It was new stuff I talked about. It's always more fun after a big down week and things like that. I threw a lot of content out there on Saturday morning. I just didn't get a chance to hang around afterwards to talk to everybody because the next person was coming up. We'll do the same show, a similar show, in L.A. on November 1st and then Houston. Those are the 2 we have left.
Tony: Nice.
Tom: Also we'll be at USC, Friday night, Halloween. Just for a quick discussion to a bunch of USC seniors. Anybody that's a tastyliver is welcome to come. I'll give you all the details soon. Then the following week at Harvard at the new Harvard Innovation Center. We have a 100 spots for tastylivers at Harvard and I think we have a couple left open. It's not a trading discussion but if you want to come on by and just bullshit, whatever it is, and listen to the discussion. You're more then welcome. You just have to email Beth - beth@tastylive.com.
Tony: Very good.
Tom: I really enjoy, sometimes, just trying to tie in a bunch of different segments that we've done over time. Just tie everything together and that's the purpose of a lot of the live shows and to get some stories out and other things like that. This is going to be an exceptional … I think we're now in for some exceptional trading going forward. Just a very …
Tony: I couldn't agree with you more.
Tom: Very different market place when you have 20 percent [Vicks 00:03:05]. You've got a lot of different things that are stressed like crude oil. Stressed.
Tony: Mm-hmm (affirmative).
Tom: S&Ps, stressed. Anybody thinks you can just close your eyes here and buy NASDAQ after down 118 on Friday, you're crazy!
Tony: Well, did you buy when they were down 60, down 40, down 80, down 100?
Tom: I bought them when they were-
Tony: Down 150 last night.
Tom: Well, I bought them when they were equivalent, on last night's thing, down 135.
Tony: Right.
Tom: I'll take my chances with … I just want to lay it-
Tony: You're just covering shorts.
Tom: I know I'm covering shorts, but I just want to lay them back out still. I want to sell every up to cure. I don't care what anybody says about, "This is the bottom of a channel. We're on support. This is the 50 day moving average. 200 day moving average." Who gives a crap? It's all garbage.
Tony: 87th day moving average, got it.
Tom: What a bunch of bullshit. I can't believe people still talk like that, in this day and age. Drives me out of my mind. We haven't even seen a down tick yet.
Tony: Mm-hmm (affirmative).
Tom: Look what happens when you start to see down ticks. Look at crude oil. Tell me how many people out there were calling for 84.37.
Tony: Right.
Tom: How many?
Tony: Right.
Tom: How many people were, by the way, we have a, while we're sitting here talking. We just sold some at 84.79 and we'll buy some back at 84.37. Or not. 84.39, I just put it in at, there you go. Same price we bought them at earlier 20 84.39.
Tony: Mm-hmm (affirmative).
Tom: We just got filled. I just think this is an interesting … I think you're going to have a lot of two-sided action all over the place. How many people thought that you'd see a 10 point sell off? 10 points, in 4X. How many people thought you'd see a 10 or 12 dollar sell off in crude oil? These are big giant moves on a percentage basis. The S&Ps can do the same thing.
Tony: Sure.
Tom: We're down 3 percent, 4 percent. 4 percent from the highest. It's nothing. Wait till you're down 10 percent, then talk to me about being oversold.
Tony: Sure.
Tom: Okay.
Tony: We started the year at 18.40 on the [EMN 00:05:00] S&Ps. They're 1900. Right.
Tom: We were at 18.80 last night. We go down 40 more percent we're down on the year. Then tell me how many money managers, who have taken money all throughout the course of this year, who have bought into this market significantly higher, are going to want it for the end of this year, to show negative returns to everybody. And their leverage, and they bought all the shit. They haven't bought the goods, they haven't bought the cheap stuff, they've bought all the expensive stuff.
Tony: Right, the highest buyers.
Tom: Now they're in all the crap at horrible prices and when you go down on the year. Then tell me how much down on the year they're going to be able to take.
Tony: Mm-hmm (affirmative).
Tom: We'll see. Let's just play close to the vest and we'll see. Anyway, you ready for this segment?
Tony: I am, Sir.
Tom: It's a good one. So, a lot of people come up to us and they say, "Hey Tom. How do you guys do your research? what's going on?" Well, we have everything from quants, to data scientists, to just lots of smart people, to ex-traders. We have a lot of different intellectual relationships, we call it, for research. We try to mix and match our team. It's a combination of input from lots of different places. If you watch the Pitch, which we talk about we're going to do, you'll eventually meet everybody. We continue to grow the team with just … I don't know. I put together what I think is smart-
Tony: A strong team.
Tom: Smart people and best available player type of mentality. When analyzing pairs trades and comparing underlyings, what do we mean by correlation? That's a big question that we get. So, we're just talking right now about understanding tastylive research. Correlation is a measure used in statistics that indicates the linear relationship between 2 or more variables. The correlation ranges from negative one, to minus one. You can see "Talking with Tom & Tony", October 2, 2014, if you want more information.
Tony: From positive one to negative one.
Tom: From positive one to negative one.
Tony: Mm-hmm (affirmative).
Tom: I think most people get that, but we are definitely making a bigger stink about this than we used to. In fact, over the weekend, I saw that at least one brokerage firm, maybe 2, have started to introduce correlation studies.
Tony: Mm-hmm (affirmative).
Tom: A lot of people watch tastylive now, that's all I'm going to tell you. I also saw it on another network, they actually talked about correlation for the first time. It's just interesting. We are making a difference in this industry by talking about, by actually getting people to understand strategic relationships, correlated relationships, both inverse and essentially inverse, which is like negative correlation.
Tony: Mm-hmm (affirmative).
Tom: Then also to try to get people to just to look at things that are a little bit contrary in nature, okay? It's a new way of introducing the strategic approach. Which is, buy low and sell high. The closer correlation gets to plus one. Both stocks move up or down by a similar amount in percentage terms. The closer a correlation gets to minus one as one stock moves up or down and the other stock moves in the opposite direction by a similar percentage terms. Again, we did this in "Talking with Tom & Tony" on October 2. What's interesting-
Tony: We got a lot of email from, a lot of feedback from and that's why we're kind of going over it one more time like this, a little bit more in the correlation part.
Tom: What's interesting here is we get, we have an approach that essentially says that we're introducing everyone to a different take on contrarian moves. Instead of saying, "Hey, crude oil's down, I'm going to sell puts in XYZ." We're talking about the relationship between a specific commodity to a specific stock and gold and silver is a perfect example. If you have higher implied volatility in silver and silver has moved down twice as much as gold, let's be smart here.
Tony: Mm-hmm (affirmative).
Tom: Let's buy gold and sell silver, do some ratio and then you have a reason to hang in there. As soon as it works for you, take it off. All these things. It's really good. It's actually, it's reinvigorated our trading and it's helped us hang in there for most of 2014. How do we understand the study parameters? Here's an example of a recent study that we broke down. SPX, 2005 to present, entered the first day of the month. Closest to 45 days to expiration. Sold one standard deviation strangle, which is 16 percent of each side. Managed at 50 percent. Taken to expiration. Again, this is August 21st.
Just take a look at this because if you're curious how we put it all together. First, the metric, the underlyings, time frame, the parameters, the trades set up, and the management style, okay? The underlyings is a list of all the stocks or ETFs, whatever it is. The time frame is the duration of a study period. The parameters is when the trade is set up. Now, the reason we're telling you all this is so we're encouraging everyone to start to do a little bit of your own research. When you start to do your own research, you'll look at our stuff and you'll go, "Oh. This is cool. I can do this too."
Tony: Sure. Sure.
Tom: Yeah.
Tony: Or even just validating it.
Tom: That's right.
Tony: And saying okay. Right.
Tom: Now I know where these guys are coming from and you know what, I'm fascinated by this stuff. We all are! That's why people go home and they'll sit there and, you know, when I was a kid I used to go to a baseball game and I would score the whole game. The reason I would score the whole game is because in your mind you want to think like the manager.
Tony: Sure.
Tom: Now kids go to the game and all you can think about is how many beers can you afford to buy or how much-
Tony: Listen, I told this story about my-
Tom: How much food can you eat.
Tony: I told this story about my daughter going to get gas, the first time she filled up her car. She thought it was 4 dollars to fill up her car! It is a whole tank you've got to fill up. There's a different correlation there, it's not 4 dollars, it's 40 dollars because you need more gallons but yes, I got it.
Tom: I'm not sure what that means.
Tony: You know exactly what it means.
Tom: Yeah, I don't know.
Tony: Oil's 64 by the way.
Tom: What?
Tony: Oil's 84, 64, 65.
Tom: Thank you.
Tony: Mm-hmm (affirmative).
Tom: We have-
Tony: We have sold at 79 last time, I figured, since it's 70 ticks away.
Tom: Okay. That's a good thing. We'll put a 79 offer in this time. Same thing. We'll take our chances. Bat. You know, give a little scalp and fool right?
Tony: Yeah. Why not?
Tom: If you can take 40 points out of this thing, on every one lot, that's 500 bucks.
Tony: 400 bucks.
Tom: 400 bucks. Sorry. Thinking of 12.50.
Tony: Mm-hmm (affirmative).
Tom: Hey, so my son goes to Vegas this weekend with his buddies.
Tony: He went, or he's going?
Tom: He went.
Tony: Mm-hmm (affirmative).
Tom: And he text me from-
Tony: Gave him the story right?
Tom: What?
Tony: You gave him the story right?
Tom: I didn't tell him the crash story. He goes, "Dad, I need some advice. I need some good gambling advice because …" You know. And so, I give him-
Tony: Tell mom you won 40 bucks. It doesn't matter what happened. Keep it to yourself.
Tom: It's a different strategy for mom. I give him my little: "Always hit on 12. Take the [bankis 00:11:30] when you're playing pigalle. Always bet the bank when you're, I'm sorry, always bet the bank when you're playing baccarat. Take the deal when you're playing pigalle. Always bet 29 and 32 when you're playing roulette. Blah, blah, blah." He texts me back a couple seconds later and goes, "This is the dumbest advice I've ever seen! But I don't care because we've got a system." 3 hours later, I get a text and he goes-
Tony: System blew up.
Tom: Basically. And he goes, "Hey. Where's mom?" And I go, "What do you mean?"
Tony: "Does she have a marker?"
Tom: No. He was looking for her because he needed money.
Tony: That's what I'm saying! Does mom have a marker? Dad. Mm-hmm (affirmative).
Tom: Yeah. He knows he's not getting any money out of me. So he was like, you know, I go, "Listen. I've had friends walk to the airport."
Tony: That's correct. To go home. True story.
Tom: Yeah. So anyways, long story short, I'm pretty sure he didn't … He said he made some money at the end, though, which I don't understand.
Tony: Oh, of course. Yeah. Right, at the end there. Playing the slots, getting a sandwich.
Tom: Guess how he ended up, in the whole thing?
Tony: Unched.
Tom: Unched! Isn't it surprising? Don't you love the unched?
Tony: It's a great story. I hate the unched story. I like the up 40 dollars, give it to mom, say: "Here, buy yourself something." It's worth it.
Tom: Unched.
Tony: Best 40 bucks you ever spent.
Tom: And it's amazing how it works too, because I said to him, I go, "There's no such thing as unched in Vegas, okay?" He goes, "Yeah. I was about unched." And his mom says, "Oh. Yeah, sure, he broke even." People just don't believe that.
Tony: Sure.
Tom: Okay. So the parameters-
Tony: Just sold oil at 79. Good scalp by you.
Tom: While we're talking. Take the 40s ticks. That raises the bar from the other day, so it's nice.
Tony: Sure.
Tom: Again, I think this is a great scalping weather. That's all it is.
Tony: And this is what you get in volatility. We've told stories about how people would be scalping in and out on small amount of contracts, small amount of futures. Because volatility was so high, you're getting more opportunities.
Tom: Yeah. You just got to close your eyes and play the ranges. It's going to be, probably, a range-bound inside day with all the risks in the downside. So every rally is a sale and you hope for … But it's going to be hard at the close today, to sell them, because after a big down underwater close, starting at around 10:30 this morning, you could get some upside. What is the trade strategy? How is it set up? One standard deviation strangle is 84 percent of the money. Whatever it is, we just want you to get very comfortable. Understanding what our methodology is. So, we look at underlyings, time frame, parameters, trade setup and then, what's the management style?
Tony: Mm-hmm (affirmative).
Tom: How do you hold it? Do you hold it to expiration? Do you manage it at 50 percent? What's the profit targets? So, all of our studies have to have a takeaway. All of our studies have to have an investible idea. So, we just use, essentially, the same set of metrics: underlying, time frame, parameters, trade setup and management style. That's what's important. Now, the trade has to be driven, then, by correlation, by IV rank, whatever it is. There's something that drives the trade.
Tony: Something's got to get you there.
Tom: That's right. So it could be correlation, it could be high IVR, it could be just ridiculous price extreme, whatever it is. But then once we get there, it has to be underlyings, time frame, parameters, trade setup and management style. We then go towards a results table because we want to see, "Hey, what's our takeaway?", "What are we really learning from this study?" and, "Is there a takeaway?" So what you see here, this is the mega straddle study on August 22. But what you're seeing here is, what were trying to, in the end, figure out is: Look at the difference between low IV at expiration and high IV at expiration. And then, when you start to break it down, you see … You get a higher percent of winners, and significantly more capital, and significantly more P/L per day-
Tony: For basically the same usage of capital.
Tom: Yeah. It's really easy to understand. We're just going to back off until we have high IV.
Tony: Mm-hmm (affirmative).
Tom: That's it. And listen, nobody else knows anything either. Remember that. Don't sit there and don't think to yourself: "Oh. Well the counter-party knows so much." The counter-party doesn't know jack. Okay? Just remember that. The counter-party is just playing the dumb trends.
Tony: Yep.
Tom: And as soon as these markets become [trendless 00:15:31], which I think it is now, you don't have to worry about the counter-party anymore. They don't know anything.
Tony: Sure.
Tom: Okay? The counter-party only knows to do whatever everybody else does and when the counter-party gets scared and they get skittish in their head and all their brains get all messed up and scrambled-
Tony: You're at a big advantage.
Tom: You have no disadvantage.
Tony: You're at a big advantage.
Tom: Well, you're at the advantage that you no longer have to worry about all their dumb trends.
Tony: Mm-hmm (affirmative).
Tom: Okay, so. And now you've got everybody trapped like rats. You've got the longs super nervous, there are no shorts out there, only the shorts are the crazy ones. So there are no longs, I mean, everybody's long. The world's massively long and a few of the wannabe longs are vocal and that's it. The shorts? The real hardcore shorts? Man, they don't even exist right now. So you have the definitions. So the metrics: P/L, P/L per day, P/L per trade, number of winners, the percent of winners and the biggest loss.
Tony: "So we're the crazies?" My peeps want to know?
Tom: If you're short here, you're crazy because you've been short for a long period of time, myself included. And those are the shorts that are not getting out. Again, you have to sell into strength when nobody else wants to sell. And you always have to sell when it looks most difficult. It's going to be difficult to be short today. Because we closed so far underwater and because every rally, every sell-off, is going to be a buy today.
Tony: Mm-hmm (affirmative).
Tom: But that's okay.
Tony: And that we'd end up buying it.
Tom: And we're probably going to close strong tonight.
Tony: Mm-hmm (affirmative).
Tom: All that said, I wouldn't read anything into it. Again, metrics here: P/L, P/L per day, P/L per trade, number of winners, percent of winners and biggest loss. I think this is, we've talked about this many times in house, I think that's a really strong way to go after kind of understanding our research. It makes the most sense. It gives us the most takeaways. And lastly, what about return on capital? How is it calculated, how is it shown in the studies? We always attempt to show return on capital when we have the data available. We calculate return on capital as P/L divided by margin. We often show the average return on capital which is an [arithmic 00:17:32] mean-
Tony: Easy for you to say.
Tom: Of the return on capitals for all the trades in the study. Sometimes broken down as the average winning ROC and the average losing return on capital. Return on capital, to me, is one of the least important because return on capital gets very clouded-
Tony: You do a vertical spread-
Tom: That's right.
Tony: Your return on capital could be huge, it could be a small amount of money for a little bit of position, sure.
Tom: I think return on capital is an extremely interesting talking point. I'm not sure return on capital is …
Tony: You mean sales pitch?
Tom: Sales pitch, okay? Return on capital is a real interesting sales pitch. And I think for some people it makes sense as to why you use derivative strategies. But I don't think, in the end, that we base our trades necessarily off return on capital, I think it's important that we understand return on capital. The only trades I base strictly on return on capital: naked short puts, cheap stokes, something that I think is just extremely rich relative to the risk.
Tony: Very good. Let's take a quick break, we'll come back. We've got the opening bell next. You're listening to tastylive live.