Double or Nothing
Russian Roulette In The Stock Market
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Here are the results of Coffee Can 12, 234 days in:
Note: Ethereum is not down 15%. The error exists because 10% of ETHE is being spun off into a new security, and I haven’t had a chance to update the spreadsheet yet.
Today’s article is based on a fun little experiment i’m thinking of running. That said, if you’re new to Options, this article should reveal to you that options can be used in unique ways to manufacture some very interesting trades and outcomes, ones not possible with stocks alone.
Would you accept a bet where if you were right you’d make 8X your money, but if you’re wrong, you’d lose it all? What if your probability of success was 12.5%?
If you answered no,
Consider this: Entrepreneurs do it all the time.
Most businesses fail. And many of the ones that survive don’t make much. Yet, many entrepreneurs even take on debt to start their businesses…
I’m sure you know at least one person who started a business only to see it fail.
What do you think their odds of survival were when they started? More importantly, what do you think their expected value of success was?
If you answered yes,
You’re essentially betting that when you flip a coin 3 times, you’ll be right about the outcome each time, and of course that you’d double your money on each coin flip.
Can We Flip A Coin With Similar Odds In The Stock Market?
WARNING: THIS IS VERY HIGH RISK
With Option Spreads, we can devise a trade where we can risk $1 to make $1.
This means that if we’re right, we double our money.
If we do it twice, we 4X.
Do it three times in a row, we 8X.
Compounding at 100% like this is obviously very inviting.
BUT there’s a catch! If we’re wrong, in the worst case, we lose it all! (Hence Russian Roulette)
If you’re new to options, take a look at my Fun With Options Series.
How Could We Make This Bet?
If you’re a risk taker, how could you make the above bet?
Here’s one way:
All you have to do is guess whether a stock will be above or below today’s approximate price, by a certain date.
You can choose a date a few weeks in the future, a few months in the future, or even a year or two out.
And it doesn’t matter how much above or how much below today’s price the stock goes... only that you’re right about the direction, by the date of your choosing.
Do You Think You Can Do That?
For example,
Do you think you can guess whether SPY will be above or below today’s price a month from now?
How about 6 months from now?
Would you be more comfortable predicting the price a year from now?
Can We Put The Odds In Our Favor?
Let’s say we were willing to predict that prices will be higher 12 months from now. Would that be a high probability bet?
Recall that historically, ~70% of the time the stock market ends the calendar year positive (see distribution below).
So the odds are 7:3 but on a coin flip, the odds are 1:1.
Of course, past performance is not indicative of future results… but that’s seems like a massive advantage.
The Bet Is Pretty Simple
Although there are multiple different ways to express this bet, here is one way:
Believe the price will be higher? Just buy the At The Money CALL spread.
Believe the price will be lower? Just buy the At The Money PUT spread.
You’re likely able to buy these spreads at a price such that you’re risking roughly $1 to make $1.
Here’s an example I shared on X on July 1 when TSLA 0.00%↑ shares were trading around $210/share. Would you have taken this bet? As of July 22, this was up ~43% in 22 days.
How about this one when KWEB 0.00%↑ was trading around $28 on July 10?
As of July 22 this was down ~8% in 12 days.
Things to Keep In Mind
The Good:
Since you’re buying a spread, you can’t lose more than what you risk up front.
In order to win big (100%), you don’t need a heroic move in the stock. You just need it to move slightly in your direction.
Most importantly you get to choose when you make your bet AND you get to choose the timeframe.
The (Not So) Bad:
If you’re right about the direction of the stock’s move, the options you sold will cap your upside. (But 100% upside is not so bad, is it?)
The Ugly:
Beware that this is not an investment. It’s speculation.
If you’re wrong, you could lose 100%.
So manage your risk with appropriate sizing!
Finishing Up:
Last earnings, DraftKings told us that they had 3.4 million average monthly unique paid users who made at least one real-money bet. But when it to comes to gambling, the odds are never in your favor. However, with the scenario presented above, we can put the odds in our favor… significantly in our favor.
So rather than sports betting, perhaps this is a better way to speculate?
Of course, none of the above is financial advice. Just some stock-u-tainment…
But if you decide to do this, let me know how it goes :)
PS: If you liked this article, please do share it with a friend & click the ❤️. Thanks