Selling Puts Is Easy Until One Starts Losing, Here's the Exit - Professional Investor Reacts
Summary
The host shares a personal story of losing over $200,000 by selling puts and calls, using the experience to critique the "wheel" strategy and the "efficient market theory." He explains the mechanics of short puts, emphasizing that while they are bullish trades, they carry unlimited downside risk that violates the golden rule of leverage. The episode details a specific exit strategy based on multiples of the initial credit received, such as closing a trade when the loss reaches two times the premium collected. Finally, the host introduces the concept of convexity, illustrating how it benefit…
Topics discussed
Intro: Losing $200k and the golden rule of leverage
Defining short puts and the bullish nature of the trade
Why the Wheel strategy is broken and dangerous
The 84% win rate trap and the cost of losses
Case study: Holding losers on Apple in 2017
Calculating break-even points for short puts
The problem with rolling and holding losing trades
Critique of efficient market theory and trends
Strategy: Closing puts at 2x the credit received
The danger of cutting winners and holding losers
Sponsor segments: LinkedIn, Gatorade, Amex
Analogy: Short selling explained with a coffee mug
Practical example: Setting exit points on Comcast
The insidious nature of time decay and daily losses
Estimating future option prices using current strikes
Understanding convexity in long vs short options
Outro and preview of earnings trade strategy
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