Trends Watch: Options Trading

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Stephen Wu, Founder & Managing Partner, Carthage Capital. 

What is your outlook for options trading?

This first half of 2024 has been an irregular market. The S&P 500 (“SPY”) was up 14 out of the last 15 weeks in a row (through February – ed.), the longest winning streak in 54 years. SPY hasn’t had a drawdown of >2% in a day this year; the longest stretch since 2007. SPY market breadth (aka the number of stocks going up vs. down) is the narrowest since the 1990s, with only a few artificial intelligence (“AI”) companies holding up the whole market. Going forward, I would expect more irregular market behavior and more opportunities to trade options.

Options trading has been particularly booming. Option trading volume is the highest in history (meaning lots of speculation). Notably, over half of all SPY option trades are zero days until expiration (“0DTE”). 0DTE options expire that same day – meaning over half of all option trades were one-day gambles. At the same time, the VIX is the lowest since pre-COVID. I believe there are better opportunities in the options market in individual names, rather than indexes.

Where do you see the greatest opportunities and why?

Individual name options are often mispriced. Especially at market open, option pricing can be volatile and fluctuate. If you know a company well, you could recognize a mispriced option and sell it for profit. For example, Workday (WDAY) has never dropped -17% in five days in history. During times when there are no expected announcements, I may sell WDAY weekly put options at -20% below current prices to profit as long as WDAY doesn’t drop down there. I also analyze investor positioning, financial reports, statistical modeling of historical price movements, macroeconomic conditions, weekly credit card spend data, and website traffic data to understand what are theoretically impossible price movements to sell these options. Basically, there is alpha in understanding option price movements versus actual name risk and drop possibilities.

What are the greatest challenges you face and why?

Options pricing can be volatile. It can be highly lucrative if you are on the right side of it but can be the opposite if you are on the wrong side. It is important to have strict risk management systems and patience when opening trades. For example, I strictly sell options during times when there are no expected announcements. I also sell options at statistically near-impossible levels and have automatic stop-losses and hedges. Consistency is key. I make sure these trades are safe, since my whole net worth is invested in this fund, alongside investors.

What keeps you up at night?

I actually ask myself this question daily because I intentionally build my portfolio so I can sleep. I run daily portfolio worst-case simulations and have automatic stop-losses such that we should never lose more than -2% in any week. Also, I primarily trade weekly options so I can exit trades quickly and have hedges to balance our downside risk. My goal is to make +30% profit each year, regardless of if SPY is +-20%. All in all, I aim for small, consistent weekly profits and a good night’s sleep.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.