If all you see from a trading guru is profitable trades and 100% gainers, it’s probably a scam. At Raging Bull, I’m committed to full transparency. Real trading involves hits and misses. The best traders in the world usually have a win rate of around half their trades.
Last Friday, I got absolutely smoked on one of my most profitable trading strategies. I’d been milking Friday lotto options trades in AMAZON (AMZN) for months by following the smart money. You can read about the strategy and how I made $24k last week here
I was going to keep riding this trade until it didn’t work, and on Friday, I was on the wrong side, as were the smart money market makers leading to an outsized move in AMAZON (AMZN).
The Smart Money
Market makers, the guys who provide most of the liquidity in the options market by sitting on the bid and offer, are like the house in the casino. And most of the time, the house wins because the odds are in their favor. There are some folks who are often called the “smart” money— and as an active trader, I want to know what smart money is doing—to stay competitive in the market.
I do this by looking at the options chain and open interest. I look at the open interest at various strike prices to gauge how market participants are positioned and what the smart money is likely to do.
For example, I have been watching and trading AMAZON.com (AMZN) very closely over the past several weeks. And what I’ve noticed is over this recent time period is AMZN has tended to sell off or at least stay range-bound as the smart money market makers look to collect as much options premium as possible. By reading the options chain, I can see where a large number of options contracts have been sold and thus the range which AMZN might trade in.
This strategy has been working for me for weeks, and I was reading AMAZON on Friday lotto options like a book! In fact, I published the strategy here last week. Now I am no conspiracy theorist but it’s interesting that the week after I published the strategy, it completely fell apart and led to a Gamma squeeze.
A Gamma squeeze happens when the smart-money market makers are on the wrong side of a trade and a forced to hedge their bets by buying stock as price moves against them. Here is my Friday lotto options plan which I traded:
Looking at the chart on Amazon.com, Inc (AMZN), I believe that sellers are going to start to come in near the recent pivot level and the 200 hourly moving average that is lurking above the current price.
In order to play this price action, I want to look at strategies that can not only profit in a downward trend, but also a sideways trend. So instead of buying puts, I’m going to sell a Credit Call Spread.
So, what’s my plan here?
My Trade Details: Selling the $3310/3320 and $3330/3340 call spreads. And I plan to add to the $3330 spread tomorrow near the open.
Why on earth these contracts?
Look at the outrageous amount of calls sold above $3300 that expire tomorrow. I think there is very little chance that AMZN closes north of $3310 and it is remote that we see $3330 tomorrow.
This is another perfect setup week and I am going in big on the Friday AMZN fade tomorrow.
I’d been making this trade for weeks, and so had the smart money market makers. So when AMZN got above 3330 and held, there was an EXPLOSIVE move higher! Why? A Gamma Squeeze works like this:
There were tonnes of options sold above 3300. Usually, it’s in the smart money call sellers’ interest to keep the price at or below these levels to collect all the premium paid by the call buyers. A lot of the time, they are able to do this, as has been seen over the previous weeks. However, when the smart money call sellers lose control over the stock due to breaking news for example this can lead to an even bigger move against them, especially on Friday Options expiry.
1min chart of AMAZON intraday on Friday October 15
So as we see in the chart above, as AMZN began to hold above 3330 this meant that all the market makers that had sold the calls above 3300 were now underwater. In order to prevent even further losses, Market Makers will buy back stock to hedge the options they sold short, which leads to a gamma squeeze and an even bigger move than expected. Then momentum players and algorithms can begin to buy even more calls at cheap prices on a Friday, and this vicious cycle usually continues further than most people expect.
Here are my trades in AMZN:
Once AMZN started to hold over 3330 I knew I was in big trouble. However, I understood that there could be a gamma squeeze and quickly adjusted my strategy. I took a huge loss on the calls I was short and held the calls I was long. This is a risky move in that if there is no gamma squeeze, I can lose big on both positions, but I understood the uniqueness of this situation and happened to make the right call. I was able to turn a huge loss into a slightly green trade in one of my accounts as AMZN ripped higher and the calls increased in value. However, I left the call spreads alone in my other account as a precaution and ended up having to eat the loss as AMZN squeezed.
I was able to make the best of a bad situation but have to take the loss on the chin and move onto the next trade. This was a great example of when the big money is trapped and leads to outsized moves against them as they are forced to hedge/liquidate their positions. Joining the pain trade is a great trading setup!
Real trading involves hits and misses. The best traders in the world usually have a win rate of around half their trades. A trader’s job is to keep doing what works until it doesn’t. On Friday, one of my best trading strategies that I’ve been using for months finally stopped working. The smart money market makers on AMZN were trapped, and this led to an epic squeeze/ breakout. I was caught with them but managed to make the best of a bad situation by adjusting my trade and limiting the loss. However, I still had to eat the loss on some of my position as AMZN ripped to close at the highs of the day. On to the next trading setup!