Divestor

Here is a classic “trap” situation for market participants, especially those that follow technical analysis. I personally think technical analysis is nearly useless, except for the fact that other people find value in it, which means that the TA playbook can be used against other participants. Here is what I think is going on, although this is about as much speculative quackery as the analysis of charts, and thus I suggest treating this post as entertainment value only:

Blue lines: So what’s happening is you see the trendline is broken – technical analysis 101 recommends bailing out once the trendline is broken and shorting.

Red lines: This is a classic “descending triangle” situation, where the Nasdaq is attempting to hold support at the 10,800 level. TA 101 says once this support line is broken, that things are going to sour.

Green line: All of these retail investors at this point, with their “education”, will decide this is the point to capitulate and sell out their technology holdings because clearly things are going down. And indeed, it will be for a little bit as they bail en masse.

Except it will stop and rebound and confuse the crap out of everybody that has taken their chart-reading education.

Probably due to Robinhood, retail investors are getting into the business of option selling. Almost nobody in the retail scope should be doing this. The new professed method to riches has been selling put spreads (likely due to the fact that margin requirements for spreads are lower than flat-out selling naked puts). Robinhood loves people engaging in these strategies since they make far more per trade. Put spread selling appears to have been, at least to the end of August, a viable manner of making untold amounts of gains as they are the recipient of both price appreciation and time decay (theta).

In fact, since early June, it would have been near-impossible to lose money employing such a strategy, which is why in the month of August, you probably had hordes of people self-educating each other on the virtues of selling put spreads for a limited risk method to making free money. Free money!

The issue with put selling is that when it works you make a little (especially in relation to what you could have made had you just bought the common stock directly), but when the trade goes against you, you lose a ton of money. Many retail investors fail to calculate their risk exposure, especially in market environments in the past few days where not only do you lose on price (the delta skyrockets) but also volatility (which inflates the price of a short position and makes it much more expensive to cover).

Now the tide has turned and people are finally seeing that such strategies can make a thousand dollars a week, but lose you ten grand in a day when you bet incorrectly.

Just reading the reddit group /r/thetagang, it’s pretty apparent that a lot of people viewed this as a low-capital perpetual money making machine, at least until now. The quantitative algorithms that take the other side of these option trades, for the most part, have basically won to a degree more than one would at a casino playing a reasonably fair game of blackjack.