David Sun emphasizes the use of stop losses in options trading, which is not common in the industry.
David Sun takes advantage of high implied volatility in a unique way to optimize his options trading edge.
David Sun highlights the importance of managing the win size to loss size ratio in order to effectively manage risk exposure in options trading.
Deep dives
The Strategy of David's Hedge Funds
David discusses the systematic options trading approach used in his hedge funds. He emphasizes the use of a multi-layered approach involving stop losses, which is not typical in options trading. He also explains how he takes advantage of high implied volatility in a unique way. Additionally, he shares insights on managing the win size to loss size ratio, highlighting the importance of fixed profit and stop loss levels.
David's Background and Journey in Options Trading
David, an electrical engineering graduate, shares how he got into options trading during his masters and his early experience of selling puts. He discusses his involvement with Tastytrade and how it reinvigorated his interest in options. Eventually, he started his own hedge fund in 2018 and another one in 2021. He explains the transition from stock trading to options and his focus on credit targeting.
Applying a Top-Down Approach to Sizing Trades
David explains his top-down approach to sizing trades, which is based on setting a target return and using credit targeting. By calculating the daily credit target, he ensures consistent trade sizing and manages sequence risk. He also discusses the impact of implied volatility on sizing trades, highlighting the need to adjust for high or low volatility levels.
Maximizing Premium Capture Rate
The speaker discusses the concept of Premium Capture Rate (PCR), which measures the net profit captured from all premium sold. By shaping the win-loss profile and focusing on liquid instruments, such as SPY or SPX options, and longer-dated options, the risk of big spreads and slippage can be minimized. Although occasional spread-crossing or slippage may occur, they can be incorporated into the overall profitability by adjusting expectations and including them in the trading models.
Risk Management and Misconceptions in Options Trading
The podcast addresses the importance of risk management in options trading and dispels some misconceptions. It emphasizes the need for appropriate position sizing and bankroll management to mitigate the asymmetric compounding effect of losses. The speaker discusses the role of options in expressing directional opinions and managing volatility levels. They also highlight the value of starting with simple strategies and gradually expanding knowledge and complexity in options trading.
From Electrical Engineer to Hedge Fund Manager, David Sun, previously on TastyTrade as a Rising Star guest went on to start his first hedge fund in 2018, and then went on to add a second one in 2021.
Learn about one of David's concepts applying a systematic approach to Options trading. It has to do with these 3 things; stop losses (which is not common in options trading), how he takes advantage of high implied volatility (IV) - but not in the way most options traders would think, and his approach on managing the win size: loss size ratio, all to manage risk exposure and optimize edge.
Looking for actionable ideas to explore? Then this is a must-listen-to episode!
