Investment Products

Discussing Options Trading

Trading options is an approach that has been exponentially increasing in popularity because of its potential for larger returns. However, it is also a very complex field that can be easily misunderstood. In this newsletter, I just wanted to share a few lessons that I have learned from trading options in my own personal portfolio.

The first is that I only sell and do not buy options anymore. This is because buying options in the long run is like driving to the bank and handing over half your net worth in cash. When buying a call or put, you are paying a premium for the insurance of not having the obligation to own the shares at the strike price. In other words, you are essentially paying for someone else to assume your risk for a dedicated period of time.

Instead, I like to sell covered options contracts. I buy 100 shares of a stock that I have done fundamental research on, and sell an out-of-the-money covered call on it to collect cash flow premiums. As the seller, I assumed the risk when buying the shares initially. The only downside of selling the contract is that I limit my upside; however, because my fundamental long models have implied one-year price targets, I would have sold the shares at my out-of-the-money strike price either way. This is a great way to receive a fixed income stream while in a researched long position.

The opposite also applies. I can sell an out-of-the-money put on a stock I don’t think will go below the strike price by expiration, I don’t mind owning at the strike price, or I already have a short position open on it. There is a common strategy called “the wheel” that implements this concept. First, you sell puts over and over again until you eventually get assigned 100 shares. Then, you sell calls on those 100 shares over and over until you get called out, and just keep repeating the process. This, on average, generates between 10-20% per year.

If you want to buy options contracts, I would recommend looking into debit spreads, such as a bull call spread or bear put spread. For a bull call spread, you place a buy-to-open order at the current stock price, as well as a sell-to-open order above the price, creating the implied spread. The opposite is true for a bear put spread; you sell a put at the money and buy a put out of the money. In this way, you both sell and buy the previously mentioned insurance, balancing out the risk and reward while still amplifying potential profits over time.

Cryptocurrency Overview

Cryptocurrencies represent a new form of value representation. Theoretically, infinite value can be created in an economy, but usually this requires some form of investment, whether in physical resources, paying people to develop an idea, or simply capital. Currency itself does not generate value; it is a liquid representation of value and only functions if people are willing to accept it in exchange for goods or services.

Bitcoin became widely adopted because it offers a limited supply that cannot be tampered with, can be fractionalized, and is easy to transfer globally. Its supply mechanics follow a four-year cycle known as the “halving,” where miners receive fewer rewards for validating transactions. This reduction in supply increases scarcity, often driving price appreciation, which can trigger FOMO (fear of missing out), followed by profit-taking and price consolidation. The blockchain system is robust because altering a block requires changing all subsequent blocks and correctly guessing their hashes faster than the entire network, which is a nearly impossible computational task.

Ethereum differs from Bitcoin by offering more functionality: it enables decentralized applications and smart contracts that execute automatically when interacting with Ether. While Bitcoin primarily serves as digital money and a store of value, Ethereum extends the concept to programmable value and decentralized computing.

Stablecoins play a complementary role in the crypto ecosystem by providing a stable-value asset for exchanges to use as cash reserves. They enable trading, withdrawals, and liquidity management in a market known for high volatility. Cryptocurrency markets operate continuously, 24/7/365, unlike traditional stock markets.

In traditional finance, governments make a currency valid by requiring taxes to be paid in it and often by mandating certain exports be settled in that currency. Monetary stability often begins with a fixed currency and transitions to a floating one as acceptance grows. Central banks manage monetary policy through quantitative easing (QE) and quantitative tightening (QT) and controlling money supply, while the Treasury handles fiscal operations, including collecting taxes and servicing national debt.

In summary, cryptocurrencies are digital representations of value that function through scarcity, decentralized validation, and trust in the system, while platforms like Ethereum add programmable utility beyond simple currency. Stablecoins and continuous trading infrastructure support liquidity and market functioning, making crypto a distinct asset class from traditional government-backed currencies.

Breaking Down ETFs

ETFs are investment funds that trade on stock exchanges like individual stocks, providing investors with exposure to a basket of underlying assets. The ETF provider (e.g., Vanguard, BlackRock) manages the fund, setting its investment objective, portfolio composition, creation/redemption rules, and daily NAV calculation. The provider earns revenue through fees, typically reflected in the fund's expense ratio, which grows with assets under management. The ETF itself holds the assets, not the provider, and the provider does not trade individual shares directly.

Authorized Participants (APs) are large banks or broker-dealers approved to transact directly with the ETF provider. They facilitate the creation and redemption of ETF shares. In the creation process, an AP delivers a basket of underlying securities to the provider and receives new ETF shares, which can then be sold on the exchange. In redemption, the AP delivers ETF shares to the provider and receives the underlying securities. APs bear short-term market risk while holding ETF shares and often hedge their positions with the underlying basket. They profit from arbitrage opportunities that arise when the ETF's market price diverges from its NAV. APs do not set portfolio composition or fund rules, but instead operate under the provider's specifications.

Retail investors buy and sell ETF shares on the stock exchange and never interact directly with APs or the underlying securities. By owning ETF shares, investors gain proportional exposure to the fund's underlying assets. The ETF's market price typically remains very close to its NAV due to the creation/redemption mechanism and AP arbitrage.

The creation and redemption process is central to ETF functioning. When the ETF trades at a premium to NAV, APs can create shares by buying the underlying basket and exchanging it for ETF shares to sell on the market. Conversely, when the ETF trades at a discount, APs can buy ETF shares and redeem them for the underlying securities. This process dynamically adjusts share supply and keeps ETF prices aligned with NAV.

ETF fees and incentives flow mainly to the provider as assets under management increase. APs earn through arbitrage and trading spreads, compensating them for taking temporary market risk. Retail investors indirectly compensate APs through the bid-ask spread when buying ETF shares.

ETFs can be index-based, sector-focused, or synthetic (using derivatives to replicate exposure) and can be either passively or actively managed. Overall, ETFs provide a flexible, transparent, and efficient way for investors to gain diversified market exposure while relying on APs and the creation/redemption mechanism to maintain fair pricing relative to NAV.