A Response to MonkeyDew, Pope of SPY θ

A Response to MonkeyDew, Pope of SPY θ  

In the late night hours of August 30, 2020, MonkeyDew, Pope of SPYθ live-streamed the strategy that brought his account back from the brink of ruin. Using primarily ITM call debit spreads on SPY, MonkeyDew brought his account up from $19 to about $12,000 in a month. Showing off his strategy and showcasing his favorite indicators, the stream lasted about 4 hours and ended 3 hours after midnight on August 31st.

His strategy is one that we all know, with theta traders often choosing call debit spreads to take a bullish position at a reduced cost. MonkeyDew, however, switched things up by electing to set his debit spreads ITM and on short expiration. This post explores the strategy and offers feedback, including some hard truths.

tl;dr: Use "fuck it" money to trade aggressively using ITM call debit spreads for 30+% gain each trade. Use a portion of the gains to purchase shares of the underlying ETF, and purchase a hedge after reaching a 100% gain threshold. Use of stop-loss orders is optional. Mentally anticipate losing most of money in the trade if the market moves dramatically against you. 

Who is MonkeyDew?

Information on the individual is scant, and I do not intend to release personal details beyond what he shared during his live-stream. We do know that he is 19 years old, lives in Florida, and works multiple jobs, at least one of which is in the finance industry.

He is a member of Theta's Discord who posts the gains he made using his aggressive trading strategy. 

And lastly, he is one of the people
who texts like this
like it's 2011 and we are using those T9 text phones
lol

What strategy does MonkeyDew use?

MonkeyDew made his money mostly by using a strategy called call debit spreads on SPY. In a traditional call debit spread, the trader pays premium to buy a call, a bullish bet. Then, the trader sells a call at a higher strike to recover some of that premium. When trading at-the-money or out-of-the-money, this creates a bullish position in which the underlying must rise for the trader to profit. This is the most common way of using a call debit spread.

Example of a call debit spread slightly in-the-money (ITM)

For example, if AAPL is trading for $500, the trader buys a $500 call for $250, then sells a $505 call for $150 to establish the call debit spread. The trader will be paying a debit of $100 to enter the spread. He now has the option to buy shares at $500, and has the obligation to sell shares at $505 if the stock goes higher than that.

His max loss is the $100 he paid to enter the spread, and he will lose this money if AAPL closes below $500. His max gain is $500 (buying at $500 and selling at $505), minus the amount of money he paid to enter the spread ($100). Therefore, the max gain is $400. The breakeven point is at $501. To achieve max profit, AAPL must go above $505. Here is a video on the strategy.

Most people use call debit spreads as described above. MonkeyDew changed the game by using call debit spreads in a different way. Rather than enter the spread by buying a call near the stock price and selling an OTM strike, MonkeyDew both purchases and sells his strikes in-the-money.

Why does buying ITM call debit spreads make a difference?

Then MonkeyDew enters his spread, he selects strikes that are already below the market's current price, with the long call (lower strike) ~1% ITM. Recall that in a call debit spread, the trader receives maximum profit if the stock is above the higher strike on expiration, and suffers max loss if the stock is below the lower strike.

In MonkeyDew's case, the stock is already above the higher strike as soon as he enters the trade; he begins the trade in max-profit zone. Therefore, rather than need the stock to rise in order for him to realize max gain, he only needs the stock to not drop below his short strike by expiration in order to achieve max gain. This greatly increases his probabilty of achieving max gain each time, and allows time to work for him, rather than against him. For MonkeyDew, expiration is a good thing. That is not the case for ATM or OTM call debit spread traders who need the stock to continue rising.

In exchange for MonkeyDew's high probability of profit, his strategy carries additional risks. First, buying a $1-wide OTM call debit spread may only cost $20 for a max gain of $80, with max gain being 300%. On the other hand, buying an ITM spread, as MonkeyDew does, may cost as much as $75 for a max gain of $25, or 33%. He therefore puts more money at risk for a lower max gain, but his probability of profit is significantly higher than OTM call debit spread buyers.

Further, any downtick in the underlying's price will eat into MonkeyDew's investment faster than it would in an OTM spread. Since MonkeyDew's ITM spreads have much more premium on them and involve buying calls with high delta, premium will melt off quickly if the market moves against him.

However, his high probability of profit cannot be discounted. Achieving max gain 3 times in a row on OTM call debit spreads is remote. Achieving max gain on ITM spreads is comparatively high.

What kind of returns can MonkeyDew's strategy provide?

Based on the information MonkeyDew broadcast, he typically pays ~$70-$75 to enter a $1-wide ITM spread. Therefore, his max gain on each trade is ~33-42%. His max loss, of course, is 100%, as it is with any spread.

Achieving gains of 40% on a $1,000 investment will compound very quickly when all of the winnings are reinvested. In fact, if the trader returns 40% 3 times in a row, the trader will have $2,744. 5 in a row, and the account is worth $5,378. 7 times, and you break $10,000; this is about where MonkeyDew is now. 10 times, and you're at almost $30,000. Using SPY, you can achieve 10 successful trades in less than a month because of the Mon/Wed/Fri expirations. You'd have to be right 21 times in a row to break $1 million, which would take about 2 months if you trade the 3x weekly SPY plays.

Of course, 21 successful max gain trades in a row is not likely. However, if SPY goes up 21 expiration dates in a row, then the trader can achieve this much more easily than if he were using naked calls or OTM debit spreads.

MonkeyDew has revised his goal several times, but his ultimate aim is to reach $1,000,000. He will need 11 more max-gain debit spreads to achieve this, and it is possible to do so if SPY continues its rampant climb. According to my analysis, beginning with $1,000 and winning 21-straight $1-wide call debit spreads is among the most probable ways to reach $1 million through trading, so this is not an unrealistic aim. According to my quick math, if one enters a debit spread with a 90% probability of max gain, there is an 11% chance of being successful 21 times in a row. At 70% probability, that drops to 0.05% chance. At 60%, it drops to 0.002%. MonkeyDew's PoP is likely near the latter, so it is not likely to work 21 times in a row. But if 500 people attempt this strategy, probability states that 1 of them will likely achieve 21 straight gains (another 1 or 2 will have been right 20 times).

Why aren't more people doing this?

There are risks that MonkeyDew is not regarding adequately, and although I hope he succeeds, I do not believe he will do so without revising his strategy. 

Although MonkeyDew trades ITM, his trades are still within 1% of SPY's market price. Therefore, if SPY closes down 1.3% at expiration, he will have lost his entire investment. Out of the past 30 days, SPY has closed red 6 times, with 4 of them being deep enough cuts to cause max loss of 100%, wiping out the entire investment and all previous gains. Although MonkeyDew has so far avoided those days, I anticipate that SPY will eventually reverse on a green day, dropping rapidly and destroying the spread.  MonkeyDew claims to use "100% sure" technical analysis to ensure his trades succeed, but he is obviously speaking in hyperbole and is more realistically indicating that he does not trade unless he feels strongly in his positions. However, even the most convicted trader is likely to be wrong occasionally.

Even if the trader is correct 18 times in a row, being wrong on the 19th time will wipe out the previous 18 wins.

You may ask, who is aggressive enough to reinvest all of his gains each trade into largely speculative spreads? MonkeyDew.

MonkeyDew has reinvested 100% of his gains into SPY ITM call debit spreads on each successful trade, creating larger and larger positions each time. While this allows him to compound quickly, it leaves him vulnerable to washouts.

The Drug Dealer Mentality

In response to MonkeyDew, I first applaud the strategy. Then, I wish to harshly criticize the level of risk he is taking by continuing without a hedge.

The level of success he is seeing so far is causing a drug dealer mentality. That is, drug dealers make lots of money quickly, but almost never get out until they get caught. The enterprise is doomed to fail, because the dealer does not stop dealing until he does fail.

I believe MonkeyDew is falling into this mentality, and will likely continue trading with this level of aggression until that unexpected moment when JPow says something that spooks the market and SPY drops 2% in an hour. MonkeyDew says he pays enough attention to the market to identify this sort of drop and will be able to close quickly for a "small gain." At only one point during his live-stream did he acknowledge that a bad day could destroy his account, but argued that it was unlikely to happen. I believe 1% SPY drops between 2:00 and 2:40 are more likely than he believes, and I am not entirely confident that he will be able to close when down 50%. Diamond hands have cursed many a trader who is fearful of taking a 50% loss and so takes a 100% loss.

What would I recommend to MonkeyDew and others using this strategy?

I endorse ITM call debit spreads. I think they are a great twist on the traditional way of using call debit spreads, and as a Theta Gang Capo, I like how time works on your side. MonkeyDew's strategy is fundamentally solid.

What I do not like is the idea of overly aggressive reinvestment. Reinvesting your gains is good. However, reinvesting into the same aggressive trades repeatedly does not ensure a solid portfolio protected from a measly 1% drop on SPY. I certainly do not relish the idea of making $30,000 and not purchasing a hedge to ensure the portfolio will at least survive a red day.

My recommendation: After doubling your money (which will take two successful trades at 40% gain each), use your original investment value to buy a hedge.

Specifically, if MonkeyDew were to spend half of his $10,000 account now on a long-term hedge and bought an ATM put on SPY, he could protect himself from a drop on SPY through December 16, 2022. For 26 months, MonkeyDew's account is protected from a wipeout. And it would only take 2 successful trades with the remainder of his account to reach $10,000's worth of spreads again. 

Those gains could be achieved on SPY in one week, and his portfolio would be protected by that put for several years after. I strongly encourage MonkeyDew and others using ITM call debit spreads to invest a proportion of their winnings into a long-term hedge before continuing on. Doing so allows the investor to continue trading aggressively, and also maintain a reserve of money that will actually gain value on a black-swan event.

The price of a SPY put LEAPS that can protect the account from a major dive

I would also encourage periodic reinvestment of some of the winnings into index ETFs such as QQQ shares or QQQ LEAPS to ensure continuous growth even when the market becomes less suitable for ITM call debit spreads.

Finally, I would recommend that any trader who is not actively viewing his positions, as in not currently staring at his screen, use stop-loss orders to automatically sell the spread if it drops 50%. Taking a 50% loss while SPY takes a shit is preferable to opening Robinhood and seeing the spread drop 95% with no bid. If actively watching, this is not necessary or even preferable, as the trade may whipsaw and come back up. For the trader who is not watching, stops can save your account.

Scared money don't make money, got it. But neither do traders with the drug dealer mentality- they only make money on paper. Purchasing a long-term hedge will alleviate the risk of suffering a washout, and diverting some of the gains to a more stable position will ensure continued growth of the account. 

I think MonkeyDew is onto something with this strategy. However, I strongly recommend the modifications above to ensure this strategy continues. Keep doing what you're doing, but do it with the protection of a long-term hedge.

Disclaimer: The strategy described above is high risk. This post is an evaluation of the strategy based on Mikey's good faith assessment of risks and reward. For those not prepared to trade with this level of aggression, do not attempt this strategy. Always consult a financial advisor if you are not comfortable handling investments yourself, and always trade within your personal risk tolerance.