Options and futures with Jake Larmour at financiallyFreePodcast.com and neytorres.com
Ney Torres: [0:02] Welcome everybody to the show! Today, we have a conversation with Jake Larmour. I met Jake in an event in California in December and we were just in a line and he’s talking about options trading and derivative trading in a very deep level, so I’m very happy today because we’re going to have a conversation about financial derivatives. Welcome, Jake.
Jake Larmour: [0:26] Thank you for having me out. I’m really excited to be here and excited to provide as much value to your listeners that I can
Ney Torres: [0:34] Thank you. So, can you tell us your story? How do you get into this world?
Jake Larmour: [0:40] Yeah, no problem. So, my journey started a few years ago back in 2015. I like how we met. We met in line at a seminar. I like to go to those, right, constantly trying to expand my understanding, learn new concepts. And there was a seminar put on by what was then branded as Rich Dad Education and Robert Kiyosaki, he’s kind of education company.[1:07] I walked into a room not knowing about finances. I was in college studying engineering, electrical engineering, not because I liked it, because I was told that’s what you do to make money and just looking for a better path. And these people there started talking about stocks and options and other products. You can click buttons and make money. That was never something ever taught in my life prior. My dad, my mom, the people around me knew nothing of that field of investing in general. I found a group of people that I could really connect with and that had the information that I didn’t so that kind of started the journey. I spent a good deal of money in education, in mentorship, hiring ex-hedge fund managers, ex-floor traders, people that just teach me the business. I dove headfirst really. Really seeing this as an outlet that could change my life. I did that. I went full time in trading about 2016. Let’s say started q2 about and that’s what I’ve been doing ever since. [2:20] A few years after that, I started teaching some webinars and then started teaching live in person events all around the world. Most states in America, Southeast Asia, Mexico. Just trying to share with people some of the different concepts I’ve learned along the way because what I find is kind of sad, but it’s very true for many people, is they find this field very overwhelming sometimes. They find it overly complex or maybe too hard, and they never tackle it. In reality, guys, it’s really not. It’s just money. Its own language. It takes a little bit too learn but once you learn about it it’s very freeing. The peace of mind you get even in turbulent times like we’re seeing these days is I think, priceless. So, it’s totally worth that journey.
Ney Torres: [3:13] We’re talking a moment ago. I want to talk today about options because that’s where you really shine, right? But before we go there, you are not trading options at this moment, right?
Jake Larmour: [3:26] Not a lot. Yeah. I’ve shifted my trading style to match the market. And, I think that’s something that took me a while to understand and learn. We’ll talk more about options here in a moment. But what I’m mainly doing is on top of my long-term hold positions, so you know, my long-term investments which I never intend to get rid of, I’m doing a lot of day trading in and out, inside of one day.[3:55] I’m using a product called The Future’s Contract to do that. So, it’s a different type of contract and different derivative but essentially, it’s something that I can just buy and sell the same day. It has good leverage to it so I get good bang for my buck. But in this environment, and we were having this conversation, I think it’s very difficult to really know day by day where the market’s going. [4:22] This global pandemic is really kind of going and we’re learning day by day. How long is this going to take? How many people are going to be affected? What measures are each country, or in America where I’m kind of stationed, what each state is going to do to try to combat this type of situation? We don’t know. And it’s changing so fast. And the markets are reacting to that. [4:49] And one thing you’ll find about options is that there’s many variables to them, and you need to be able to control a lot of the variables to be successful. Right now, I think it’s hard enough to pick direction so that’s all I’m doing is I want to buy low, sell high, or do the reverse and only deal with direction products, just plain simple vanilla and use that to make money and then stack cash to buy some deals. Because I will say this to all your listeners. The takeaway would be I would at minimum be setting up some accounts to start throwing some money at this market. We haven’t seen a good buying opportunity like this in the last decade. We haven’t seen really everything on 30% to 50% off sales for a while, right? So, I’m trying to stack cash different ways so I can start picking up those deals for the next decade to come.
Ney Torres: [5:42] Yeah, me too. Me too. Can you explain me from the beginning what is an option?
Jake Larmour: [5:50] It’s a great question. That’s a loaded question too. Let’s see. Options are contracts. No different than the other types of contracts you use in your life. Like, maybe you have a contract with your job, your employment contract, maybe you have one with the cell phone provider, or even with houses. Every time you do house, like you by yourself. Sometimes there’s contracts involved. So, there’s two people on the contract. Two sides, if you will. These contracts were originally invented as insurance. So that I’d say is a really kind of big takeaway for a lot of people when they first start learning about these is that these products were meant to reduce and take away risk.
Jake Larmour: [6:34] Imagine if you’re somebody like a Warren Buffett or a Soros or an icon or somebody that’s like a massive hedge fund manager, and you have like $10 billion of money in the market. You see a situation like we’ve had recently where we clip 30% to the downside. If you have 10 billion that you’re managing and you clip 30%, you lost $3 billion. Now, I don’t know about you guys, but if I ever lost an amount of money with a B next to it, I think my heart would explode. I don’t have the ability to handle that right now, at my stage in life. Maybe in the future.[7:10] But for those individuals and everybody else like myself, and you included, they created these products that say, “Hey, just like if your home catches on fire, you don’t lose the whole value of your home. Let’s do that with our stocks.” That’s really where the conversation started. It started late 70s, early 80s. They’ve been around for a long time. Now, they’ve recently become more and more used over the last couple decades as computers have gotten better, and we can agree upon what the fair price is. But really, there are contracts that allow you to control a lot with very little. There’s a lot that we can do with that. A lot of cool strategies. But that’s kind of really what they are.
Ney Torres: [7:55] Okay, perfect. So, what kind of strategies do you use? We were talking and, of course, there’s an obvious way to use an instrument. Better the market is going up. Better the market is going down. You kind of have to guess. But there’s other ways where you just sell time, right? Like, you don’t really have to decide if the market goes up or down. You’re selling time.
Jake Larmour: [8:22] Yeah. So, one of the things I mentioned earlier was that there’s a lot of variables with options, right? Let’s compare really quickly because many of us, I’m sure are familiar with stock. Stock has only the variable of direction that you need to worry about. You buy a stock, it goes up, you make money. If it goes down, you have risk, right? So that’s pretty plain vanilla. It doesn’t matter on time. It doesn’t matter on speed of movement. There’s a lot of other things that don’t need to be taken into account, just direction and you can make money.[8:57] What you were just mentioning is, “Hey, there’s a lot have other strategies in the world of options because there’s more variables at play.” There are three major, I’d say groups and categories of strategies. The way that I rank them is number one direction. So, like you were just mentioning. That’s I think the easiest one for people to really wrap their head around. Just like with the stock. Let’s say you buy an option contract that makes money from a price going up. They refer to that by the way as a call option, like you’re going to call somebody on the phone. Easiest way to remember these guys is think up calling up a friend, calling up a buddy, calling up your boyfriend, girlfriend, if you want to talk to them, and husband, wife, whatever it is right. And call up, call up, call up. You can buy these call options. If the price goes up, you make money. Direction. Direction would be the primary driver of profit. [9:53] But there are other types of variables in there as well that you can isolate. So, you mentioned the one that’s time. Time to me is the second biggest category. So, those are strategies that you are literally just trying to profit from tomorrow showing up. It’s a very different type of mindset. Right? It’s not saying it’s going to go up. It’s not saying it’s going to go down. It’s saying I want to make money due to the passage of time. [10:20] I’d say the easiest way to kind of visually conceptualize this would be think about a car, right? Most people, if you don’t have a car… You use a car, right? Even if it’s not yours. Uber, Lyft. Everybody kind of has been in one. Many of us know that when you buy a car, there’s this phenomenon that we refer to as depreciation, where it loses value over time. Now, that’s not all cars, right? Of course, if you collect or use special type of something, it’s different. But the majority of your vehicles, they’re going to lose money every day. Well, if you could not be the buyer of the car, losing that money, and instead be the seller of the car, you could profit that depreciation if you could buy back the vehicles from the same person you sold it to. So, that’s kind of one way to quickly conceptualize, but really time is the second bulk of category. That’s where I like to live the majority of the time. [11:23] You need to realize that markets are not typically this chaotic. They’re not typically this volatile. Most of the time, like even through my couple years in the market since 2015, if I would have seen a 1% move on a day like 1% for the entire market to move, that was a really big day. That was a mind-boggling day. I’m currently staring at the S&P 500 and this is March 25th. It’s up 4%. And 4% seems like a small day. These markets, crazy or not, is kind of the world we’re living in. But in those other more calm times, making money through the passage of time is a really cool way to do it. [12:08] The last category that I’ll quickly mentioned, but not really dive into too deep, is going to be something called volatility strategies. Now, think about it not as the direction you’re moving, not on how long it’s going to take you to get there, because that’s going to be direction in time. Think about it as the speed of movement. Right? Is it going to be really big type fast movement? Or is it going to be very dull, slow movement? The tortoise and the hare, if you will. [12:39] There’s a whole category of strategies that you can make money in whether the bunny turns into the turtle or the turtle turns into the bunny. There’s a lot of different types of situations we can create, but we can make money there as well. [12:53] The one thing that I just want to briefly mention that’s very interesting with options is that you need to be correct more than once. What I mean by that is that when you want to use these products effectively, and this is why I mentioned to most my students that it takes a little bit to learn, but it’s totally worth it in the end is that… Let’s say that you pick direction correct. And you say it’s going to go up and you buy that call option. But you get your timeline incorrect. You thought it was going to take one month and you buy a one-month option, but the move actually took two months. It’s possible to get direction correct, time incorrect, and sadly not make any money. Right? [13:36] So, what you find in the world of trading these types of products is remember, direction, time, volatility. As soon as you pick one as the way you want to make money, the other two become your risk and the game becomes how well you can manage the other variables to make sure that the one you’re trying to use makes you money. If you can do that guys, it’s quite a fun game and it’s one that you can do from home. And man, do people need more ways of making money at home right now. I’m sure you’re loving the fact that you’re in the markets and you can trade. But I mean, I think everybody right now needs some sort of way to be able to work from a computer, make money, and not be beholden to a job.
Ney Torres: [14:22] For sure. In fact, I always say through these podcasts, you need two ways to make money. One is stocks and the other one is real estate. In stocks, we are talking about these derivatives. But for practical purposes, for everybody listening, if you’ve never traded a future or an option… Quite frankly, I’ve never traded a future before. I do not know anything about futures. Probably you can explain a little bit. But in options, it’s a couple of clicks. It’s a little more complex but not that much. It’s another way to play the game. And that’s right. Right now, for example, my rents aren’t going to stop because for example I have gyms and I have commercial property where people have to close their doors. And guess what they’re going to say? “Sorry but we have to close our doors. We don’t have money so we are not going to pay rent.” And that’s hard right now.[15:19] But we have options right now and that’s another game we can play. How does a day in the life look like for you, Jake?
Jake Larmour: [15:28] A day in my life? Oh, well. I mean recently if I would talk about the last 48 hours, I don’t know if that’s going to be really great picture of my every day but I’m pretty fluid. I’m not going to lie. So, I like to kind of make it up as I go. That’s one of the great parts about shifting to mainly day trading. I’ll talk about that for a moment.[15:51] Let’s talk about the last 48 hours. I was up. I was telling you I slept for like an hour between the last like two days ago. I was just getting stuff done. I was driving. I was doing a little rehab work on a property that I have. I needed to fix some stuff up so I was working there. I was working in the markets. And I was just moving and grooving. And then, I finally crashed last night. Woke up about half an hour before we started recording this podcast. Sat in front of the markets to try and see what’s going on and get my bearings. [16:26] But I would say, the normal day would be – I probably wake up. I’m on the east coast. I’m right outside Washington DC. So, I usually wake up between I’d say 11 to noon. That’s typically. Like maybe 11:30 is probably an average of time I like to wake up. I hate setting alarm clocks. I don’t need one. If there’s no appointments on the books, I won’t. So, I like to wake up then. I like to sit in front of the computer. Do maybe a half hour to an hour. That’s kind of my typical. Probably closer to the half hour on the average. [17:02] These days I’m doing more so I’m caveat in that saying, you know, with these volatile markets, there’s a lot of opportunity. I mean guys, it used to take… I mean think about this. The entire year last year, we moved 30% in the S&P 500, which pretty much represents the total US stock market, for argument’s sake. So, it took an entire year to go up about 30%. And that was one of the best years on record. One of the best years in the last decade, right. Gold star type year. [17:33] We moved down 30% in a month. People who know how to trade have been able to make the same money in one month that it took everybody else one whole year last year. That’s the type of market we’re in. So, I’m spending a little bit more time these days. Probably two, two and a half hours a day in front of a screen. But probably not more than that because one thing you have to realize when your day trading is one of the risks people have is themselves getting too sucked in and overtraining. There is such thing as overtraining. It’s good to breathe. It’s good to leave your desk to go do other things, go walk outside. You need to definitely take care of yourself in that regard. [18:15] So, yeah. I’d say in normal days, I would trade again that noon timeframe. That’s typically when the European markets are kind of closing for us, right, because we’re a little offset by timing. So, all the Euro traders are out of the US markets. And it’s really just the US traders through the end of the day. So, I typically trade to the close, not the open. You’ll find for a lot of day traders. They like to sit typically on one side or the other. You trade the early morning hours, right when trading starts, or you kind of trade the ending block or what we refer to as the close, the last few hours. That’s kind of what I like to do.
Ney Torres: [18:56] Got it. So, can you teach me about futures? I do not know bunch of other futures. How are they different from options?
Jake Larmour: [19:05] They’re quite different. When you look at the world of derivatives, which is a very fancy name, if you guys ever took advanced math in school, like some sort of calculus, you’ve heard the name derivative before. Essentially, these contracts have no value on their own. The reason they have any value at all is because they are tied to something else. So, they derive their value from something else. This is true with options. This is true with futures.[19:43] Now, options and futures are two of the most I’d say traded derivative products for the average investor. Average meaning Mom and Pop type investor, you, me, anybody listening to this podcast, kind of sitting in that category. Now, the major difference I would say, between the options market and the futures market is that what these futures are tied to is very different. They’re traditionally tied to physical goods. The hard stuff, right? Hard stuff, meaning your grains, your corn, your soy bean, your wheat, your metal products. Meaning your gold, your silver, your Platinum, your palladium, all these things. It really filled a need at when markets were first developing. [20:38] Think about this. Think about a farmer. And maybe we have some farmers listening, maybe we don’t. I’m not sure. But you know, if you go back long enough, even in American history, Chicago used to be a really big place that people would exchange these goods, right. So, let’s say you raised cattle down south and you wanted to go sell these cattle to market. You’d have to bring them up, take a train, move them up, whatever you do, and bring your goods to market and everybody would come. You bring your corn, your soy beans, everything, and you’d sell it to the manufacturers. [21:14] So, let’s say corn is your product. Because you’re going to sell it to a cereal company, they’re going to manufacture it and make an end good for the average consumer. Well, there was a really big problem back in the day where you had to manage the supply and demand of this product. Imagine if you’re the last person to show up with corn. The last guy. Well, if you’re the last person to bring corn to market, everybody’s already bought the corn they need and you don’t get paid. And for a farmer, if you work… because it’s not easy. I have massive respect for people who actually work the land and do that type of work. Nowadays, like in in some parts of the world, they’re using big manufacturing equipment, big old machines to help them do it. But it’s not easy work. You work all year long to get a harvest. And then, you have to literally dump that harvest into the Chicago River because there’s nobody to give it to. That was a really big problem. You can only maybe do that one year. Two years, you’re broke. You cannot survive like that as a farmer. [22:20] So, what they did is they said, “Hey, why don’t we create a contract? I’m going to tell you that I’m going to bring you this corn in the future.” You can know exactly how much you’re going to get because you’re going to do this with multiple farmers and you’re going to stagger them. So, like, “Hey, I need you to bring the corn this time and you’ll set a date to it. And you’re going to bring me one ton of corn or whatever the amount is. Right? I’ll pay you this set price.” And you agreed to everything ahead of time. That helps solve this issue. What they call that was a contract for the future, a futures contract. [22:57] Now, what started happening is like many other things is that people like to make wagers, right. They like to speculate. The speculators in Chicago started asking questions like, “Well, what if the weather is bad? What if there’s a drought and they can’t grow the corn? How is that going to affect the price.” People started buying and selling these contracts off speculation. They really developed into the futures market that we know, love, and use these days. So, that’s kind of where it originated and what they are. Now, you have a few major categories of these products. They would include your agriculture. I already mentioned that. It’s your corn, your wheat, your soybeans, your lean hog bellies, all that kind of stuff. You’re going to have your metal products, which are going to be your copper, your platinum, your palladium, silver, gold, all those things. So, if you’ve ever heard somebody say, I’m a gold trader or something like that, traditionally, it’s going to be in the futures market. You’re going to have your energy products, meaning your oil, like oil’s a big headline these days with the Saudi Arabia raging war with Russia. But crude oil, if you’re an oil trader, you know, natural gas. If you’re trading different types of energy products, you’re trading gas itself. All of that are found in the futures market. [24:13] And then, you also have your currency products. So, those would include all of the different types of commodities you have. You then have your currency products. So, let’s say you want to trade the pound, the Euro, the Japanese yen. They all have futures contracts that track those. And then, they also have indicee products or indexes. Indexes, for those of you that maybe that’s a vocab term. An index is a basket of stocks that’s used to track performance over extended periods of time. Examples would be the Dow Jones Industrial, the DAX, the Nikkei. There’s a lot of different ones all around the world but they have futures that track those as well. So, that would be the S&P, the Dow, the Russell, the NASDAQ here in America. Pick your market. They’re going to have someone that track it. [25:04] I would say the really big key things to know that really differentiate these markets to other markets are the fact that number one, they’re really big. Big! What do I mean by that? Like, if you trade one oil contract, technically what you’re trading is physical delivery of 1000 barrels of crude oil, you know, those big round barrel drums that you think about in like movies that explode and cause a really cool explosion. When you trade one of these oil contracts, you’re trading 1000 of those showing up somewhere. You tell them where to go, but it’s not like a little bit of oil. This is where all the airline companies… Every airline company trades oil contracts, futures oil contracts that is. Why? Because they need to hedge their cost of gas. They need to do all these. It’s really made for those types of people, not necessarily you and me, but we can use them to our advantage, but it’s really big. [26:06] One gold contract, I’ll give you another example, is 100 troy ounces of gold. 100 troy ounces! You’re looking at gold being 1500 dollars per ounce, and you’re trying to trade 100 ounces. So, there’s a lot of value that you’re trading. But what they give you is high leverage to them. So, if you want to trade that gold contract, they’re not going to make you put up hundreds of thousands of dollars to control that contract, at least not here in America. I can’t speak to every single marketplace necessarily. But here in the States, they only make you put up US$9900 so just under US$10,000 to trade one contract, one single contract. [26:51] But for some people that are maybe they’re just getting started, 10 grand in one trade is a lot of money for them. Let alone if they’re trading two or three contracts. So, I typically say if you have US$30,000 or more in your account, this is when this market can open up and become available to you. [27:11] Now, the second biggest caveat besides the fact that this is a really big kind of contract, is the fact that they trade 24/5, essentially. Not quite. They’re turned off for a certain period of time. Maybe 23 and a half hours a day is a better representation. But it’s almost all day long. So, when you want to trade at night, for example, and there’s been really big news announcements that have happened overnight. One for example, that I mean you’re over in Europe so it’s daytime for you but it’s nighttime for me, you know I can easily remember is when Britain exited from the EU, Brexit. That whole debacle, that whole situation. When that first was voted on. That was at like 9:10pm Eastern Standard when I was at home watching the results come in. It was nighttime. If I only knew how to trade options, I could not do anything to make money. If I only knew stocks, I could not do anything to make money. But because I knew about the futures market and the futures market was open, I could use that to try to make some money and make some good money inside of that. We had about a 5% move down on that news. And that means within putting in at the time off of how much money they had you put up to control a contract, you could have essentially doubled your money on one trade overnight, which is nothing to blink at. That’s pretty awesome.
Ney Torres: [28:43] Yeah, that’s a lot of leverage. That brought to my memory, George Soros, who’s one of the biggest well known, best known, hedge fund managers made a name for himself by shorting them going down the bound back in the day. He was known to be the guy that broke the England central bank. He probably did it by using futures, right?
Jake Larmour: [29:16] Yeah. It’s a lot of leverage. On average, the way I think about it in normal market conditions is about 25x leverage. Meaning that you put in $1, and your $1 is controlling 25. So, if 25 turns to 26, your $1 turns into $2. It’s pretty amazing. People like Soros, as you were mentioning in that famous trade, Breaking Bad or breaking the pound, the Bank of England that is, you know, that you can use these types of products on a little move, create a really big splash in the P&L or the profit loss, which is awesome.
Ney Torres: [29:58] One of the things I like about options is that you can limit your risk, right? Because whenever you’re buying an option, you’re probably saying, “Oh, I’m going to buy, I don’t know, 1%, 2%, 3% of my account into this product. And that’s the maximum you’re going to lose. You know that. These futures, do they act the same way?
Jake Larmour: [30:21] No. That’s something that’s… I love this piece. I love talking about risk more than I love talking about reward because I think it gives everybody a sense of what’s actually going on, but also keeps you very humble in these markets because it’s very easy to get blinded by greed, but it’s also very easy to take a butt whipping if you’re not careful.[30:52] Futures are non-directional products. Meaning you can click the buy button if you want to own one, or click the sell button if you want to sell one. It’ll make money in the direction that you’re pointed. So, if you’re pointed up, it’ll make money going up. You’re pointed down, you’ll make money going down. But there is no limit to risk. You have to limit your risk with other types of tools. Things like stop losses or other mechanisms like that. But those are not foolproof, you know. [31:20] And, a great example, a recent example I can give you is oil. If you remember, and it was the weekend for me, and this was a weekend a few weeks back when oil gapped down from about $40 a barrel down to like $30 a barrel. It clipped overnight from Sunday morning open, Friday close, to Sunday night open for me. It clipped about a third of its value overnight. I think that was the low point it got to is about 30% down. If you would have bought one of these crude oil contracts, just one, at the time, I think they would have made you put in about five grand to control one contract. Recently, now they’re asking you to put up more and more because people took big losses. Now, they’re asking for almost 8000 in order for you to control one contract, and partly because of this situation, is that the people that owned those contracts over the weekend, they woke up on Monday morning to their account losing. And I did the math on this. It was about three times the amount of money that they had in the trade. Meaning that if they had put in only five grand to control the contract, they woke up over the weekend, down $15,000. And that’s huge, right? This is not always happening but that risk is real, right? And your stop losses would have just triggered at that low price. And people had to go through margin calls. It was a scary time for some people.
Ney Torres: [32:57] So, let me ask you something. What happens if I… I don’t know. I have $10,000. I put everything into that contract. I wake up the next morning, minus three times my account. Do I owe money to somebody? What happens?
Jake Larmour: [33:18] You do. And by the way, if you look at interactive brokers, which is one of the really big firms, brokerage firms, that is for international clients, as well as institutional us clients, going into that weekend event, about 80% of their position holders in the crude oil futures market were net long, which is a fancy way to say that 8 out of 10 people that were trading oil at the entire brokerage firm, and they’re one of the biggest, were buyers not sellers. So, they owned these contracts and had to go through this situation. So, this happened to quite a few people. It may bankrupt a few hedge funds possibly. But what happens is you wake up and you owe them that money.[34:05] So, if you had that 10 grand in the trade and you wake up and it’s 30,000, depending on the brokerage firm, what happens immediately depends on the firm in question. My understanding is that firms like interactive brokers give you a 24-hour window. Meaning that Monday morning you’ll go into a margin call. They’re going to say we need you to put in US$20,000 in this account right now to hold this trade, or we’re going to close it out and come after you for the money. [34:37] Now, other brokerage firms like who I primarily use, like TD Ameritrade, my understanding is that they do not wait. They automatically sell it for you and then come after you and ask for that money. But before you ever trade these products, there’s a lot of disclosures that you have to sign ahead of time saying, “Hey, I understand the risk. The risk is real. I know what I’m doing.” Those disclosures have meaning behind them guys. The markets are a great place to make money but uneducated individuals can give it just as fast as you can receive it. That’s a lesson that for some is hard learned. I run my entire business off of risk management. I don’t even look at the profit. The moment you start looking at the profit is when you start trading… Your head is going sideways. You got to be careful. Just manage the risk. Manage the risk. Manage the risk. And the winners honestly just take care of themselves.
Ney Torres: [35:37] I love it. Probably that’s the great value today for listeners. I mean that’s sometimes not obvious. Especially, these weird moments. I call them… Everybody calls them “Black Swan events”. The idea is that they’re very rare, but if you look into history, they happen every seven years. So, they’re not as rare as we think. They kind of happen often.
Jake Larmour: [36:03] Yeah. And it’s good reason too, right? You can’t just only go up. You got to come down too.
Ney Torres: [36:11] So, explain to me a little bit more about margin call. So, let’s say all of you are worth $20,000. All your savings are those $20,000 you have in your bank account. Or, I’m sorry, in your interactive broker account, right? You wake up in the day like the one that happened two weeks ago, they will go for your mess with lawyers. Is that what I’m hearing?
Jake Larmour: [36:39] Ah, well, typically, if you’re trading properly. Let’s caveat some of this. If you have all of your money in one trade, that is not proper trading. In any stretch of the imagination, right? There are concepts in trading things called like the Risk of Ruin theory, where if you put in too much money in one trade, the likelihood that the account can completely blow up and go to zero is too high. And it’s not a viable business model. That number is about 4%. So, you can’t risk more than 4% of your whole account in more than one trade. The properly trained traders, what happens is not that they actually need to put more money in the account typically, it’s that they have to use the other trades that they’re in to finance this massive losing trade that was bigger than expected.[37:40] And so, for example, it’s one of the reasons why I personally think gold has underperformed in this situation relative to a lot of the other products because traditionally, gold is seen as this massive safe haven asset class, right. It’s where people go to with bonds, and with cash, where they see, “Hey, when times are really risky, I need to move out of these types of products into safer ones.” It has that viewpoint. But if you’re the investor that just lost their short on your oil trade, now you have to sell the other stocks you own, the other futures trades that you’re in that are maybe profitable to finance those losers. [38:24] So, honestly, that’s why I think some of these products aren’t doing as well as they could because gold has been one of the only areas that people have made money in as the market was falling as it kept going up as the losses from the stocks, as the losses from oil started mounting. What you do is you sell off some of your winners. Hey, I made money in gold. Let me get all of my money out of gold to finance that loss and we’re good. So, it’s traditionally just selling of assets more than coming after you to add cash. But sometimes it can be a combination of both.
Ney Torres: [38:56] Perfect. Now we understand the risks. For my listeners, Jake, I want to say… I’m one of my listeners and I say, “Okay. I like this option idea where I can limit risk. I can make a living from anywhere in the world through a computer pressing buttons. Where do I start? What’s the strategy you will advise them? It’s like, something low hanging fruit you will give them.
Jake Larmour: [39:26] Yeah. So, I can give a few thoughts. I would say in this marketplace, if you’re brand spanking new, and I was literally teaching a webinar class, that was… I mean it was like six hours of education or something like that. I did that last week. I was telling my students. I was like, “Hey, I don’t feel comfortable quite yet with you doing time strategies or volatility strategies.” My reason is because even the most professional traders that I know, and I won’t consider myself in that category. But I’ll consider a lot of my mentors who’ve been trading 20-30 years in that category. Of those individuals, how many of them are being able to effectively maneuver inside of these highly volatile markets? It’s not many. It’s a difficult time. And if it’s difficult for the pros, I don’t want my new traders to be trying to do those things.
Jake Larmour: [40:19] So, kind of my advice… I am careful with that word in the world of finance. Maybe my thoughts, if you will. It’s a better word. My thoughts would be to learn to buy options. Like you were saying before, it’s very limited risk. When you buy an option contract, you cannot lose more than what you paid for the option. Meaning, you spent $100 on that option, $100 is your total risk. The whole world blows up tomorrow. You don’t lose more than $100. I’m comfortable with people starting there. So, that would be in buying a call, buying a put.[40:55] To give you guys some general kind of I’d say baseline rule sets to really make this helpful for you and give as much tangible content to your listeners as possible is I’d write these things down. If you guys are taking notes, put out your book. I would say as baseline rules, you want to buy two months longer in the trade than you think you need. If you think it’s going to be a one-month trade, buy three months. If you think it’s going to be a two-month trade… I think I just said that. Buy four months. If you’re going to think it’s a one-week trade, buy two months in one week. [41:31] Give yourself more time than you need for the trade to work. Because again, time is the enemy if you’re trying to make money on direction. The other thing that I do is I would buy an option that is slightly in the money. That’s more vocab terms, if you will, but if you think… If the price of the stock is currently $50, I want you to buy it inside and underneath that level. So, buy it at like $49 or $48 or something like that, which will give you a little faster way to make money when you’re right. It’ll have a little less risk. I don’t want to go into all the rule sets for that. But essentially, if you buy it slightly inside… Think about it with equity in the deal. [42:23] So, for all my real estate investors, you can relate to this, right? If you buy a house at $50,000, you know, equity would be… If you only owe 48,000 and you have 2000 of equity, buy an option with a little bit of equity, right? So, go in there and buy more time than you need. I’d feel comfortable people starting there. After you do that, though, say in a month from now, two months from now, I want everybody to write down these words “covered call”. So, covered as in your covering, like a covered porch or like you’re wearing a jacket, you’re covered. And then call as in a phone call. [42:59] That’s a strategy that’s one of Warren Buffett’s you know, number one trading strategies. It’s a way just like rental properties. You can make money short term on your long-term investments. I think for people, if you can make a little bit of money buying these options directionally right now short term, then change that money into good quality stocks, and then just “rent out your stocks” by doing things like a covered call. That would be what I’d want people to start with. That’s a great starting place for them.
Ney Torres: [43:31] So, right now I own, say, a stock. Let me see. Berkshire Hathaway, right.
Jake Larmour: [43:37] Okay.
Ney Torres: [43:38] So, BRKV is trading right now as we speak at 186. I got in at 179. Meaning that I’m making money right now. Just gearing up. How do I write a cover call?
Jake Larmour: [43:58] Okay. Well, I’ll caveat my answer. I wouldn’t write a covered call right now in these volatile markets, but I’ll tell you how to do it. That’s my two cents on it. But what I would do is I would be going over, depending on your software, you go over to what’s referred to as an option chain.[44:18] The options chain is where you can actually look at all of the current available options that you can trade on that stock. Berkshire Hathaway B shares, if you will, what options can I trade on that stock? I’d go right into the options chain that says, “Hey, here’s all the option choices you want.” [44:39] Now, we didn’t quite dig into this too much. And there’s a lot of technical reasons as to why I’d be doing it this way with time decay and stuff like that, but I would go into the closest to 30-day mark. So, what I would do is I’d go to the options chain. What you’ll see there right now is anything from options that last two days, two calendar days, meaning they expire on… Right now, what day the week are we on, my man? I don’t even know.
Ney Torres: [45:08] That’s 25. That means that April 24 will be 30 days. Exactly.
Jake Larmour: [45:13] Yeah, gotcha. But we’re on a Wednesday, right? Day of the week saved in my mind. Honestly, when you work from home, my life exists with market days and non-market days. If I wake up and the markets are moving, it’s a week day. If they’re closed, it’s a weekend. That’s kind of how I know.
Ney Torres: [45:34] It’s funny, yeah. And let’s get out a little bit of options to talk about the lifestyle. It’s funny that people are going crazy with, you know, how do you say this when people have to stay at home?
Jake Larmour: [45:45] Like isolation stuff or kind of quarantine?
Ney Torres: [45:50] Quarantine. It’s funny. I just laugh because I love it. That’s my lifestyle. Like that’s how we live the last 15 years and I love it because you can sit down in your place and just be quiet and learn and read. Yeah, I don’t see the big deal.
Jake Larmour: [46:11] Yeah, I literally. My life is the same. I’m doing a little less traveling, that’s the only thing that’s really changed because nobody really wants to be traveling in this type of environment and there aren’t places that are open to travel to but besides that, I mean yeah, it’s nothing changed and at home doing the same gig, it’s pretty cool.[46:32] Anyways, I was mentioning that because we have some contracts that expire two calendar days from now, that would be Friday. So, if we were trying to place a trade like this, you could place a trade two days out, all the way out to 814 days, which is mind boggling, but that’s a few years. So, I would go closest to 30 days. That would be the April 24th contract as you mentioned prior. And then, I would sell an out of the money contract. So, that would mean without equity. I’m doing a price point above with calls above the current market value. Current market value is 186. And essentially, I want that to be able to give me some growth potential. I don’t want to cut my growth off at 186. I want to say, “Hey, I want to create some, say, short term cash flow but I want to leave growth on the table as well.” And then I would actually personally be selling the 195 contract. So, that would give you about eight to nine more dollars of upside. So that’s on a $200 stock just about your like what? Four and a half percent of growth potential if it goes to 195, which in these markets is like one day, which is nuts, but in normal markets, that might be a whole month. So, I would sell that 195 contract.
Ney Torres: [47:57] For listeners that are getting dizzy with the numbers, that means that in a month you can make 4% on your stock, right? Like, say you have 10,000 – 20,000 of Berkshire Hathaway. You just make 4% of those 20,000 to promise somebody that you will sell them at a price you want to get rid of your stock, right?
Jake Larmour: [48:21] Yeah, exactly. So, you’re making a promise here. So, what you’re doing is you’re getting paid to make a promise. I tell one person and you don’t know who it is, it doesn’t matter. It’s a computer these days. You say, “Hey, I already own this stock. If you want to take it from me and you want to own it, I’ll sell it to you at 195.” which for us is a decent deal because it’s trading at 186. So, we can still make about $9 of upside, right? That $9 in $186 stock is 4.8%. So hey, if it goes up another 4.8% take it from me. I’m okay with that.[48:56] But I’m getting paid to make that promise. So, I’m getting paid in this exact contract on current market values. It’s trading at $600 a contract. $6 a share, each contract controls 100 shares. $600 a contract. So, I can bring in another 600 on my $18,600 investment. I could bring in an extra 3.2% this month. So, the deal is such. Let’s kind of try to take some numbers out of the picture. I get immediately paid 3% on my money to make this promise as long as it stays below the price that I told them, they could buy it from me at. There’s no way they’re going to do that deal. I mean if the current value is open market that is, is 190, there’s no way they’d pay me 195. So, they might use this. They might not. But I get paid no matter what. The stock goes up, down, or sideways, I get that 3% guaranteed by clicking a button, and I still have an extra 4% to 5% of growth on the table. Does that happen? Well, it depends if the market goes up or down. We don’t know those types of things. At least, especially in this marketplace. But it’s not a bad deal. I mean kind of what rental property… Let’s say we max this out. You make 4% of growth, you make 3% cash flow. That’s 7% on your money in one month, one month. That to me is not a bad deal any day of the week.
Ney Torres: [50:29] Yeah, compared to real estate. The good piece of real estate around the world I have found. And that could change depending because the market is hyper local, as you guys know. This street may give me some good numbers. In the next vlog, it’s completely different. But in general, I have found through my experience that if real estate goes from 3% to 12% a year, right. So that’s why we need leverage. So, you can do in a month.[51:00] And let me tell you something. If you want to sell this stock, for example, I want to sell… I think BRK right now, if it goes back to normal, it’s 220 right now. I will gladly sell BRK at 220. So, please take it out of my hands, I have no problems. But if the price goes down, I make 3% a month. And I don’t mind holding BRK because I think it has a lot of value, right? So, if it goes down, I’m happy. If it goes up, I’m happy. I’m making money. Thanks to a little bit of sophistication through options. So, that’s why it’s important to learn to stop. Jake, how long do you think it will take somebody to feel comfortable doing this?
Jake Larmour: [51:43] That’s a great question. And I do want to make one extra comment to what you just said. I think it is important for people to learn this stuff. There is actually a year that Microsoft, the computer company, the most profitable division of the entire business was the division where they sold call options, what we’re doing right here, we’re talking about doing at minimum, against their own company held stock.[52:09] They made more money there than they did with hardware, than they did with software. It’s where they made the most money one year. This is what the biggest players in the world are currently doing. Just because you aren’t, doesn’t mean everybody else isn’t. So, definitely get caught up to speed with how the world of money really works. How long is it going to take for somebody to feel comfortable and confident? That’s an individualized answer. I will say I have some general guidelines that I provide to any new trader if they’re jumping into this field that I’m willing to say in a recorded sense that I feel most people can hit. [52:49] Now again, do I have students of mine that go much faster than this? You better believe it. Do I have students that are kind of slower? Sure. I mean everybody’s a little bit difference. But what I typically tell any new student is I say, you know, usually from starting zero. Meaning you don’t know what a stock is. You’ve never even looked at anything ever. Ever. I would say typically my goal is 60 days or two months for you to start using your real money. And somewhere in that ballpark. That could be two weeks out. That could be three weeks, four weeks, six weeks or eight weeks. It doesn’t matter to me. Everybody’s different. [53:29] But I want you to set some time goals for yourself. Don’t just say, “Well, I have to wait till I know everything. It’s not going to be like that. I don’t know everything. I’ll be the first to admit that. These markets are ever changing, ever evolving. The deepest rabbit hole I’ve found in terms of things you can keep learning about. So, you have to set some timeline goals. I’d say two months so that you actually have money in the market, doing some clicking buttons, doing this stuff. I would say about six months out, you would probably know a bunch of different strategies. If you’re going to treat this like a business, that’s the point that in my opinion, you should have a fully formed business plan. [54:10] The business plan includes what strategies are you doing them? How are you doing them? What’s all your rules for your strategies, your risk, your reward side? How many of each are you doing? When are you doing them? It could be time of day, how many a day. Everything. Just like a regular business plan, everything being thought out. About six months from zero is when I think it should be fully formed. Right? You’ve tested a few things. You’ve tried a bunch of different strategies. You’re like six months out, I’m good. And then, I would say about one year from start, I think anybody and everybody should start feeling really competent, capable, and confident in their ability to execute on that plan. [54:50] Now, that’s for a business. If you are only trying to learn how to run out stocks. That’s a different conversation. That could literally be, maybe a few months of somebody. Just like, “Hey, I only want to learn one strategy. I just want to do things like covered calls on my long-term account. That’s it. Never anything else.” Okay. Obviously, there’s going to be a lot less to learn. But I also want to talk to the students or potential listeners here that, you know, maybe they’re really thinking about taking this up as a new business opportunity, especially when they’re at home quarantined, you know. [55:22] I want to be realistic with you. It’s not overnight. It’s not like zero to 100 necessarily. Can it be? Sure. Right? But when I’m giving you guys these timelines. I’m expecting you to only be doing about five to 10 hours a week. A week. That’s like, I don’t know, half an hour a day. An hour a day is kind of what I would expect somebody to be able to put in. This is really super realistic, not changing your whole life making this everything you do but maybe taking an hour in the morning to learn some this, do a little bit. And you just do that for the next couple months and it really snowballs into something amazing.
Ney Torres: [56:01] Thank you very much, my friend. Jake, it has been a pleasure to talk to you. Thank you for your time. Where can people find you?
Jake Larmour: [56:11] You can find me on social. Just @JakeLarmour, literally. J-A-K-E-L-A-R-M-O-U-R. Any of the networking sites, feel free to reach out, you know, Facebook, LinkedIn. Any of those you can find me. I don’t have a website or anything quite yet. I’m working on it. We’ll see. Maybe in the future. But I will say this for the females that are listening that are interested in a female centric voice because I will say there’s a lot less females out there than there are males. I have a trading partner. Her name’s Emily Maurie. She’s immigrant from Kenya. Most amazing human that I ever know in this world and she’s the only person in this role that has full access to my trading account besides myself. I trust her more than I trust my family type deal.[57:03] She has her own whole thing. I’m serious about that, too. You need people like that in your life to keep you accountable. Right? Anytime I place a trade, she gets a text message. Anytime she places a trade, I get a text message. And we hold each other accountable. She has a whole website, whole social media, everything. It all talks about it from a female’s point of view, which is a little different than a male. I recommend checking her out. You can find it Women In Trading. So, just the word women in trading. Look her up if you want to, but I would say that’s a few different sources. And if you’re looking for some help, reach out. We’re here to help.
Ney Torres: [57:46] Thank you, my man. See you in the next time.
Jake Larmour: [57:48] Sounds good.