Casino Trading

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I know I’ve been quiet the past couple of weeks, but don’t mistake my silence for sedation.

I’ve been recharging my batteries and getting my mind right for the year ahead, and now I’m LOCKED & LOADED, BABY!

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I’ve come up with a blueprint to make the next trading year a banger, and hope that by this time next year, I’ll be able to donate even more trading profits to St. Jude than I did in 2019.

  1. The most popular method of trading like the house of a casino is to use credit spreads. Credit spreads involve the simultaneous purchase and sale of two options contracts, either both calls or both puts, with the same expiration date but a different strike price.
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  4. One important difference between day trading and going to the casino is that when you go out to gamble, you have a negative expected return. In other words, the house is always expected to win over the long run, on average. Trading, however, if done skillfully and artfully, can put you in the position of the house.

My path to a million bucks this year is dependent on working my three primary services — Jason Bond Picks, Smoke Signals, and of course, Weekly Windfalls.

The guys and gals who have been with me a while probably know why we call the credit spreads I trade in Weekly Windfalls the “casino strategy.”

But for my newest subscribers (welcome aboard!), let me break it down for you…

And for fun, I’m throwing in a few stats to take to the actual casino this year.

The Casino Strategy

I trade bull and bear credit spreads in Weekly Windfalls.

But what does that mean?

Well, to put on a bull credit spread, I would:

  • Sell a put option at a strike that aligns with support for the stock
  • Buy “insurance” on that positionby purchasing a lower-strike put, which protects me in case the stock makes a big move lower

Since the premium I received from selling the first put is more than the premium I paid for buying the second put, the spread is established for a net CREDIT.

Hence the name — bull credit spread.

The credit that I receive from the get-go is the most I can possibly make on the trade, assuming the stock doesn’t move majorly against me and the options stay out of the money (meaning the stock stays above the sold put strike).

My goal is to capture as much of that premium as possible.

If the stock does move majorly against me, though, the “options insurance” I bought via the purchased put limits my risk on the trade.

Specifically, risk is capped at the difference between the sold and bought option strikes, minus the initial credit received.

On the flip side, to put on a bear credit spread, I would:

  • Sell a call option that aligns with resistance for the stock
  • ”Insure” my sold call by purchasing a higher-strike call, which protects me in case the stock makes a big move higher

But — you know what? Maybe it’s best to teach you with a real trade example.

On Dec. 27, I told my paid Weekly Windfalls subscribers:

Casino Training Online

I sold the Jan 17 $220 / $222.50 vCs for $1 premium using $15,0000 to try and make $10,000 if I’m right and BABA is below $220 at the close on the 17th. I fully expect to close this trade much earlier than the 17th but wanted to give myself a little time just in case.

What I like about selling a vertical Call spread on BABA here is the declining volume divergence from price action. Rallies are getting less and less volume and the 7-day RSI is very extended so while it’s still making a new high (yesterday) I think it’s very close to the top.

This means I:

  • Thought Alibaba (BABA) stock was running out of steam and was overbought, and would stall under the $220 level
  • I sold the weekly 1/17 220-strike call
  • I bought the weekly 1/17 222.50-strike call, to limit losses in case BABA continued its rally

I received a credit of $1 for the spread — that would be my maximum profit.

Since I trade 100 contracts at a time, and each option contract represents 100 shares, the credit came out to $10,000.

Then, the most I could lose on the trade was $1.50 per spread ($2.50 difference between strikes minus the $1 credit), or $15,000 (x 100 contracts).

In other words, I was risking $15,000 to make a possible $10,000.

So, how did the trade pan out?

Very well!

This past Tuesday, Dec. 31, with BABA still trading under $220 (my sold call strike), I cashed in my chips with my spread worth about $5,000 — or about 50% of the premium!

But, you ask, why is it called the “casino strategy,” Jay?

The bull and bear credit spreads are called “the casino strategy” because they give you odds similar to that of a casino — i.e. the best odds.

These spreads tend to profit roughly 70% to 80% of the time, and can make money three ways:

  • If the stock moves in the anticipated direction
  • If the stock makes a slight move in the wrong direction
  • If the stock stays stiffer than James Franco hosting the Oscars

That’s because traders who put on credit spreads are option sellers, even though they also bought an option. (Using the BABA example, had the purchased option cost more than the sold option, it would’ve been a DEBIT spread, and I would be considered a buyer.)

And the odds are in favor of option sellers, because the probability of profiting is greater.

Does that mean you shouldn’t buy options?

Of course not.

In fact, in my new Smoke Signals service, I’m buying only put options, anticipating this bull market to run out of steam soon.

But those are more aggressive trades, with a higher risk/reward ratio. I’ll continue to make my more conservative trades in Weekly Windfalls.

Your Real Casino Handbook

Now… for what you really came for. 😉

Just for S&Gs, I wanted to share some interesting statistics on actual casino games.

But first, a note about the “house edge.”

The house edge tells you how fast the money will be lost. A player at a game with a 3% house advantage will tend to lose their money three times as fast as a player at a table with a 1% house edge.

That said, according to experts, table games give you much higher odds than slot machines (which we’ll get to later).

However, some people avoid the table games at casinos because they’re intimidated — usually because they’ve never played.

So here’s some advice I found around the web…

Blackjackis one of the easiest table games and gives you the greatest odds of winning.

  • Goal: For your cards to add up to a number that’s higher than the dealer’s number without going over 21.
  • The house edge at a Blackjack table is just 1% at most casinos.
  • The dealer has a slight advantage because the player has to go first.
    • Also, if you both bust (go over 21), you lose.
  • Some estimate you have about a 44%-48% chance of winning at every single hand of Blackjack — making it the most favorable casino game.

Of course, different casinos have different ways of playing Blackjack. Per experts, here are some variations that are beneficial to the player:

  • Fewer number of decks
  • Doubling after splitting
  • When the dealer stands soft on 17

If you’re still not feeling social enough for the Blackjack table, but want those hot odds, you can play video Blackjack, which gives you similar odds.

Crapsgives you the second-best odds of winning, at nearly 50-50.

  • Goal:There are MANY ways to play Craps, but the easiest is playing the Pass and Come bets.
  • The Pass bettor wants the dice roller (the shooter) to win.
    • If the come-out roll (the first roll of the bet sequence) is a 7 or 11, the Pass bet wins.
    • If it’s 2, 3, or 12, the bet “craps out” (loses).
    • If the roll is any other number, it becomes “the point.”
      • Now the shooter wants to roll that same point number before rolling a 7.
        • If they hit the point before a 7, it’s an even-money payout.
        • If they hit a 7 before the point number, the Pass bet loses.
  • The Come bettor steps in when the Pass bettor has rolled a point.
    • If the shooter rolls a 7 or 11, the Come bet wins.
    • If the shooter rolls a 2, 3, or 12, the Come bet loses.
    • Any other roll becomes the point for the Come bet.
  • The house edge for craps is about 1.4% (assuming only Pass/Come with full odds)

Roulette also gives you a nearly 50% chance of winning, assuming you stick to betting on just Blacks or Reds. If you bet on Red and that’s where it lands, you will double your money.

However, the house has a slight advantage due to the extra 0 and 00 slots on the Roulette wheel, which are green.

If you’re feeling hot, though, you can play just one number — if it hits, it pays out 36-to-1.

Pokercan also offer good odds at a casino, but because it’s steeped in a lot of strategy (as opposed to pure luck), it’s important to practice before you sit down with seasoned players.

The house edge on poker can be less than 3%, if the player is very skilled.

On the other hand, Keno — a game of pure chance — has a house advantage of nearly 30%. Yikes.

In the same family, slot machines require no skill — they’re in the “game of chance” family. They have a house edge of 10% or more, which is also not great for players.

Several articles indicate the popular “Wheel of Fortune” slot machine offers the worst odds for players, feeding the casino about 20%.

But research indicates a few tips and tricks for slot lovers:

  • The higher your bet, the higher your chance of winning
  • Penny slots offer the worst odds — $1 and $5 machines tend to pay better

Meanwhile, Nevada’s 2017/2018 fiscal-year gaming revenue report indicates you should reconsider your trip to the Las Vegas Strip… and hit the Boulder Strip in Nevada instead.

Data showed higher slot payback percentages there compared to the Vegas Strip, and some Boulder Strip slot machines offer the best returns in the U.S.

In conclusion — whether gambling at the casino or on stocks via options trading, it’s important to know your odds.

Also, as with options trading, you need to be responsible when gambling. As I said in my 2020 trading plan, making money is about trading smarter, not trading more or trading for the rush.*

That said… while everyone enjoys a mind-numbing pull of the slot machine lever, I’d much rather be the house.

Casino Trading System

*If you or someone you know has a gambling addiction, call The National Council on Problem Gambling Helpline for confidential guidance at 1-800-522-4700.

Gambling?


Is day trading gambling?

In a word, YES.

But let's examine this more closely and see why I consider it tobe gambling and yet still a viable business.

What is gambling?

Some dictionary definitions:

  • the act of playing for stakes in the hope of winning (includingthe payment of a price for a chance to win a prize)
  • a: to play a game for money or property b: to bet on anuncertain outcome
  • to stake something on a contingency : take a chance

Some assumptions

In order to make a comparison between day trading and gamblingI'm going to broadly define 2 types of day trading and 2 types ofgambling and use examples for each.

For my gambling choices I take the casino games of roulette andblackjack because I feel that more people reading this article willbe familiar with these two games of chance than any others. (Youmay be a poker player and that can be substituted for blackjack.)Roulette has fixed odds of winning and a fixed payout. Blackjackhas variable odds of winning and a fixed payout.

For day trading I chose the mini-sized Dow ($5) Futures (YM).This instrument has variable odds of winning and trading it can bestructured such that it has a fixed payout similar to blackjack androulette. I also define two day trading methods in order to makethe comparison. The first day trading method is calledrandom and using this method both direction and time of entryis randomly chosen. The second day trading method is calledsignaled and using this method both the direction and time ofentry is based on a predefined signal. Both methods of day tradinguse a 20 point target and stop.

This leaves us with two types of gambling:

  • roulette
  • blackjack

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and two types of day trading

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Trading

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  • random
  • signaled