GHETTO SPREADS: What are they? $CVNA — Jackie Le' Tits — Video Wiki
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Full transcript (1,088 words) — every glorious word
0:01what is a ghetto spread right you've heard me talk about this a few times before so let's let's answer that question once and for all what is a ghetto spread a ghetto spread is taking the implied move for earnings and then doubling it AKA two standard deviations away from the anticipated move okay so how do we get the expected move I like to use Market chameleon and I go into the earning section implied moves and IV and we've got carvon on here it says the anticipated move is 15.9% all right 15.9% so what we do is I'm just going to round it right we're going to take 16% and we're going to double it from where price action is right now all right so that means that we're going to take this to 32% and that is supposed to give us the strike prices that we are targeting right that's supposed to give us the strike prices that we are targeting so in this instance I would just say go to 30% and that I mean a 170 strike call is probably be what we would Target so uh let me just open up my broker here I'm just going to open up my phone and I'm going to make sure that we put the proper options in here so we're looking at a cvna 170 strike call for the expiration of next week okay so August 2nd is the one that we are looking at for carvana for the 170 and then what we do is then we take that exact same measurement to the downside so we measure 30% down that gives us a strike price of roughly let's just call it 95 right let's call it 95 just to be safe so a 95p with the exact same expiration August 2nd or just for the expiration of next week when the earnings is right now a lot of the times I do suggest taking these ghetto spreads early because these stocks typically the ones that we do for these ghetto spreads are very volatile given that they're very volatile typically this leads to explosive moves in price action right even before the earnings happens so if you take the put and the call a lot of the time because the implied volatility will continue to rise prior to the earnings those puts
2:24and calls can both actually go up even if price only goes up or only goes down a lot of the time those calls and puts can actually increase both in value all right A lot of the time they can actually both increase in value okay so that's why I like taking the ghetto spreads early and often so here's the deal the uh 95 put okay so the 95p is trading at $74 as I type this okay and then the 170 C is trading at 195 as I type this now the C is pretty expensive right at $195 that's pretty expensive so what I would say is maybe we can even take a little bit more risk right with a little less money on the table and what we could do is we could do a carvana uh 175c instead of the 70 okay for the same expiration and then that contract okay that contract is currently trading at 15 okay so they're still both relatively expensive all right so they're both relatively expensive no matter what you do but having said that we have traded the carvana ghetto twice already and both times since we've traded it it has led to over 1,000% in gains because carvana is so [ __ ] volatile so just understand that if you don't have the cash to do this ghetto spread that's okay right because this is a fairly expensive one you're going to have to put on a minimum of 150 and 75 so you're going to put on basically a bare minimum of about $225 at a bare minimum right right arguably you could put it on as high as 300 if you took the 170 call the reason the 170 call is so Juiced out right now is because of this big move that it's made so far today of 7% so that's why you're seeing the calls are kind of Juiced out a little bit so if you want you could wait until next week right you could wait until Monday to take this trade and maybe some of these options contracts will have come down a little bit okay but that is what we look at for a ghetto spread and the idea being is the reason it's called ghetto is because the options are supposed to be cheap and the reason it's
5:04a spread is because you're taking an options on both s side of the trade the idea behind this is though is that there is logic behind two standard deviated moves beyond the fact that there's logic behind two standard deviated moves you have a reason for the stock right to take this spread because every [ __ ] earnings this thing is so volatile right it is super [ __ ] volatile 15% this one was 32% this one here was 33% so like you guys can see that the earnings are relatively really volatile right so if we have another volatile earnings you could potentially turn this you know $200 to $300 into like 1,500 or better right like it really could be like that now I it's not a guarantee it's never a guarantee because anything at any point could happen at any time right and we we hope for the best but prepare for the worst but these ghetto spreads right are meant to turn a small sum of money into a larger sum of money it is not meant to make you rich overnight so you are not supposed to be trading you know 20 of these [ __ ] contracts when I do the ghetto spread I'm just doing one of each and I'm turning a small amount of money into a large amount of money or I'm walking away with a small loss right that's what it is at the end of the day okay so that is what a ghetto spread is and what we are looking at in terms of a ghetto spread for carvana all right I'm going to go ahead stop this recording and then we're done