How Jim Plans to Turn $25K Into $750K With Systematic Options Trading

[00:01] aware of the power of ensembling uncorrelated trades that have positive expectancy. To me, that's really the magic in in what I'm trying to do. My magic in in what I'm trying to do. My guest has set himself a very ambitious

[00:15] goal to turn $25,000 into $750,000 into $750,000 in only 2 years. How will he do that?

[00:27] Tim, let's go straight to it. Most traders would think your $25,000 to $750,000 in 2 years is just impossible. What

[00:39] makes you think you can pull this off? Or is it basically a joke? I'd say it's not a joke. Um, you know, 25 grand is not a trivial amount of money to me or or my family or most people, I wouldn't think. But I think a

[00:54] lot of traders may not be aware of the power of ensembling uncorrelated trades that have positive expectancy. So, to me, that's really the magic in in what I'm trying to do is uncorrelated trades um put together in an optimized

[01:10] ensemble, traded systematically, and I'm also doing it in an automated fashion as well. Tell us about yourself, just both as an options trader and a person. >> Yeah, so I mean, I'm just a retail trader. Started trading more seriously

[01:26] trader. Started trading more seriously in 2020. I was looking for a hobby, uh kind of like most people when COVID hit, and stumbled upon the Option Alpha And kind of got my start there. I also traded on their platform for a bit. And

[01:41] then from there, I kind of uh found out about Tastytrade and Tammy and a couple of the other trading groups like Trade Busters and Speaking Greeks and that sort of stuff. So, really got serious in probably 2022.

[01:56] And it's been really my main hobby since then. So, a lot of people probably come home from work and kids go to bed, maybe play video games or watch sports and that sort of stuff. To me, I I I think I get the same gratification from running

[02:09] back tests or optimizing back tests as people do probably from playing a video game. Now, you have started this project that you call Falling Knife Project, where the goal is to grow $25,000

[02:24] to $750,000 in 24 months, and you are doing this publicly. What What made you come up with this idea? Yeah, so actually in one [clears throat] was talking with a few people, and we were talking about a

[02:39] different group that um trades very, very aggressively. Uh they martingale, which is doubling your bet size when you lose, and you keep doubling your bet size until you either win or blow up your account. And now,

[02:52] I'm not martingaling. I I don't think that's a good idea, but that is kind of what spurred the aggressiveness of what I'm trying to do. It got me thinking, what could I do and how aggressively could I potentially scale some of these

[03:05] debit trades I have because I already had some that I was running, and then I had recently um kind of come up with a few more. And so, I put them in an ensemble, ran the backtests, was pretty happy with what I saw.

[03:18] And uh I did share with a couple people what I was going to do, and and somebody said, you know, if you if you end up pulling this off and you didn't document it or make videos or something like that, then did you really even do it?

[03:31] publicly, but really the the main thing I'm trying to do is is is turn it into 750k. That's what I care the most about. And that is actually 30 times $25,000.

[03:44] What would it take to get there in that time period? It would take definitely time period? It would take definitely not a huge regime change. Although, um 2016. Uh the the main model for what I'm

[04:01] trying to do, I went back really focused on uh daily expirations from SPX. Um and that's because I run different durations of trades within the strategy itself. >> And we we will talk more about the risk uh later. But just to tease that topic a

[04:18] uh later. But just to tease that topic a bit, how big risk are you taking in this that you will actually blow up your account instead of succeeding? Yeah, I mean, it's a very real risk. I did run some Monte Carlo simulations. I ran

[04:33] bootstrap and permutation testing, and it indicated that starting with about it indicated that starting with about $25,000, which is what I did, that the risk of blowing up out of the gate was about 20%. That risk declines over time

[04:48] because of how I'm scaling, but obviously a significant amount of risk. there's no regime change and that I don't get hammered by sequence risk or something like that. So, you will either end up as the

[05:02] fantastic guru who multiplied your money or as the fool trader, maybe. Um that's fine. I can live with that. I to the risks in this. I've been doing it for quite some time. You know, if I fail

[05:18] and and the account does blow up, you know, I again, I wasn't naive. I'm I'm possibility. So, where are you now about a little bit >> So, the end of next week will actually be 3 months in, and right now, I believe

[05:35] my profit's a little over $23,000. So, um a little north of 95% over a little over 2 and 1/2 months. I had forecasted out the schedule for the

[05:47] had forecasted out the schedule for the first for the first 6 months. Um I need to make about $7,700 per month. Um so, really I'm I'm right on track for that. I'm a sliver above or ahead of pace right now. And I think

[06:00] what's fascinating about this is this is although you are very open about the risk you're taking, it's not a just a big gamble and see how if you can do it. It is actually a very thought out plan with a set of different strategies that

[06:17] you have backtested for a long period that you believe has a fair chance of actually achieving this goal. So, let's get into your plan. Can you tell us a get into your plan. Can you tell us a little bit more in detail about how you

[06:31] set up the plan for the Falling Knife Project? Yeah, so starting with 25 grand, uh the reason behind the $25,000 um the minimum you need to avoid pattern day trading uh rules. That was one

[06:46] thing. There's also just a mental hurdle there. That's really all I could or was willing to lose in this project. Um and then when I modeled things, I also tried to see how much leverage I could apply with modeling a 50% drawdown, assuming

[07:01] that in real life, I'm going to at some point probably come pretty close to doubling that drawdown. Um and that was pretty close to 750,000. It was a little under it, but I went ahead and rounded it up. The ensemble itself is made up of

[07:16] seven trades total with four of them being what I call the core four trades. Those trades make up about 80% of the total returns of the portfolio. Um all four of those trades are debit spreads.

[07:30] And there are three additional trades that I call tinker trades, and those are more convex trades, um simply buying a call or a put option. Um and those trades, several of them are actually negatively correlated with the

[07:45] core four. So, in some ways, they will act as a hedge or will lock in profits >> [clears throat] >> How have you used backtesting to come up

[07:57] with these seven trades? Trading uh and backtesting is really my main hobby. So, backtesting is really my main hobby. So, I spend tons of time backtesting. Um my wife can't stand it, but um I think she's she's accepted that it

[08:12] is what it is at this point. But um I do use Option Omega for backtesting. I think what I I lack maybe in mental aptitude of some of these Ivy League graduates, I kind of make up for in grit, I would say. And these seven

[08:27] in grit, I would say. And these seven strategies are not correlated, I guess. They are uncorrelated, where between uncorrelated and negatively

[08:39] correlated, right? So, uncorrelated means that they just do not move together, okay? Whereas negatively would mean they move in the opposite direction. So, really what I'm trying to do is run as many strategies as possible

[08:53] that are uncorrelated, and make sure that I'm sizing them small enough so that no single loss will draw me down too much in the portfolio. And really, the magic is that right there. It It prevents significant drawdowns and

[09:06] really smooths out the equity curve and really is what makes this whole thing possible. And I know you also have a plan for how you will scale up your plan for how you will scale up your trades as you become more as you collect

[09:20] that? Yeah, so I'm using what I call Yeah, so I'm using what I call step-based scaling. So, the initial starting balance is $25,000. I'm trading in fixed lots for that first

[09:33] $25,000, and then I am only scaling up at fixed and then I am only scaling up at fixed profit milestones that I predetermined, and those fixed profit milestones get wider and wider apart or further apart

[09:48] as the project goes along. And the point of that is to really start deleveraging and de-risking as this project goes along. For example, we started with the $25,000. My first scale up is at $40,000 in

[10:01] profit. So, when my net lick reaches $65,000, I'm essentially going to be doubling my bet size from that initial $25,000 amount of leverage. Take note of the date.

[10:16] December 17th at 12:00 noon Eastern Standard Time. We will organize a new Theta Live that you don't want to miss. The topic this time the wheel, covered calls, and cash

[10:30] secured puts. Income strategies many of us trade, but as always, the difference is in the details. And to break it all down, we have invited three traders that you all know

[10:46] from previous interviews on this channel and who approach these strategies differently. The first guest is Paul Gunderson, who has done thousands of wheel trades. The wheel strategy has produced very

[11:02] consistent income for me. Even on stocks that don't [music] pay dividends, the wheel creates very reliable income. It's a fairly low-risk strategy. And we have

[11:14] Lee Lowell with decades of market experience. experience. He just loves selling puts. The risk of ours is very low. I would put our risk in the one to three category on your

[11:27] scale. And then we have Brian Terry, who runs the Conservative Covered Calls runs the Conservative Covered Calls Facebook group. To me, it it seems to be a great income strategy. And I like trading options. I pretty much do that

[11:41] In this Theta Live, they will all present how they trade their strategies. But we will have lots of time for your questions. Ask about entry mechanics,

[11:55] when they take profit, what they do when things go wrong, how they manage their trades, or whatever you would like to ask these three great panelists. This is December 17th. Check the link that you see on the

[12:11] Check the link that you see on the screen and register to secure your spot. See you then. Let's get into your strategies. But first, you said they were all debit trades, not credit trades. Why is that?

[12:24] Debit trades are [snorts] much easier to leverage because they don't require as much buying power. If I were [snorts] to try to do this with credit trades, it would reduce the buying power too much. I would not be able to compound and grow

[12:39] this project. So, that's really why I'm doing debit trades instead of credit. What I typically do is is credit trades, and that's my main trading. That's what I do. But over the last year or so, I'd

[12:52] say I've gravitated more towards the debit side as well as credit trades that require no stops, simply because of some of the liquidity issues that we've seen with the CBOE and stuff like that over the last couple

[13:06] worried. Are you placing these trades manually or is it automated or a combination? Yeah, so I have a full-time day job that's very demanding. So, everything is fully automated. I will sign in for the

[13:22] week or whatever to keep the automation active, but I don't have to touch that's a big part, I think, of being systematic and mechanical is making sure that you're keeping your hands off of the trigger and letting the

[13:37] odds play out and the back test play out, live trading play out like the back test. I'm sure everyone is now very curious about what are exactly are those strategies that you hope will bring you to $750,000.

[13:53] you hope will bring you to $750,000. So, you said that you have four core strategies. Could we walk through those one by one? not going to give the exact mechanics, but the four [clears throat] core four

[14:06] trades, I have an oscillator trade, which really that takes advantage of the which really that takes advantage of the market typically moving a set duration or a set amount over a set duration of time. Okay?

[14:19] I also have a volatility crush trade, which takes advantage of the VIX gapping down overnight. Typically, when that happens, the market tends to be a little bit more volatile the next day or volatility can become underpriced.

[14:36] I have an inside day replicator, is what I call it. And an inside day, for those who aren't familiar, is when today's range trades totally inside of yesterday's range. That would make today an inside day.

[14:52] And [snorts] if today is an inside day, when today's ranges are broken, okay, in run. And so, that's what my inside day replicator takes advantage of. And then I also have a trend trade, which that

[15:08] one I don't give too many details on because I really like to use that in my credit selling as well. And what type of DTEs and deltas are we

[15:21] talking about the underlyings? Yeah, so half of the core four are zero DTE, and then the other two are a little bit longer duration. None are more than 21 days to expiration. And then as far as the deltas, I like to

[15:36] like to play pretty close to the money, I would say, on on all of these trades. But Jim, why can you not give us the exact mechanics of these trades? We are all curious. I'm I'm sure you are. I do believe in

[15:50] alpha erosion, I would say. Also, the fact that I've spent the hundreds and hundreds of hours kind of putting in the work to back test, you know, I feel like people can put in their own time and and do that. Now, if I am successful and I

[16:07] achieve that 750k, maybe we could circle back and I could divulge a little bit more of the secrets at that point, but uh for now, I'm just going to give the premise, I would say. Can you also give us a little bit about

[16:20] the three extra trades that you have? Yeah, so those are more timing-based trades. All three of those actually fire in the afternoon. And again, they're more convex. So, simply buying a call or a put based off

[16:34] simply buying a call or a put based off of a basically a signal or trigger for those three trades. But the core premise here, if I understand it correctly, is that you have an ensemble approach. You take different strategies that are not

[16:49] correlated and together they give you the hope that you can actually achieve this goal. Yeah, for sure. So, if you, you know, were to just run one of these strategies on their own, the equity equity curve would look, you know,

[17:02] pretty solid, I would say, on them. But again, the the secret sauce is really combining the uncorrelated trades together. And I do I on YouTube, and I'm sure other people have made videos showing the same exact

[17:17] uncorrelated strategies, you know, you might have a pretty jagged equity curve, but if you combine four that are non-correlated and have positive expectancy, you can really smooth out that equity

[17:31] curve. But what is the projected curve for how you will reach $750,000 in 2 years? You are now almost double the money and that's you said that that

[17:44] is the projected curve after almost 3 months. I don't scale up, at least in the projection, for about the first 6 months. And for those first 6 months, the projected profit is $7,700 per month.

[17:59] At which point, I will double my bet size if I'm fortunate enough to get to that point, which will also double the expected return per month. What is that? $15,400. Once I get to the next milestone, yet

[18:12] another $7,700 because I'm scaling up again. The back end of the project is where things are going to get very interesting. that point because

[18:25] that point because this is very, very aggressive. So, that is not being actively managed, it's just

[18:37] kind of managing itself, draws down 20% the psychology and the feeling of that is totally different from when you're in control of your own trades. So, drawing down, let's say I get to 500,000 and I draw down 20% psychologically, that's

[18:54] me. So, that's that's one of my bigger concerns as well. But again, if I'm fortunate enough to get to that point in this project, I've got to be doing pretty well. So, we'll we'll deal with that when we get that get there. You say

[19:07] in your videos that you take crazy amounts of risk. How worried are you that you will blow up your account? valid concern. Again, with the permutation and bootstrap analysis, out

[19:22] permutation and bootstrap analysis, out of the gate, I was looking at 20% risk of blowing up the account. And again, that was assuming that there's no major regime change. It assumes that I'm not overfit. That sort of stuff. So,

[19:35] definitely very aggressive, I would say, at this point based on the permutation and and bootstrap testing at the $48,000 that I'm at right now, the risk is much

[19:49] lower. It's more in probably the couple one-to-two-to-three percent range. However, when I scale up again, my risk of blowing up is actually going to increase due to sequence risk and basically re-leveraging a little bit at

[20:03] that point. So, the risk of blowing up is going to go back up to about 10% if I again, assuming I get there, once I scale up this this first time. If

[20:15] I can get beyond that, I think I'll be in pretty decent shape in terms of blow up risk. But you are mentally prepared that you might actually lose all the money. I am, yes. For sure, that's definitely

[20:29] something I'm I'm not naive to. And your wife is also okay with it? Um she was pretty apprehensive about it out of the gate. She's also very conservative in terms of finances, which I can certainly

[20:43] appreciate that. I'd rather have it that way than the opposite. I think she trusts me enough to allow me to do this. So, you know, I'm grateful for her for for trusting in me and hopefully uh hopefully I don't crash and burn, but

[20:57] we'll see. But there is another type of risk in this, which is more emotional, failing in public. Yeah, I mean, I would say that I've failed enough in my life. All you got to do is ask my friends. Um failed enough in my life to to not be

[21:12] uh too worried about that. I'm I'm okay with it if I if I fail on that front. What does success look like for you with this project? Is it only achieving 750,000 in 2 years or

[21:27] is there another way [snorts] of saying that you have been successful? Yeah, I mean, really the goal is that 750K. I think I would probably feel satisfied if I hit about $400,000

[21:41] cuz that's on the Monte Carlo simulation kind of the lower end of what I would kind of the lower end of what I would have expected um had I not blown up, but um ultimately the goal is $750,000. So, that's really what I'm going for. I

[21:55] always ask my guests to rate their strategies or way of trading on a risk profile scale from one being very low risk and 10 being very high risk and you

[22:07] can define those numbers as you see fit. Where would you put this approach on that risk scale? Like a 9.5. And the only reason I'd say it's not a 10 is because it is a systematic approach that is using uncorrelated

[22:22] strategies. Otherwise, I would say it's it's absolutely a 10. approach to? Probably nobody. At least nobody that couldn't afford to lose the money without it causing hardship, I would

[22:36] say, in their lives. What I could vouch for would again be the the systematic approach to trading. So, using a systematic approach with uncorrelated I know I'm driving that home. This is probably about the fifth time I've said

[22:51] it, but that's really where the magic is and that's that's really what got me super interested in trading is when I I found out how that magic works. This is found out how that magic works. This is not your only trading. How does it fit

[23:03] with your other strategies? What other type of options trading strategies do you do that are outside of this falling knife project? Yeah, so I've traded like um MEIC or uh double ickers, some people call it, but um I do some trend on the

[23:20] call it, but um I do some trend on the credit side as well. As far as how this fits in with that, it's made it a little bit difficult because some of these trades in the falling knife project are ones that I was already running in my

[23:33] other uh portfolio. So, trying to figure out how to if I want redundancy there or not because really psychologically I'm trying to break this falling knife project into a totally different subset

[23:48] project into a totally different subset mentally than my normal trading. And I'm finding that's really difficult to do. So, I did scale back some of the trades that I'm already running in the falling knife project in my main portfolio. So,

[24:04] yeah, it's it's been a challenge. What would be good resources to learn more both about your specific project, but also about this approach to options Yeah, so my project, I I do have a YouTube channel. I make short videos. Um

[24:21] most of them are 5 to 10 minutes. As far as other resources, you know, you have your videos are good, John. I know there's other podcasts as well. David Sun has the TradeBusters podcast, Option Alpha podcast, Speaking Greeks podcast,

[24:36] Alpha podcast, Speaking Greeks podcast, Tasty TastyLive, although I I I couldn't vouch for TastyLive on the zero DTE side of things. But yeah, I think there's enough information out there that um yeah, people can educate themselves if

[24:48] they would like. Would you also have a couple of good books on options trading you would like to recommend to our viewers? I'd say for um beginning and intermediate um

[25:01] people trading options, probably not. I find that the options trading books can be very very technical and hard to understand. So, I think a good place to probably start would actually be the podcast route um just to see if you're

[25:17] interested and can kind of get an initial grasp of of how the trading and options world works. So, again, my start was with the Option Alpha podcast. I think that they do a nice job of doing a little bit more beginner

[25:31] beginner type content. Jim, thank you very much for sharing this exciting project. It's very ambitious and I'm impressed by how you systematic you are in how you put this together and it would be very exciting to follow your

[25:47] your route and see how well you succeed and I hope that if you succeed, you will more details about the exact strategies that you did. But thank you very much for joining and and telling about this project. Yeah, thank

[26:02] you, John. Thank you so much for having me.