The Power of Options Trading - Inside Wall Street with Chris Capre

"I use blue and white candles on my graphs instead of red and green because red triggers a different reaction in the brain which affects my trading."

"There is no consistency in your trading if there is no consistency in your brain."

"Markets take the elevator up and the stairs down."

Rodrigo Cerda speaks with Chris Capre a former broker on Wall Street, former hedge fund trader, and founder of 2ndSkies Trading, Lead Educator at Benzinga Options Trading School about trading the markets with a consistent profit.

Guest:

Chris Capre

CEO & Head Trader at 2nd Skies Trading

Lead Instructor at Benzinga Options Trading School

Host:

Rodrigo Cerda

Benzinga Pro Product Expert

Transcript:

All right. Welcome ladies and gentlemen, to another episode of inside wall street today with us chief educator at Benzinga option school. Chris Capri is going to be here with us today. How are you doing Chris? Very good news. I'm doing good, man. I'm doing good. There's so much here to cover a lot of interesting topics here and facts that you seem to be as someone that has an interesting background.

 Let's just start from the beginning here. I'd say Chris, how did you get into trading. ?

So 2000, 2001, I was a full-time yoga teacher. And so I wasn't on any necessarily particular career path. At that time, I had graduated at the university with a bachelor's in philosophy, and I was finishing up my undergrad in neuroscience while going for my masters in philosophy.

And I decided to take a break from a kind of like my dual degrees and a. Went to California to spend some time out there and just work on some personal things in my life that I felt like needed to go in a different direction. And so I started teaching yoga meditation after I got into it for about a year.

And  you realize very quickly that okay, unless I go down a very specific career path in yoga, this is not going to bring me the financial means. To really do the things that I want to do in life. And it's not that I want them like 10 Ferrari's or anything like that. It's more of I realize I have to build up a financial portfolio to really achieve and accomplish.

Do some of the things I want to do in my life at that time. So I started getting into just trading stocks and mutual funds at the very beginning. This is early 2000, 2001 before the.com bubble.  In the process I had started working with a client and he was a radiologist who had retired early.

He sold technology or radiology technology to Kodak.  Millions of dollars. Like he was a DECA millionaire several times over and as I was working with him one day, he comes up to me and he's Hey, I was reading this book and I've never had this before, but I had this strange intuition that you need to read this book.

I have a feeling that you need to read this book. This is something that you need to do, but in the book was about currency. At that time. And it was a story about an American who was an athlete and he doesn't know what to do after college very much like me. And he ended up getting a job, working for an outfit in Japan, trading currencies that led to some incredible stories and experiences in his life.

And I read the book and I felt oh yeah, I definitely want to try this out. And so keep in mind, this is like early two thousands, 2001, 2002, 2003. This is the early part of that decade. And so very little. Websites on the planet about trading FX or stocks or options or anything like that. And so I had to just teach myself.

So I got a demo account back then and I treated the moment I opened up the demo upon account and the platform I just instantly lit up. And I knew, I just felt like this made sense to me. There was just something about the platform like, Hey, I understand the language. I feel like I can read the charts.

I feel like whatever was in this platform made sense to me. It just clicked instantly. And a month later I went With a $3,000 account. And by six months later, that account was $83,000. And so I had just a wild started to trading at that time. And I felt yeah whatever this is my path to achieving the financial means that I want to.

That's interesting. And well, Chris, you've been trading for about like 20 years around, so are there, right? I think it's like 21 years plus now at this point it's hard to keep track. So yeah. So take us to the beginning of that journey and   the first couple of. You know how things were and  I don't know what our, we were on, like in 20, 22.

So that was like in the two thousands. So is that like by the bubble, the.com bubble, did you start winding up right before the bubble and then in some sense, the bubble happening that was like 2001 that everything started to explode at that point. Yeah. And that was the tech bubble and the.com bubble.

And in some sense, it was a tough lesson because I had known a lot of people that were heavily invested in stocks and were losing money, hand over fist when the bubble split. But it was also a good experience because you're talking the first few years of my trading and I didn't learn the. There's a lot of traders that have come in the last few years that have been told by YouTube burrs or other people like Dave Portnoy, that stocks always go up and I didn't get that education right off the bat.

The first year I was in the markets, the stock sold off and they sold off for over a year.  I learned very early on that stocks. Don't always go up that stocks go down and they can go down very  you could say impulsively or violently or intensely. And that kind of taught me the expression, that there's a very common expression in the markets, which is the markets take the stairs up and they take the elevator down.

And  I learned very early on that markets have both bull and bear markets. I didn't come into the markets with the idea that stocks always go up. And I think that's given me a massive advantage because when the markets do go down, I feel prepared to be able to trade to the bear side. And so it wasn't that just stocks went down at that time shortly after in the FX.

The Eurodollar, which had been on a several year bull trend started to sell off. And so again, it was another indication that markets don't always go in one direction. They go in both directions. And that was an advantage of trading currencies, because currencies do go in both directions where stocks, while traditionally they have an upward bias stocks do have periods where they go down and sometimes those periods can be quite long.

 Yeah, that was the early 2000, the first few years, the two thousands. And it was. A great experience for me to get that education, to be able to trade both directions and learn that markets can move both directions at any time. Yeah. And then in shortly right there, 2004 FX broker for FXCM working on wall street.

  Take us through a little bit of that experience there for the folks considering this is a very interesting time for trading comparing to where we are now in this market with the new meme stocks and whole different type of things we're seeing here. Yeah. This is a great question. So it's late 2003.

I've had a pretty amazing bull run on my FX account. I turned 3080 $3,000 in a period of six months. And that was just hitting everything like 70, 80 plus percent accurate trading. My first trade. Totally. Overleveraged had no idea about leverage, had no idea about risk management. I had risked a standard wat in FX, which is a thousand dollars for every a hundred pips.

And I did that on a $3,000. And I was literally risking about a hundred pips on the trade. So if I lost it, I lost 33% of my account in one shot. Look at my first year, it was 124 PIP winners. So my $3,000 account by day at the end of day, one was 4,200. And that just kicked off a winning streak for me that just kept going and going.

So you're talking like over almost a 30 X return on the account. So I get to $83,000 and I start to do the math and I'm thinking, Hey, if this continues at this rate, this account is going to be $160,000 in a. And by the end of next year, it's going to be like about three, $400,000, because that should have been in the sign.

If I had experienced that should have been the sign that I need to pump the brakes and maybe realize, I don't know much about Marcus as I think I'd. And so the next day I start looking for Lamborghini's and cars to buy and things like that, because I felt like, Hey, I'm going to have no problem paying cash for these in a matter of.

So I started checking out cars to buy, walk down, Venice, look to all the dealerships. And that night I placed the trade. Totally. Overleveraged very poor risk management and I lost $25,000 in a matter of minutes. So imagine you take six months to build up three to $83,000, and then you lose $25,000 in a matter of minutes.

And that just created kind of a shock and a pullback in my performance. And pretty soon I'm down like $50,000. And so that made me realize, okay, I don't know as much about Marcus as I think I do, and I need to get training, but there's no training at that time. This is like early two or three now, early oh four.

It was just no training at that time. And I'd saw an ad in the paper for a looking for a brokers, FX brokers, because FX was taking off at that time. FX was blowing through the roof and it was a job at FXCM and I interviewed it and I had no experience, no business class. But I felt like I just gave a really good interview.

And the next day they called me and they said, we want to hire you. We're going to fly you out to New York. You're going to work on wall street. We're going to pay for travel. We're going to pay for your housing. We're going to pay for all this come work for us. And so I took the job and that just started this totally different phase in my career from just being a trader who didn't know anything to all of a sudden becoming an FX broker on wall street and keep in mind at that time in oh four Forex was the.

Kind of hottest market. At that time you had volatility, you had movements, you had differentials in yields. They were beating stocks, hand over fist at that time, stocks are great up until the.com, but then after the.com, a lot of people lost taste and flavor with the stock market, for sure, because they just lost so much in a short period of time.

So people were looking for other markets to get into, and FX was only new FX was only available to the retail trading world in late 98. So still as new market stocks had been around forever, but then people were exhaust because they lost a lot of money in the.com. So the money was moving into effects of that.

And you're talking, trillions of dollars is moving in the FX market per day. Yeah. And it totally makes sense that people move to other things whenever that happens. More recently we haven't really had at least  I'm a newer trader I've been trading for about three years.

So I really have never seen a year of  a bear market as they call it, like back in those days. So it's just, it seems like it can't happen, but then it's  real right. It can happen. I think that's common for the human condition. That, when something doesn't happen for a while, they tend to think that things won't happen until they do.

Like probably before COVID nobody had ever thought in our lifetime I'm almost 50. And so I had never thought that I would see a global pandemic through some biological health scare. That was something you saw in movies, but things do happen. And I think that's the only differences in markets is that they happen probably when people least expect it.

And we've had a great bull market before COVID we had a great bull market for years. That was pretty uninterrupted with only minor 10, 20% pullbacks. So when COVID hit, it was something new. But since COVID for two years after COVID, the markets just went in one direction that was easy mode.

So it's very, if you haven't had. And the markets, then you don't really see all the different conditions that can happen. And I've seen a lot of conditions I traded through the September nine 11, I traded through the.com bust. I had actually traded through the London terrorist bombings, which was a learning experience that if I hadn't had that, I wouldn't have different ideas about how to relate to certain events like that in the future experience matters.

All right. So you went through that at a effects. So you start up there and then in 2006, you become a funded trader for the JNF fund and you also train traders and students there. So how was that experience? While I was a broker on for FXCM, I D I I expanded my duties massively there because I was just super hungry.

I had never had a job in finance before, and I realized that working for a brokerage was a massive operation. To see the market from the inside out. So I tried to take on as much work as possible. I literally worked like 80 to a hundred hour weeks every week for two years. And literally only took one vacation that entire two years.

So I use it as an opportunity. And throughout that process, I got opportunities to teach classes to the other brokers, but then also to the clients as well. And that just started to expand. I didn't apply for a teaching job with them, but they had me teach class. In that process of going through these workshops and expos all over the country, I had run into this hedge fund outfit, several times they were an FX hedge fund at that.

And we just run into each other and talked, and it was had some very cordial conversations. At the time they wanted me to come over to them after talking with them. And I wasn't interested, I liked my brokerage job, but in 2006 window opened door. I was like, you know what, maybe this is a good time to take that opportunity.

So I had. Join them as a trader. And I was a funded trader for them. I got to book like literally within the first week, I got my own book within the first week. And in the process of going through their program, their trainer trading program, I had been offered, Hey, you seem pretty good at this.

Do you want to teach classes to the younger students as well? And I said, sure, I'd be happy to. And so that. Was the next extension of my teaching and trading career, trade the book for them, and then also teach the newer members. And so that was a year. And that was a great experience because there, my only focus was trading and teaching.

I didn't have any sort of managerial responsibilities or team member responsibilities per se. It was just like, look, trademark. And then teach the new members and that's it. And it was great on many aspects to be surrounded by all these traders and talking trade ideas all day, talking markets all day, sharing ideas all day.

That's all we did. But after a year of that, again, another window open for me where now I've been in the institutional war for three years and I realized. You know what? I have my own style of trading that doesn't necessarily fit with everybody. And I also have my own style of teaching that doesn't necessarily fit with everybody.

And so I said, you know what? I think it's time for me to go on my own in terms of my own trading and my own teaching. And so in 2007, I opened up second skies and that was mostly in the beginning. It was just the people who were in the hedge fund training program that wanted to keep working with me when I left.

And all I did back then was just a weekly webinar, talked about the markets, gave trade ideas. Answer questions and that was it. And here it is 15 years later. And we've blown up into a very well-known respected brand in the industry and someone that's providing quality education and train many trails to become profitable.

Like some of them funded by prop firms. Some of them been funded by investors. Many of them are trading on their own. Now that was the hedge fund was great, but I also realized maybe I need some time on my own to develop my own views and own ideas and develop my own methodologies to.

Take things to the next level. Walk us through a normal day now of your in the, into option school with the members, all that stuff, walk us through a normal day in the school. My normal Monday through Friday trading day is I wake about 4 35 o'clock and I have to get up early because I'm on the west coast.

So the markets for me opened up at six 30. That means I have to be fully prepared and ready before I even get to the market open. I am usually doing research on the markets, looking at positioning and options. What are the changes in the open interest, which has posted generally around midnight.

So OBRA, that's the option pricing authority. There. They're the ones who collect all the data on the option, positioning and then update. And it's around midnight Eastern. So when I wake up in the morning, I can see that adjustment and positioning and see, Hey, where's the changes in positions and options in the markets going on from there after collating that data.

Then I start to look at what's going on in Asia. What happened in Europe to see how that's influencing the current price action, the model. And then I start making ideas as to how do I want to trade the day? Is it going to be more or less volatile today? What are key support and resistance levels?

What do I want to trade on the day after I've done all that preparation, then I have to teach a class with my second sky's members, but then at 7:00 AM Pacific, I am now treat teaching the members in the Benzing option school, which means that I will have to have already made my first day. Before I actually start teaching the Benzing option school.

So that's why I have to get up early. Cause I have to do all this preparatory work to have all my trades ready so that they can be like executed before I even start teaching. Cause I don't like to be making trading decisions to stop the teaching, to make trading decisions. I need all those to be done before I start teaching.

So I'm just focusing on teaching. And so Monday through Thursday, 7:00 AM to 9:00 AM Pacific I'm teaching the Benzing options school and we do lessons on that day. We cover different lessons in the curriculum and we do a lot of. And a lot of examples in the markets and it's really about teaching members, a few things, one how to make less bad trades and bad mistakes.

Because if you aren't trained, you're going to make a lot of bad decisions. You're gonna make a lot of bad mistakes just because simply you don't know nothing to do with IQ, nothing to. It just, you're not experienced, you don't have the training. And so that's my first job is to teach them the skills to make money, train, to be a professional trader.

After I've taught them the skills and the core lessons, then I have to teach them how to make less bad mistakes. And then I can start teaching them how to make better. And so that's our morning until 9:00 AM Pacific. My time after that, then I go back to trading. I take any new trades that set up there.

I have my break for breakfast, basically, whatever I need to do at home. But then I go back to trading. I'm analyzing the market in real time. And then at noon, which is one hour before the market closes at 1:00 PM here in California and in the west. Is that I have to make more of my trades by that new lesson, because a new one I'm teaching again in the Benzinga options school, and we're doing open Q and a we're doing live market analysis for them.

We analyze student trade ideas in real time. So if they have a trade idea, Hey, I want to be long calls or short calls at this strike in this expiring. We analyze all those trades. And it's a great thing for me to be doing because. I don't want to be spending eight hours a day, just hitting keys to generate income.

If I do that, it means I'm a human ATM machine and I don't want my life to be a human ATM machine and all about money. And so by taking breaks where I'm like trading for a few hours and then I'm teaching for a few. It allows my brain to use a different set of skills. And it also allows me to train the next generation of traders and to have a positive impact and turn traders who are not profitable into profitable traders.

It's incredibly rewarding. It's always rewarding to make a good trade and to hit a perfect trade. Like the perfect timing you get in you're bullish and in the moment you get in within seconds, it launches higher. And then you get out when the momentum ends, that feels amazing. It feels not just for the money that you made the no, that over 20 years you've been building a skill that allows you to throw that perfect pass. Like Tom Brady, that's what it feels like to me, but I don't want to be doing that all day. I have multiple desires and interests and to be able to take this knowledge and help the next generation make less mistakes than I did and lose less money on those mistakes than I did makes me feel like I'm doing something good.

And so to see them go from struggling traders to competent traitors, to profitable traders. That's a very rewarding aspect of the journey. And I do this because when I first started trading there was nobody, there was no online classes. There was no Monday through Friday streams, nobody was teaching this material about options.

Back then nobody was teaching this material about price section back then nobody was teaching this material about risk management back then. And the only way to get this training was to pay five, $10,000 in a workshop. That was maybe once or twice a year or something like that. And so I didn't have that.

And I had to go through a lot of painful. To get to where I am today. And so to be able to save people time and money doing that, it's an incredible joy for me during your entire period in the markets, what would you say is the craziest thing you've seen in the markets? Flash crash. And I would say top three are flash crash.

 The COVID crisis was unique because even Warren buffet has been around forever and in his long trading career, which is like seven decades old, maybe even eight, he himself has never traded through a global pandemic. Only people that have. Older than born Warren buffet had traded through a global pandemic.

So there's no playbook or no experience in the markets for that. At that time, nobody had experienced trading through a global pandemic. So that was unique. And it also really highlighted the impact of options. Because if you look at actually, when the market started selling off in the COVID crisis, the day, it was like right after the monthly op ex.

And that's because traders had an immense amount of call positions and all of these positions on wound in the market. And then traders flip from net long calls to net long puts, which exacerbated the downside. If you also look at the bottom in the COVID crisis, it was after the March OPEX. So traders, particularly BlackRock, and all these others had unwind these massive put positions, which allow the market to rally.

So it was unique because it was a global pandemic and it was unique because. The timing of it really showed how powerful options are. So that was a powerful experience. The London terrorist bombing was obviously an incredibly tragic event. Nobody ever wishes for that. It was incredibly tragic.

Like the art, everybody on the desk, our first reactions were just like a heart sink. When we heard about the new. But we also had books we had our own accounts that we had to manage and we had to trade them like, Hey, how do we avoid losses and make money in this? And so we all kicked into gear, me being one of the younger ones on the desk, my first thought was, okay, there's a terrorist incident in the UK money is going to leave the UK and go to safe Haven.

So what did I do? I sold the pound, which was the obvious play. The obvious play was sell the pound. That should have been the first thought on every trader's mind, but then people who are a little bit more experienced are like, which currency is the pound going to depreciate? The most, and they figured Japanese yen and Swiss Frank, because there's a safe Haven currencies.

So they made more money because they picked currencies that sold off even more. And the most experienced on the desperate, like pounds is going to sell off against everything. So they sold the entire basket and they made a killing on that day because they had the experience of realizing, Hey, Howden's going to lose against everything.

Let's sell it all. And so that taught me a very valuable experience of how experience matters in the market. We all had certain skill levels that were relatively equal, but some of us had more experience than others to translate the event into better trading ideas. And so that was very powerful. And then the flash crash, the S and P flash crash was that was what May 6th, 2010.

I believe the S and P 500 dropped over a hundred points in a matter of two hours, people have been freaking out because the S and P has sold off 45 points from the. Imagine that happening and that's over a period of what, six weeks, seven weeks since the, this year opened, imagine the S and P 500 doing double that in two hours.

Like what would that have done to people's portfolio?  I have been exposed to events like this literally once every two years for the last 20 years. And that experience has been valuable to me. All of them, immense learning experiences, you're into bro science. So how do you apply this to trade-in?

I, you must apply this to trading somehow. Tell us about this passion for neuroscience. Yeah, it started. So in the early or mid nineties, I was finishing my undergrad in philosophy and I have always from very early on, been curious. Why do I think the way I do, what is it about my mind that makes me think the way I do, what is it about my brain that makes me think the way I do?

How could I improve? Memory, how could I improve learning? How could I improve mental performance? So this question has always been in my mind since the nineties and to that was my focus in neuroscience. At that time, my focus in neuroscience was human learning and memory that hasn't stopped over the years.

But I recently saw a podcast several years ago on neuro by a neuroscientist and it rekindled this interest. And then it had always been there, but it the fire again. And  after reading more and more books on this and really kicking up the neuroscience learning I've decided that I'm going to graduate school to get my master's and PhD in neurobiology.

And so it is now here we are, 2022, the technology is way better than it was 25 years ago, and so we're able to understand more about how the brain affects performance. Sleep making decisions, managing emotions memorizing data and the charts patterns in the price action.

 How to manage these emotions, how to manage these thoughts. What, how does sleep affect our performance? How does caffeine affect our biological performance? We know a lot more. Then we did when I was going to school, hundreds of times more. And so for me to be able to study how the brain affects performance is important because that's my main tool.

I'm not an athlete, swinging a baseball bat. I'm not a pitcher throwing a ball. I'm not a quarterback throwing a football. It's not my brain and my body. My main tool is my brain. My body is a tool, but not to the same degree as my brain in this. So if my brain is my most important tool, then I need to sharpen that and put that in a position to where it's going to be function.

The most optimal way. And so that comes from little things. If you notice my charts do not have red and green candles, they're blue and white. Why is that? Because the color red can trigger stronger neurological responses in the brain than blue or white, which is much more neutral. And so instead of triggering.

Fear response. When I see that big red candle, I don't have the same neurological response because it doesn't trigger that my brain in the same way. So I do everything like I do everything I can to optimize my brain, to make sure that everything I do in trading is optimized from the sleep schedule to the learning schedule.

 Concentrate. Very important. You have to concentrate to be able to trade well, what is one of the main factors that allows you to concentrate besides attention? What's the main biological thing that allows you to concentrate. We actually need a chemical. You need a neurotransmitter called acetylcholine, which allows you to focus and concentrate, but our brains don't have unlimited stores of that.

It takes time to produce stores of this chemical that allow us to concentrate. And so after about an hour and a half or two hours, Those stores tend to get depleted. So I know once I start hitting that hour and a half, two hour mark, it's probably good if I take a break, because then that gives my brain time to build up those stores again.

So these are all the little details that are available now that weren't available 25 years ago. And so for me, I try and leverage how the brain functions most optimal. How it learns, how remembers, how it concentrates, how does it pay attention? How do I direct my focus? How do I use this brain in the best possible way so that I can maximize my opportunities?

So hopefully one day in the next year or two, I'll write a book on optimal trading performance and using neuroscience to. Empower your trading to the next level. What what would you say is like a tip you can leave them with right. Something you can leave the folks here with not just the current students that are listening to this, but to the other folks that are listening to this in some other podcasts place.

Yeah. Over 20 something years I've seen a lot of traders come and go, and I've seen a lot of. Students come and go. And everybody seems to spend a lot of time looking for the strategy, thinking that if they have the strategy that makes money, that they will make money and I've seen that attempt or that approach fail, not just thousands, but maybe millions of times over.

And it forced me to look. What two traders really need to make money trading consistently, and I've boiled it down to four skills. So all traders need something that helps them make buying and selling decisions. That's the strategy, but that's that by itself is not sufficient to make money trading because you also need risk management.

That's the second skill you'll need to make money trading. If you have poor risk management and a good strategy, you will lose more money on your losses and you'll win less money on your. And so risk management either leverages the mathematics for you or against you. Bad risk management leverages the math against you.

Good risk management leverages the math for you. But those two alone are not enough to make money trading because you could have a good strategy and good risk man. But what, if you have a bad mindset, what if you have a hard time pulling the trigger when your set up comes? Or what if you have FOMO or what if you have confirmation bias or what if your emotions derail you from making a good trading decision?

So you need mindset as a skill to make money trading, but then you need one more skill. And if you have all four of these. You will make money trading. And that last skill is the analytical skills. And I don't mean the ability to look at the charts and analyze that. You have to be able to look at the data on your performance on a regular basis.

Look at all your trades, see where your strengths and weaknesses, which strategies you over-perform and underperform. Where are you extracting alpha consistently. And where are you leaking alpha consistently. If you're able to analyze your own data, then you can augment your weaknesses and you can further galvanize your stress.

And leverage them even further. And so over 21 years, I've learned that it's not the strategy by itself, and it's not rich manager by itself, and it's not mindset by itself. It's not analytical skills. It's all four of those. And if a trader can build all four of those, they will pull money out of the markets consist of.

But if they're missing any one of those, they will struggle to consistently pull money out of the markets. So somebody's goal should always be to build those four pillars. If they build those four pillars, they will pull money out of the markets. But if we're missing any one of those, they will never have consistency because there's no consistency in your trading, unless there is consistency in your mind.

Super, super important. Thanks a lot, Matt, for being here with us today. I appreciate your time. I know you're busy and I'll, we'll see you in the school. It was a pleasure.