Delta Neutral Options – Jeff Beamer – Episode 058

Hello and welcome to the Consistent Profits Podcast brought to you by Inside out trading and Brian McAvoy, where the focus is on consistency because when you have the consistent part down, profits become easy. Well, hello, everybody. This is Brian McAvoy with a new episode of the Consistent Profits podcast. I'm excited today to be interviewing Jeff Beamer, EWO trader. Jeff, thanks so much for being on the podcast today.

Hey, great to be here, Brian. Thanks for having me.

Yeah, glad you're here, man. For those of you not already familiar with him, Jeffrey is a professional fund manager and trader boasting over 37 years in finance industry. His journey began early obtaining securities licenses at 19, leading to tenure at Fidelity Investments. He then founded and led various hedge funds, mutual funds, and investment advisory firms. Jeff's insights have been featured on CNBC and he's been a guest on CB, CBS's the Education or the Educated Investor. Active in the trading community, he sold leadership roles and associations like the Security Traders Association. And Jeff's dedicated to sharing knowledge. Just that. Excuse me, I'll edit that part. Just Jeff's dedication to sharing knowledge underscores his value to a larger audience of traders eager to learn from his experience. Jeff, thanks again for being here.

Hey, great to be here, Brian.

Yeah. So, you know, so you started early at 19. What, what really prompted you to go? You know, at like, you weren't even like, you know, legal to drink then. What, you know, what prompted you to go?

Well, a neighbor's, a neighbor's parent. It was take your kid to work day. And his kid didn't want to go. So I went with him to be. He happened to be in the finance industry. And I saw a bunch of people that were just literally yelling and screaming each other and, and there were a few rules I couldn't ask. And you know, we went through there like. And so anyway, learned a little bit about the business and I got out of that day thinking, wow, this is, this is pretty cool. I want to be here. And that began the journey. So, yeah, that's how I, that's how I got started. I, you know, got gained a couple of security licenses before I turned 20, and then we were off with a bang. And I was living pretty, pretty nicely until 1987. And that was my first big lesson in October of 1987 was when I really learned about being over leveraged and under capitalized.

Well, so were you, were you trading your own money or were you. No. You were working at Fidelity, right?

No, not yet. Fidelity came afterwards because I pretty much as I mentioned was over leveraged trading stocks and you know, on margin and using, using leverage, not really being responsible and knowing how to use it. And 87 came along and really knocked me down. And my mentor just pretty much said, hey, welcome to the club. Get back on the horse. And I decided to do it more conservatively and, and got, and was hired by fidelity and spent 13 years there. And then when I left Fidelity, it was really because I was trading a lot on my own in my own personal account, and there were opportunities that presented themselves that I went to pursue. And right after I left, not too long after I left, I met a, a local businessman who happened to be extremely wealthy. And it was at a. Just a random breakfast I got invited to and he, we just started talking and I had zero interest in managing other people's money at the time, and he wanted me to manage his account and I was not prepared to do that. And I put up all these hurdles and he jumped over the hurdles. We, that began a career, then the next phase of my career, which was managing money for others. So it, so, so you pretty progressive.

So were you in college at the time? Were you just kind of out of high school and working and looking for something to do and you just happened to find it fine trading?

Yeah, I went, I went to college and. But worked as well in my area. It was pretty easy to commute and then, you know, go, go to your job, which a lot of people did. And, and so, yeah, I just, my experience, you know, when I, after 87 and I kind of got back on the horse, that's when I really started to develop my specialty in the options space because I didn't have much money and I, I needed a leveraged instrument, but I needed a leverage instrument that had some defined risk to it. And options just turned out perfect for me. So my options career and really for the next decade, I perfected my, my skill and different strategies. And the timing was literally, it just, it was just, the timing was almost perfect that I left, transitioned out of Fidelity and then went into managing money and utilizing a lot of the strategies. And at the same time, I had met a couple of other people from the options industry and they had asked me if I wanted to, you know, to teach because I had now 20 years of experience and in options, you know, 15 years of experience in options. And at first I was a little hesitant, but then I learned really quickly that teaching people how to trade and how to trade options, it made me a better trader. And a lot of people, you know, there's an old saying that, that people that do do and people that don't teach. And I did not have that experience. I actually doing it at teaching is what made me a better trader. I was more tuned in, I was more zeroed in and always looking for fresh information.

So part of the reason I laugh and this just came up the other day in conversation with one of my sons because he was, he was all upset about, you know, some of the bad experience he's had with mentors and teachers along the way. And that, that phrase came up and I started laughing. He's like, well, what's so funny about that, dad? I'm like, if you think about it, that's such a stupid saying. Because if, if that's true, then by default everybody who teaches is incompetent.

Right.

Well, which is not the case.

You know, it. No, it's not. And, and, you know, interesting though, the cycle of, of that we've had in, you know, our industry with those that have been in the industry and then those that came from education and tried to enter our industry, you know, there has been some very interesting results up to that, so.

Oh, yeah, yeah, yeah. Well, actually, it's funny you bring that up because, I mean, my, my degree was engineering. And it was so funny because my senior year we had this one instructor come in, new instructor from outside academia, and this guy was like super popular, super fun, but, but one thing that everybody took note of, like super fast. It's like, wow. Yeah, you know, we just got used to learning from professors that had spent their entire life and careers in college. This guy actually went out in the working world for 25 years and now he's come back to teach. And the stuff that he taught and the experiences that he shared in the perspectives that he shared were so refreshingly different. It was just hilarious because, I mean, he was even making up some classes. He was, he was making up the names and the curriculums just so he could teach us the real world stuff that none of the other, other instructors had ever even been exposed to. Came in real handy when you're trying to do like real engineering work.

Right, right, right. And you know, coming, coming, you know, working, then developing a hit. My, my first hedge fund and, and then learning some of the systems that hedge funds do use and have the advantage of using and going down that path. Really, in the teaching world, there were two groups of instructors, there were former market makers, and then there were those of us that were off floor traders. And I've always been an off Floor trader. But the funny thing is, is that market makers typically would teach people how to trade like a market maker. And the problem with that was they weren't trading on the floor and didn't have that advantage of, you know, trading with the bid ask spread, so to speak. And we, you know, that's where I felt I had a little advantage was really showing people how to trade from a computer screen and being off floor and away from, you know, away from the pit.

Well, for, for those who that are listening that aren't familiar with the term market maker, what, what does that actually mean?

Well, market makers are, you know, their job is to make market. So when an order comes in their, their job is to match that ticket with, you know, the other side. And you know, when as a, as a money manager then I'm dealing with larger lots of either stock or options and I need then a facilitator to find the other side of the transaction for me. So you know, that's where a market maker, you know, comes to play. And that's how they, you know, they make markets. And now that's done mostly electronically, that pairing. But there still are a few pits around. So.

Okay. Okay, cool. Well, so what did you see as the advantage to being an off floor trader as you, as you put it?

Well, we have to look for our edge in different, in different places. Okay. And so, you know, there is that efficient market theory that is out there and every now and then the efficient market becomes a little bit insufficient and we look for those little, little advantages to give us a better place to trade from. Now really there were three things that made trading today a lot easier for people. First of all was technology. When I, when I started, I literally hand drew charts and that's how I became really a charting technician was because I drew candles and I didn't know much about what I was doing and then read and learned and was taught by people that you know, what different candle formations were and you know, progress that way. And then finally technology started coming in and I didn't have to draw my charts anymore. So you know, huge that was one. And then the narrowing of the bid ask spread we used to the spread on for example on options used to be dollars wide and multiple tens of dollars wide. Now they're pennies wide. And so that really helped with people who want to trade themselves. And, and then finally commissions and commissions just collapsed. My first option trade on a commodity was $75 one way, one, one contract one way. And that was a long time ago. And Now I pay pennies for an option trade.

Oh, yeah, yeah, yeah. The commission structured. Yeah, huge, huge. I'm thrilled to hear that. Yours was just 75. My, my first one starting out was 200 bucks. Oh, really hard to make money.

Well, it is. You know, and, you know, maybe the difference is I learned to ask early on with my brokers about their commissions and negotiate and really it came down to how I trade in the volume I trade and that sort of thing. And, you know, everything's negotiable, including our commission. So always ask now.

So you, you, you were working with candles. At what point did you become big into the Elliott Wave? Because that's like one of the main things of the EWO traders. Elliott Wave, correct.

Well, it is. And Elliott Wave, just, just the, the flow of the market, okay, the fear and the greed in, in the marketplace and the patterns that exist, I saw just replicating themselves over and over and over again. Now, a lot of people, when they begin to learn Elliot and Elliot Wave trading, always focus on the five wave pattern. But really there is what we call a lot of ABC patterns embedded in that, meaning chop market, moving up and down. So from point A to B and B to C and then repeats and just kind of a choppy sideways or even slightly upward or slightly downward on a chart. And it's not that perfect 1, 2, 3, 4, 5 pattern that you saw in a book. And so a lot of people get a little confused. And then, Tom, the wave count might change. And that's, you know, I've always found early on that when the wave count changes, that's actually a good thing for me because I've caught a trend usually. Okay, so the, so without going into too much down that rabbit hole of Elliott Wave trading, it just. The patterns do change. And sometimes that's a, Most of the time that's a good thing because that means you caught the right side of the market that you're trading.

Okay, well, briefly, again, for those not real familiar with Elliott Wave, and, and I want to, I do want to, I want to make sure everybody's clear on this because LA Wave actually is very cool and it can be used very effectively. I mean, the, the basic theory on Elliott Wave is you've got a five, basically a five point or five. Yeah, it's 5.4 legs, right? There's five legs.

Five legs.

Yeah, five legs that are a kind of a standard, for lack of a better way of describing it, kind of a response pattern in the markets that will typically play out. There's A. There's a certain series of things going on emotionally in the. In the markets. You mind giving us just like a real quick overview of, you know, like the traditional, you know, five Elliott Wave lakes? Sure.

So wave once is the initial impulse pattern. Market begins to move, let's say hot. Let's say it's starting to move up. It's been consolidating for a little while, and it starts to move up, and then it. There's a little bit of retracement. Market begins to pull back. Nothing violent, just a normal, orderly little pullback. And then we begin the next leg up. The market makes a new high. It continues to push higher. Well, that little pattern right there then gets labeled as a. The initial push is a one, then the pullback is a two. And now we're in wave three. And it deals with a lot of measurements, such as Fibonacci. And there's a lot of math behind a lot of those calculations. But thank you. Thankful. We're thankful for technology and computer. Computer systems that allow us to do and do these calculations very easily and for programs like Evo Trader, where we, you know, have the Elliott wave calculations calculated automatically. So here's what I was referring to a moment ago. We're in that wave three. And the wave three is the longest, strongest wave, and it's. But it's often the most difficult to trade or to catch. So what we wait for is that next pullback, that next pullback occurs, and that would be labeled eventually a wave four. And then we get the last push now in wave three. So what we wait for is that next pullback, that next pullback occurs, and that would be labeled eventually a wave four. And then we get the last push now in wave three. It used to be taught that that's when the institutions started getting involved in a stock, okay, that the big money started flowing in, and then you had a little bit of profit taking. That would be the four. And lastly, that fifth and final wave are the retail traders. Hey, we have finally figured out that, oh, this stock is a big bull, and we're going to jump in and they push the stock higher. That was the tradable wave. Well, here's the thing. Some of these stocks, in fact, okay, that wave five, which is the final wave, got relabeled a three. And what that means is that pullback that we had that was labeled a 4 is now not an official 4, because the extension is so far up that the pattern relabeled a three. Well, guess what? You now caught the longest, strongest wave, you may caught it mid, mid push, and now it's just shooting higher. And we are then waiting for that next pullback before retail jumps on and finally, you know, takes it to the top and then the pattern corrects it. The pattern repeats, but to the downside, and it just does this over and over and over again. So, yeah, it's, it's, it's a fascinating study. And we have, you know, our software is some of the, you know, it's programmed to Elliot's own teachings. So Mr. Elliot himself wrote in detail about his studies and, and we have taken that and put it into the algorithms behind our charting package. So, yeah, that's just one. One of many ways to, you know, look at a chart. Is that Elliott Wave pattern true?

Well, what, What I was. What caught my interest with it when I first heard of it, what I thought was that. What I thought was really cool was how with each of the legs, there's the market psychology that's kind of explaining what we're seeing. And legs is a distinct thing going on, but they each have meaning. And like you were talking about, you know. Yeah, the, you know, the, the three is different from a five and all that kind of stuff. That's what I liked about it was. It just. It's like, okay, I'm seeing a certain.