It's important to have a trading plan. You can't trade off hopes and dreams. You have to be very disciplined in your approach. And you need to treat trading as a business.
Leon Smith began trading stocks in middle school when his dad helped him purchase his first shares in Yahoo.com on his PalmPilot. He dabbled in writing algorithms that scanned the market looking for day trading opportunities. He is interested in trading high probability strategies and sharing the various methods. He follows earnings pretty closely to understand how companies are doing and how the market reacts.
“When I hear or see stories about people who are trading, what we call, option spreads or credit spreads for the first time, when someone is able to make money when the stock market is trading sideways when this is a new concept for them, for me that's very exciting, very exciting. Because you're not just stuck on the idea that stocks have to go up for you to make money, but you can make money in the market when the market is trading sideways.”
Leon and his co-founder (Kevin Hamilton) met while pursuing MBA's at UCLA. They are both software engineers by training, and would often talk about ways to help retail traders by writing algorithms to identify high probability trades. A year after graduation Leon started a service called "Fancy Options''. It was a simple newsletter that listed stocks that had the highest implied volatility for that day. The idea was that users could sell options on these stocks and take advantage of the higher options prices.
After learning that Kevin had also been developing software to complement Fancy Options, they decided to combine their software and passion for finance to create Tiblio which officially launched in July of 2020. Today they serve a mix of new and experienced traders. They provide data insights, journaling, and alerts to help keep users disciplined and focused. With so much noise in the world about what stocks/options to buy, they try to keep it simple and reduce trading anxiety.
WHAT ARE OPTIONS?
To understand what options are, it helps to compare them with stocks. Buying stock means you own a tiny portion of that company, called a share. You’re anticipating the company will grow and make money in the future, and that its share price will rise. If this happens, you can sell the shares for a profit.
An option, on the other hand, is just a contract that gives you the right to buy or sell a stock — usually in bundles of 100 — at a certain price by a certain date.
There are two types of options: puts, which is a bet that a stock will fall, or calls, which is a bet that a stock will rise.
Buying an option means taking control of more shares than if you bought the stock outright with the same amount of money.
Options are a form of leverage, offering magnified returns.
An option protects investors from downside risk by locking in the price without the obligation to buy.
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Hi and welcome back to Stocks for Beginners. I'm Phil Muscatello. What do you get when you cross a software engineer and a stock market news junkie? You get my guest today, Leon Smith. Hello Leon.
Hi Phil, how are you doing today?
Really good. Thank you. Now, Leon is the co-founder of Tiblio, a stock market research platform, working with his co-founder Kevin to write the algorithms that scan the market, looking for various stock and options opportunities. Leon you started trading stocks in middle-school, specifically yahoo.com using your PalmPilot. I think maybe first of all, can you explain what a PalmPilot is or was?
Leon (1m 8s):
Sure. So back in the 90s, early 2000s, we had these small computers called PalmPilots. They were essentially cell phones without the ability to make phone calls. So, you know, if you think of an organizer or a small calculator rolled into one, this was a PalmPilot. So on the PalmPilot, they had different apps where you could go online and I used it to buy and sell stocks during biology class.
Phil (1m 31s):
So your dad helped you with a bit of stock-picking early on, didn't he?
Leon (1m 35s):
He did. He did. Yeah. So when I was in middle school, we will look through The Wall Street Journal, looking at various stocks, talking about companies. And one of the stocks, that I don't think is still around, called ABV, we actually bought some shares and received a prospectus in the mail, which is pretty cool.
Phil (1m 51s):
So you would have been interested in software from an early age as well as the stock market. And in the 90s, that was the beginning of the internet boom, wasn't it? How were you feeling at the time about all of that?
Leon (2m 3s):
Yeah, so in the late nineties we had the boom, I was learning HTML, this computer language, and CSS. So I was making websites while also learning about the financial markets. But, you know, I never put the two together until college when I started writing algorithms scanning the market, just looking for various opportunities, looking at the way the markets traded and trying to find correlations between big macro news events and how stocks were trading.
Phil (2m 31s):
When did the penny drop for you? Did you have a light bulb moment or it was just a gradual development through college?
Leon (2m 37s):
Yeah. So I went back to UCLA to get my MBA, that's where I met my co-founder Kevin. During class, during finance class and such, we would talk about the stock market, the crypto market. Kevin is also a software engineer, so we will talk about different algorithms to scan the market and possible products that we can create to help retail traders trade more efficiently. And so again, during this MBA, I definitely picked up writing algorithms for different stock strategies and such. So that's really where it got stuck.
Phil (3m 6s):
This developed into quite a passion for you, didn't it?
Leon (3m 9s):
It did. So for me, really trying to understand the market and how can we create algorithms to help retail traders trade more efficiently, you know, as new traders coming into the market, it's definitely very scary. You have CNBC, Wall Street Journal, all these different new sources throwing all these information out at you. How do you disseminate it? How do you make sense of it? In addition to that, we have these social media platforms where people are sending out suggestions every second of the day. And so in order to try to get through all of that minutiae, writing algorithms, being able to show retail traders, okay, what's important, you know, how do you say discipline trading, was really the impetus for it.
Leon (3m 53s):
And so being able to, again, create a product and create ways to help people trade better was really the passion. I have a social science background, so helping people is the kind of the angle that I'm taking most of the time.
Phil (4m 5s):
It is not something that I would often recommend that people get straight into the idea of trading. I mean, we always look at more long-term investing. Do you feel that it's safe for people to come in with a trading mindset fresh into the stock market?
Leon (4m 23s):
Yeah. So a lot of times we're finding that traders are coming into the stock market based off what they see on AMC or GameStop or a lot of these other stocks, what they call meme stocks. So I think the perspective has changed in terms of how people see the stock market. You know, we try to outline different rules for people coming in new to help them stay disciplined, helped them stay focused. So for example, you know, we always want people to have a trading plan. You know, we don't want people to trade off hopes and dreams. We want you to be very disciplined on your approach. Secondly, we want to treat trading as a business. And so with being disciplined, you know, this is your capital that you're putting up to make these investments and so treating it as a business, being very astute in terms of your buying is very important.
Leon (5m 10s):
There's a couple of other items that we're really interested in helping folks with. But definitely trading is the way people are coming into the market nowadays.
Phil (5m 17s):
It is really, you know, people are looking at the market in a different way. I mean, there are people of course doing, long-term investing as well, but if people do want to trade, obviously they want to do it in the safest way possible. Let's dig deeper into what you're doing to provide this kind of safety. What are some of these things that new traders need to know?
Leon (5m 38s):
Right. So, as I mentioned, you want to have a trading plan. You want to treat trading like a business. You also want to use technology when possible to help augment some of your research. So reading the news, using services, like the one I provide, really help to, again, cut through all of the deluge of information that we have out there. We really encourage folks to study the markets. So it's important to understand how the market trades off various events. So, for example, during earning season, we definitely see what's called volatility in the market and that's important to know. During the end of the year, sometimes we see what's called a Santa Claus Rally. You know, being up to date on a lot of these different cycles is important.
Leon (6m 22s):
We're also seeing that traders risk more than what they can afford. So staying within the bounds of what you can afford is also very important. And then I think one of the biggest pieces that retail traders, kind of again, you need to know is how to manage risk. You know, if we can manage risk and be very disciplined about it and understand that losses do happen, I think people can stay in the trading game for a lot longer than what we're typically seeing. Because if you come in, you buy AMC and you lose, you're typically not going to come back into the stock market and that's not going to help you in the long run build wealth.
Phil (6m 58s):
People can come and trade and do it with quite a small amount of money at risk. Is that the case?
Leon (7m 6s):
Yes, definitely. So, you know, depending on the price of a given stock, traders can come in with a very small amount to start trading. So for example, Ford, I believe, is trading around $20 today. If someone had $20 that they can afford to spend, they could buy a share of Ford and begin trading or investing today. So you don't need a lot of money to get started.
Phil (7m 30s):
And you believe that journaling's very important. What is journaling?
Leon (7m 34s):
Yeah. So journaling is very imperative to trading and investing successfully over time. When you journal, you're essentially keeping track of your wins and your losses. And you're also detailing what happened during those trades. Again, we don't want to trade on emotion, we don't want to trade on hopes and fears and what we're seeing on internet trading boards. But if we can write down what we're doing and then study these, again over time, we see ourselves getting better. Again, athletes watch videos of themselves getting better. Performers watch videos of themselves. As a trader, we can do the same thing through journaling. And with this journal, again, we're tracking the stock price while we bought it while we sold it.
Leon (8m 17s):
And we want to review this once a quarter, at least, to understand our trading patterns and adjust over time.
Phil (8m 24s):
It is something that takes a bit of time to learn, isn't it? You're not going to come in and be a gun trader right away, are you?
Leon (8m 30s):
Yeah. Not at all, not all. And that's totally okay. And again, it's important to keep the perspective of trading. It's a long, it's a long game. We're not going to come in and do what's called YOLO. This is a very popular term nowadays. 'You Only Live Once' where people put in all of their money on one stock and hope for the best. That isn't the best way to trade, obviously. And so this is a long game. We're going to journal, we're going to stay disciplined and we're going to remove emotion out of our trading. And we can do this by following these steps: journaling, staying focused and having a system that we can critique and change over time to match not only the market, but our trading style as we become more mature.
Phil (9m 14s):
We're going to talk about the community that has built up around Tiblio a little bit further in the interview. But just at the moment in terms of focus and discipline, have you got any stories of some of the new traders and the way that they've grown and developed over time?
Leon (9m 31s):
Yeah, absolutely. So this is a very exciting question because many of the traders that we're seeing are coming to us from trades and AMC from GME. And so you come to the market based off of these hype and you soon find out that there's more to the market than just AMC and GME. And so how do I trade these other stocks? How do I invest for the long-term? And so it's very exciting to see traders change a perspective on the market in terms of, again, staying disciplined and not following the hype, but having a trading plan and being focused. Again, one of the biggest items that we talk about on our daily YouTube is the fact that, you know, trades will come and go, which is totally fine.
Leon (10m 16s):
We don't have to chase trades. We want to stick with what's comfortable for us and reduce anxiety. I could only imagine as a new trader coming in with all of the information that we have, how much anxiety someone could have. And again, we're trying to reduce that, but when people come in from, again, from AMC and GME and change a perspective on how they see the market, that's a very exciting win for us.
Phil (10m 38s):
I've seen that a lot with people who had come to the market because they've heard about people that have made lots of money with meme stocks and, you know, they've seen other people making huge gains and they think, well, why can't I do it? And it's almost like, when you tell them the reality of the situation, it's almost like their shoulders slump. But really, it's part of a journey and a part of the way of doing things.
Leon (11m 1s):
Exactly. And what we don't see is all of the people who have lost money.
Phil (11m 6s):
Leon (11m 7s):
We see the gains but there's 10 times the amount of people that have lost money, who aren't sharing, who aren't sharing those screenshots online. So, you know, that's one item we have to keep in mind.
Phil (11m 17s):
The algorithms that you and Kevin have developed, what is it that they're actually scanning for?
Leon (11m 22s):
So the algorithms that Kevin and I have developed, their scanning for what's called volatility in the market. And so when we can find this volatility, this gives traders a relatively good premium or relatively good returns with a high probability of success. And again, this high probability of success is based off statistics and based off of the different types of, what we call, options that we're looking for. And so we have those types of scanners. We additionally have scanners looking for, what we call, pops in volume. So if we see a stock that has a exponential increase in volume, this is a potentially bullish or bearish play depending on other indicators.
Leon (12m 4s):
So we're scanning the market looking for these various strategies and our users, depending on their trading style, depending on what they're looking for and depending on market conditions, can employ these various strategies, again, based off what they're looking for.
Phil (12m 19s):
And what sort of timeframes are users looking at?
Leon (12m 22s):
Yeah, so our users are looking at anywhere between 45 days and 1 day for their trades. So again, as we talked about earlier, you know, investing is extremely important. However, people are coming to the market looking to trade. And so we're trying to put bounds within what it means to trade and essentially the idea's to keep people safe, right? Investing and safe, those words don't go together. But trying to reduce the risk as much as possible to give folks confidence in their trading.
Phil (12m 54s):
What about diversification? Are you're looking at a number of position sizes across a number of positions, is that how it works?
Leon (13m 1s):
Yeah. So that's a great question. So with regards to diversification, you know, we talk about how your portfolio should be made up of stocks, options, if that's what you choose to do, and then again, various types of assets. Within Tiblio, the diversification comes in in terms of, we don't want to over diversify on, what we call, call options or put options or very aggressive types of strategies. But if a user comes in looking for various strategy, within those strategies, we talk about diversifying on what's called, you know I don't want to get too technical, but what's called Delta.
Leon (13m 43s):
So there's this Greek metric called Delta with options and we really talk about trying to be diversified within these bounds. At the same time, new traders coming in who aren't familiar with this term, it's easy to talk about, okay, if we're trading airlines, we also want to trade retail trades. We also want to trade, you know, fast food or biotechs essentially to keep ourselves diversified within various industries. It's probably the same idea.
Phil (14m 10s):
I think it might be worthwhile talking a little bit about options now. I know they're very difficult concepts to think about, but from your view, what are the basics of options?
Leon (14m 21s):
Yeah, so I agree. It's a very difficult concept just to talk about without pictures or graphs. But essentially an option contract gives the buyer the right but not the obligation to buy or sell the underlying stock at a specific price or at a specific strike before a certain date. So when I buy, what we call, a call option, I buy this option at a certain strike that has an expiration date. And so the idea is that I want the stock to go up before this option contract expires. That way I make money on this call option, hopefully, otherwise I lose all the capital if this option expires, what's called out of the money, and expires worthless.
Phil (15m 7s):
So it's basically like if a stock is worth a hundred dollars, for $10, you can buy the same amount of stock, well you buy the right to purchase that, and if it goes up before the expiry date, you can make some money on that. Is that basically how it works?
Leon (15m 22s):
Right, exactly. Exactly. So instead of buying a hundred shares of a stock, you can buy an option on a stock and you have control of 100 shares without buying a hundred shares of that stock. So it gives you a lot of leverage in terms of your trading.
Phil (15m 37s):
It gives you a lot of leverage but you just got to remember that Delta thing that the value of it is going down every day, isn't it?
Leon (15m 44s):
Sure, yes. Yeah. So we call that data, but yes, the value is going down every day unless the stock goes up. And so, you know, a lot of new traders hear about options on these trading boards, people buying options on AMC, GME and a lot of other meme stocks. But at the same time, people are losing a lot of money because these are very, very risky assets, very, very risky. And so with Tiblio, again, we're putting bounds around these options to help folks trade these options and reduce the risk somewhat.
Phil (16m 15s):
Well that was what I was going to ask. They are dangerous for new investors, are they?
Leon (16m 20s):
They're very dangerous. So if I buy a hundred shares of Ford, as I mentioned, you know, this is going to cost me $2,000. I can keep Ford for as long as Ford is in business. If I buy an option on Ford, this gives me control of a hundred shares. If my option expires out of the money, then I lose that investment. And so, again, very, very dangerous. At the same time, there's what's called option selling and people can get themselves in a lot of trouble if they're selling options and they're not aware of what they're doing. And so there's a lot of, a lot of risk in option buying and option selling.
Phil (16m 59s):
So when you're buying a call option, that's looking at the price to go up, in your view, but you can also do it in the opposite direction, can't you? Tell us about that.
Leon (17m 9s):
Right. So you can also buy a put option. So if you are bearish on a stock or bearish on the market, you can buy a put option to take advantage of that downturn. So, for example, in the United States where the debt ceiling is still being worked out, if I had a bearish view on the situation and I don't think our Congress will pass this debt ceiling and I believe that stock market will go down, I could buy a put on SPY to take advantage of that potential downturn. Same with earnings, we're just getting out of earnings season right now. Some companies have done very well, other companies have done very bad.
Leon (17m 49s):
PayPal, for example, had a very, very bad day. If I bought a put on PayPal, I could take advantage of this downturn. So options are good in that you can take advantage of the stock market going up, going down or trading sideways.
Phil (18m 1s):
So tell us about the community, the Tiblio community. It's on Discord and YouTube, I believe.
Leon (18m 7s):
Yeah, definitely. So we have a very supportive community in Discord. Discord is a chat app. Within here we talk about trades, our traders are very supportive, talk about different strategies and such. Additionally on YouTube, I do a daily YouTube live talking about the trends in the market, what's happened in the market today and how to potentially trade some of these trends. And so those combined create our, again, very supportive community where, again, people are trading ideas, giving suggestions, I mean, very supportive of folks wins and, you know again, potential losses.
Phil (18m 42s):
Have you got any stories about the interactions and the people that you're dealing with and some of the lives that have changed?
Leon (18m 49s):
Yeah, definitely. So, as I mentioned, when I hear or see stories about people who are trading, what we call, option spreads or credit spreads for the first time, when someone is able to make money when the stock market is trading sideways, when this is a new concept for them, for me that's very exciting, very exciting. Because you're not just stuck on the idea that stocks have to go up for you to make money, but you can make money in the market when the market is trading sideways. So stories like that are very impressive, very exciting. On the YouTube lives, when people share about different stocks that they found, that they got into for the day and we talk about them to their charts and what I'm seeing and what they're seeing, that interaction for me is very fulfilling.
Leon (19m 31s):
And that, you know, making that connection with people who are learning or who are very mature traders and learning about what they're doing and how we can help them trade better, again, very, very rewarding for myself and Kevin. So that stuff is very, very exciting and very, very fun to read.
Phil (19m 47s):
So presumably the algorithms are going to be showing up many, many, many stocks. How do you filter them down into a manageable size?
Leon (19m 56s):
Yeah. So that's our secret sauce. So that's where we're able to put in our own bias sorts of market. While we were at UCLA getting our MBAs, you know, learning about finance and some of the different perspective on the market, we really try to put these into the algorithm to reduce the size of this list. 'Cause you're right, it could be thousands of different possibilities. But we try to shrink it down as much as possible to make it digestible for people to trade.
Phil (20m 23s):
We're recording on the 9th of November, 2021. What are your views on the markets right at this moment? I mean, they seem to be right, just sitting there at the top and could go either way. What are your thoughts?
Leon (20m 34s):
Right. So we've just had eight straight days of green wind, essentially. The federal reserve last week talked about how they are dovish, essentially, on the market for the next couple quarters. This is because the headwinds that we've seen recently with supply chain issues, high oil prices, staffing shortages and a lot of these companies, they talk about being very temporary or transitory, given that I am very bullish on the market myself for the next couple of quarters, the holiday season is shaping up to be pretty bullish. At the same time, we're seeing retail trying to ramp up at Walmart and Target, some of these big, more staple companies.
Leon (21m 15s):
So again, very, very bullish. A lot of these headwinds that we've seen, again with staffing shortages and such, seem to be very temporary. So given all of these signs, I'm very positive. At the same time, the US Congress has just passed the infrastructure bill. So again, another good sign for the market.
Phil (21m 31s):
That's a huge impetus, isn't it, that the amount of money that's going to be going into building bridges and airports and rail and roads.
Leon (21m 39s):
Huge. So companies like Deere, Caterpillar, Vulcan, a lot of these other construction, mining companies will do very well over the next 5 to 10 years.
Phil (21m 47s):
And you'd also think that coming out of lockdowns and coming out of COVID that people are ready to get out, enjoy life and spend.
Leon (21m 55s):
Exactly. Right. So this Black Friday coming up will be very, very interesting to see how the markets, how the stores fare.
Phil (22m 1s):
So if people want to find out more about Tiblio, where can they go? Give us the channels and the addresses and all the socials.
Leon (22m 10s):
Absolutely. So tiblio.com, you can find us there. And then on YouTube, if you simply type in Tiblio or on Twitter: Tiblo, you can find us there as well. But pretty easy to find.
Phil (22m 19s):
Leon Smith, thank you very much for joining me today.
Leon (22m 22s):
Thank you, Phil. Thanks for having me.
Stocks for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Stocks for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation.