# Book 2: Experimental Defined-Risk Simulation

## Simulation Rules
- **Capital:** $10,000 virtual (separate from Book 1)
- **Strategy:** Defined-risk spreads, directional bets, volatility plays
- **Execution:** Purely simulated — no Robinhood interaction (Level 2 restriction)
- **Tracking:** Midas ledger + market data mark-to-market
- **Learning goal:** Understand spread mechanics, Greeks behavior, risk profiles
- **Target:** 50 simulated trades before considering live defined-risk strategies

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## Book 2 Capital Structure

| Tier | Allocation | Purpose | Max Concurrent |
|------|-----------|---------|----------------|
| **Active positions** | $6,000 (60%) | 4-6 spread positions at $500-$1,500 risk each | 4-6 |
| **Reserve** | $2,500 (25%) | Opportunity fund, adjustments | — |
| **Loss buffer** | $1,500 (15%) | Absorb max loss on 2-3 positions | — |

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## Portfolio Ledger

### Trade #1: TSLA $220/$210 Put Credit Spread — OPEN

| Field | Value |
|-------|-------|
| **Ticker** | TSLA |
| **Structure** | Put Credit Spread |
| **Short leg** | Sell $220 put, June 20, 2026 |
| **Long leg** | Buy $210 put, June 20, 2026 |
| **Entry date** | 2026-05-06 |
| **DTE at entry** | ~45 |
| **Net credit** | $1.50 ($150 per spread) |
| **Max risk** | $850 ($1,000 width − $150 credit) |
| **Breakeven** | $218.50 |
| **Current TSLA** | $394.87 |
| **Distance to short strike** | 44.3% below current |
| **Estimated delta** | ~0.05-0.08 |
| **Estimated theta** | ~$0.10-$0.15/day |
| **Estimated vega** | ~-0.06 |
| **Status** | ✅ SIMULATED OPEN |

**Rationale:**
- TSLA is a known holding — teaches hedging/income on existing positions
- 44% drop to short strike = extreme buffer
- Low delta = low probability of ITM
- Defined risk = max loss $850 vs. $22,000+ on a CSP at $220

**What this teaches vs. CSP:**
| CSP | Put Credit Spread |
|-----|-------------------|
| Must own stock if assigned | Never own stock |
| Max loss = strike × 100 | Max loss = width − credit |
| High capital requirement | Low capital requirement |
| Theta decays on full notional | Theta decays on spread differential |
| One Greek (short put) | Net Greeks (short − long) |

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## Trade Quality Assessment

✅ **Distance:** 44.3% OTM — extraordinarily safe on a non-crash thesis
✅ **Defined risk:** $850 max — know your worst case upfront
✅ **Capital efficiency:** 1.76% return on risk in 45 days, or ~14% annualized
⚠️ **Low premium:** $150 on $850 risk = 17.6% return if max profit. But probability of max profit is very high.
⚠️ **Wide strikes:** $10 width is narrow. If TSLA gaps below $210, full loss immediately.
⚠️ **Liquidity:** TSLA options are liquid, but spread execution depends on bid-ask on both legs.

---

## Scenario Analysis

| TSLA at expiry | Outcome | P&L per spread |
|----------------|---------|----------------|
| $400+ | Both puts expire worthless | +$150 (max profit) |
| $300 | Both puts expire worthless | +$150 (max profit) |
| $225 | Short put ITM, long put OTM | +$150 − ($220−$225) = −$350 |
| $220 | Short put ATM, long put OTM | +$150 − $0 = +$150 (breakeven zone) |
| $215 | Both puts ITM | +$150 − ($220−$215) = −$350 |
| $200 | Both puts ITM | +$150 − $1,000 = −$850 (max loss) |
| $150 | Both puts ITM | −$850 (max loss) |

**Key insight:** Below $210, you lose the same $850 whether TSLA is $209 or $50. The long put caps your loss.

---

## Greeks Deep Dive (Simulated)

| Greek | Short $220 Put | Long $210 Put | **Net Spread** | Interpretation |
|-------|----------------|---------------|----------------|----------------|
| Delta | −0.08 | +0.03 | **−0.05** | Slight bearish bias — profits if TSLA rises |
| Gamma | −0.002 | +0.001 | **−0.001** | Minimal acceleration risk |
| Theta | +0.18 | −0.08 | **+0.10** | $10/day time decay in your favor |
| Vega | −0.25 | +0.15 | **−0.10** | Short vol — wins if IV drops |

**Note:** These are estimates. Actual Greeks depend on IV, skew, and time. In simulation, I'll update weekly with theoretical marks.

---

## Adjustment Triggers

| Trigger | TSLA Price | Action |
|---------|-----------|--------|
| Comfort | $250+ | No action — deep OTM, theta working |
| Watch | $230 | Short strike approaching. Monitor delta expansion. |
| Caution | $220 | Short strike hit. Consider rolling out or accepting max loss. |
| Breach | $215 | Both legs ITM. Full loss likely. Close or hold to expiry. |
| Crash | $200 | Max loss realized. Review thesis. |

---

## Capital Math

| Position | Risk Capital | Status |
|----------|-------------|--------|
| TSLA 220/210 PCS | $850 | ✅ Simulated open |
| **Total at risk** | **$850** | **8.5% of $10K book** |
| **Available** | **$9,150** | For 4-6 more positions |

---

## Book 2 Velocity Tracker

| Trade # | Date | Structure | Status |
|---------|------|-----------|--------|
| 1 | May 6 | TSLA 220/210 PCS | ✅ Simulated open |
| 2 | TBD | TBD | ⏳ Pending |

**Progress to 50:** 1 / 50 (2%)
**Combined with Book 1:** 3 / 100 total simulated trades

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## Key Differences from Book 1

| Dimension | Book 1 (CSP) | Book 2 (Spreads) |
|-----------|--------------|------------------|
| Capital per trade | $1,300-$10,000 | $500-$1,500 |
| Velocity | ~2 trades/month | ~4-6 trades/month |
| Max loss | High/unlimited | Defined/capped |
| Psychology | Assignment, ownership | Directional wrongness, capping |
| Greeks complexity | Simple (short put) | Net Greeks (spread differential) |
| Robinhood level | Level 2 ✅ | Level 3 required ❌ |

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## Notes on Simulation Mechanics

Since Book 2 is pure simulation:

1. **Pricing:** I'll use Yahoo Finance data + Black-Scholes estimates for theoretical marks
2. **Execution:** Assume mid-market fills (no slippage unless noted)
3. **Updates:** Weekly mark-to-market in our regular check-ins
4. **Adjustments:** You can request simulated rolls, closes, or modifications anytime
5. **Reality gap:** Real spread execution involves bid-ask on both legs, early assignment risk on short leg, and margin requirements. Simulation smooths these. Always remember: **simulated P&L is optimistic by 5-15% vs. live.**

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## Director Decisions — Post-Execution

1. **How does defined risk feel?** Knowing max loss is $850 vs. CSP's theoretical unlimited — more or less comfortable?

2. **Spread width preference:** $10 width (220/210) is conservative. Wider = more credit, more risk. Narrower = less credit, less risk. Preference?

3. **Directional bias:** This trade is mildly bearish (profits if TSLA stays flat/rises). Want to try a **bullish call spread** next, or stay with put spreads?

4. **Iron condor curiosity:** Once you have 2-3 spread trades, we can combine put + call spreads into an iron condor. Interested?

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*Book 2 opened: 2026-05-06*
*Next update: Friday May 9 (combined Book 1 + Book 2 review)*