From Christmas Trees to 100% Returns: The Trading Philosophy of Erik Smolinski
Erik Smolinski’s Background and Track Record
Erik Smolinski’s journey into the financial world began far from the trading floor. Raised by a single mother who worked as an occupational therapist, he grew up in a low-income household where he worked odd jobs, splitting wood, moving shale, and selling Christmas trees, to help his family.
It was his high school ROTC instructor who first introduced him to the concept of compound interest, sparking a lifelong obsession with markets. Smolinski eventually attended college on a Marine Corps scholarship, spending his nights studying the “nut” of trading while his peers were out socializing.
Today, Smolinski manages risk for a hedge fund while trading his own personal book. His track record is notable for its consistency and recent explosive growth: he has not had a single losing year since 2008 and achieved returns of nearly 100% last year. Interestingly, he attributes these “blowout years” to focusing on implementing ideas rather than aiming for specific performance targets.
This article is based on a podcast.
The Inherent Advantages of the Retail Trader
While institutions have massive resources, Smolinski argues that retail traders possess several distinct advantages:
- Agility: Unlike large funds, retail traders can move their entire portfolio from long to short in a single day without worrying about liquidity, block trades, or institutional reviews.
- The Power of Inaction: One of the greatest edges for a retail trader is the ability to not trade. Retailers are not required to quote markets or remain invested when conditions are unfavorable.
- Access to “Cesspools”: Retail traders can operate in illiquid, “back-alley” markets that are too small for institutions, allowing them to find edge where there is significantly less competition.
- Coattail Riding: Retailers can profit by identifying and following the “footprints” of institutional order flow, such as VWAP orders or end-of-the-month window dressing.
Strategies for the Retail Trader
Smolinski suggests that retail traders should stop viewing themselves as “options” or “stock” traders and instead focus on becoming generalists who exploit market effects. His recommended strategies include:
- Replicating Momentum: He advises beginners to start by replicating well-documented effects like momentum, specifically recommending the book Quantitative Momentum by Wes Gray as a blueprint.
- Sector Rotation: By utilizing resources like the Social Science Research Network (SSRN), traders can identify market leaders and laggards within a sector to find high-probability breakout opportunities.
- Ratio Call Diagonals: To express a bullish view while managing costs, Smolinski uses ratio diagonals. These allow him to subsidize the holding costs of long options without losing money if the market moves “too far” in his direction.
- Defensive Foundation: Smolinski likens a new trader to a “white belt” in jiu-jitsu; the primary goal should be not getting decimated. He stresses that traders must accept that options have no inherent edge—they are merely vehicles for expressing a market view.
- Process Over Profit: To build discipline, he advocates for paper trading to develop a “deep relationship” with the Greeks and maintaining a handwritten trading plan to identify logic gaps before risking capital.
By focusing on why certain market effects exist, such as information asymmetry or structural limitations, retail traders can move beyond “guessing” and begin to build a professional-grade trading business