Investing lessons from AI (and a veteran human)

On Friday, one of my X/Twitter followers queried the meaning of condition codes allocated to pre-market Course of Sales data for a few ASX-listed stocks. In question was what the identifiers “EP”, “EC”, and “XT” mean.

These identifiers are common on the morning following an ASX exchange traded options (“ETO”) expiry. ETO’s allow investors to enter contracts to buy (call) or sell (put) a specified number of shares in a company at a specified price at a specified time.

In the simplest sense, investors usually buy call options if they believe the price of a stock is going to rise, and they buy put options if they believe the price of a stock will fall.

After expiry (typically the last Thursday of the month, that's a business day), ETO contracts that meet an investor's requirements are “exercised”. This means the shares associated with the contracts are called in from, or put to, their respective contracted counterparties.

In the case of Chalice Mining (ASX: CHN) in the image above, there are several EP identifiers in the “Cond” column on the far right. The first row shows 30,000 CHN shares being transacted at $2, then there are 10,000 CHN shares at $1.90 transacted in the second row, and so on.

CHN shares closed at $1.36 on the relevant expiry date in this example (i.e., Thursday, 21 November). This means that some savvy investor who purchased those $2 “strike price” puts were able to sell their 30,000 CHN shares a tidy 64 cents above the prevailing market price.

Options contracts aren’t free, however, there’s a cost to purchase them – just like any insurance policy. So, the investor in this case study may have paid, say 20 cents, a few weeks ago when CHN was trading around $2 for this right to sell at $2 on or before 22 November. The amount required to purchase an option is called its “premium”.

Consider also that if CHN shares closed at $2 or higher on expiry, there would be no financial benefit from exercising these $2 puts, and in doing so, selling one’s shares below the prevailing market price.

In this case, the investor would have let the puts “lapse” and the put options themselves would have “expired” worthless. It follows, the initial 20 cents premium in this example would have been lost.

“Just like an insurance policy” is the way I usually describe put options. When your home and contents insurance renewal notice arrives in the mail, you don’t lament losing your annual policy premium because your house never burned down.

In this example, we can see both EP and EC identifiers for Brambles (ASX: BXB). In the first row, 70,000 BXB shares were transacted at $19.51 by a put option holder. Two rows down, we can see that 3,000 shares were transacted at $19.00 by a call option holder (“EC”). In this case, the call owner was able to effectively purchase BXB shares at a 6-cent discount to BXB’s closing price on Thursday of $19.06.

The most lucrative EC’s were for options with a strike price of $15.01 – two tranches: 787,000 shares and 384,700 shares. These investors likely purchased their calls some time ago under the assumption that BXB shares were likely to rise.

We say that these options were “deep in the money”, that is, their strike price is well below the current market price. An option that is in the money is also described as having “intrinsic value”.

No mystery here, and it gets simpler than that…

My response to @saxenadheeraj is shown above. Those who follow me know my philosophy on investing: Follow the trend at all times.

For those who don’t, I use technical analysis to identify and follow trends in the prices of various securities, stocks, commodities, bonds, crypto – really anything I can get a chart on.

I believe that embedded in the price is all available fundamental information, and that the demand and supply resulting from that information has interacted in an informed and rational manner to create the price.

As new fundamental information (i.e., “news”) occurs and is absorbed by market participants, demand and supply will change to impact the price. If the price is rising over time, I assume it is because demand is exceeding supply. Similarly, if the price is falling over time, I assume it is because supply is exceeding demand.

These moves in price represent the trends I am trying to identify and measure.

I also assume that market participants are creating a particular environment of excess demand or excess supply based on their future expectations. So, if the price of an asset is rising, whilst it only indicates how market participants have behaved in the past, it does indicate to some extent where those market participants expect the price to go in the future – up.

The same goes for when the price of an asset is falling. I believe it demonstrates an expectation among market participants that the asset is more likely to deliver poor price performance in the future.

I never ask why a particular market imbalance (an imbalance creates an up or down trend) or market equilibrium (an equilibrium creates a sideways trend) is happening. Honestly, I don’t care. I just want to know that it is.

If the analysis using my trend ribbons, price action, candlesticks, and volume indicates an uptrend – it means I only have these options: abstain, hold, or buy. Alternatively, if my analysis indicates a downtrend – it means I only have these options: avoid/abstain, sell, or short.

I believe that trading with the trend gives me the best probability of success. It does not guarantee success. I know and accept that I will lose often. This is part and parcel of investing. No investor, not even the legendary Warren Buffet, wins 100% of the time.

So, I take my lickings when I have to, ensuring that on the top of my trend following regime I also have a very strict regime of risk management. I prefer to invest modestly across many opportunities, never investing so much in a single outcome that its adverse result could wipe out more than a small portion of my overall capital.

Just as importantly, I exit those investments that didn’t work out with merciless efficiency, while at the same tenaciously holding onto those that do work out. It’s hard enough sometimes to get a winner, one may as well hold onto it for as long as it continues to win.

So, these are the basic tenets of my investing methodology. You could summarise them as:

1. Demand vs supply equals price
2. Identify and always follow the trends
3. Meticulously manage risk through diversification, cutting losses quickly, and letting profits run
4. Execute all of the above with consistency and discipline, always committed to doing the work

It really is this simple.

Enter the wisdom of AI (to explain one human market veteran)

After posting my reply, I noticed the icon now embedded into each X/Twitter post denoting Grok, the platform’s AI assistant. One can ask Grok to “Explain this post”. Since the recent generative AI phenomenon has begun, I’ve been curious about AI’s progress in replacing me.

Hey, nothing I do is rocket science! It’s bound to happen at some point!

Fortunately, based upon my regular enquiries and conversations with various AI models, I don’t think AI is there yet. But, I must say, it is getting better. Scarily so, and I think Grok’s explanation of my reply to @saxenadheeraj eerily demonstrates this. Here it is verbatim:

Carl Capolingua (@CarlCapolingua), in his post on X, addresses a query from another user regarding early trades in stocks like $BXB (Brambles Limited), $CHN (Chalco), and $RRL (Regis Resources Limited). Here's an explanation of the key points Carl makes:

Terminology Explanation:

EP (Exercise Put): This refers to a transaction where the seller of a put option exercises their right to sell the underlying security at the strike price. This often indicates a bearish sentiment as the seller is looking to sell the stock at a potentially higher price than the market value at the moment of exercising.

EC (Exercise Call): Conversely, this is when the holder of a call option exercises their right to buy the underlying security at the strike price. This action can suggest bullish sentiment, where the buyer anticipates the stock's value will rise beyond the strike price.

Trading Advice:

Capolingua advises focusing on the chart rather than trying to interpret these exercise transactions for answers. He emphasizes:

Trends: Understanding the overall direction in which the stock is moving. Trends can indicate the general market sentiment towards a stock.

Price Action: This involves observing the movement of the stock price over time, looking at how it reacts to various levels, volumes, and news without getting distracted by specific transaction types like EP or EC.

Candles: He likely refers to candlestick patterns, which provide visual insight into market sentiment through their formation, showing price movements within specific time periods.

Criticism of Speculation:

Capolingua seems critical of the approach of trying to find explanations or justifications in option exercises (like EP or EC) for one's trading mistakes or to fit into a narrative or justify sunk cost losses. Instead, he suggests:

Trend Following: A strategy where one trades in the direction of the trend, which can be less about predicting market movements and more about following where the market is already going.

Philosophy on Trading:

He encourages traders to "switch to trend following" and "always follow the trend", which reflects a belief in the efficacy of trend-following strategies over speculative analysis based on less straightforward indicators like option exercises. This approach aligns with a long-term, disciplined trading strategy rather than short-term speculative moves.

Life Perspective:

His closing remark about living one's life suggests a broader philosophy where trading should not consume one's entire focus but should be balanced with life outside of market activities.

Conclusion:

Carl Capolingua's post essentially advocates for a more straightforward, less speculative approach to trading by focusing on observable market trends and price actions rather than attempting to interpret or predict market movements based on option transactions. His advice leans towards a disciplined, trend-following strategy, which could potentially lead to more sustainable trading practices by aligning actions with market movements rather than trying to second-guess or over-analyze individual transactions or market events. This approach might help traders avoid common pitfalls like emotional decisions, over-leveraging, or misinterpreting market signals.

Conclusions

I typed 274 characters in the reply to my follower. AI expanded this into several more that constituted a response that honestly, I could not have explained any better myself. Impressive, and I’d argue Grok and other AI models potentially present a useful investing and learning tool for all of us going forward.

Regardless of your approach to investing, whether it be fundamentals only, technicals only like me, or a pragmatic mix of the two, I trust that there was something in this article you found valuable either from me – the human market veteran with over 30 years of experience – or an ever-improving AI teacher.

For a detailed explanation of my technical analysis methodology, be sure to check out my Technical analysis for beginners: ChartWatch Primer.

This article first appeared on Market Index on Monday 25 November 2025.