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Options Greeks: What is Vega? 2020-03-01T16:55:27+00:00

Vega is the amount call and put prices will change, in theory, for a corresponding one-point change in implied volatility. Vega does not have any effect on the intrinsic value of options; it only affects the “time value” of an option’s price. Vega values represent the change in an option’s price given a 1% move in implied volatility, all else equal. Long options & spreads have positive vega. Example strategies with long vega exposure are calendar spreads & diagonal spreads. Short options & spreads have negative vega. Some examples are short naked options, strangles, straddles and iron condors.

When thinking about vega, we have to remember that implied volatility is a reflection of price action in the option market. When option prices are being bid up by people purchasing them, implied volatility will increase. When options are being sold, implied volatility will decrease. With that said, when being long options we want the price of the option to increase. When being short options we want the price of the options to decrease. That is why long options have a positive vega, and short options have a negative vega. An increase in implied volatility will benefit the long option holder, as that indicates an increase in option pricing, hence the positive vega assignment. A decrease in implied volatility will benefit the short option holder, as that indicates a decrease in option pricing, hence the negative vega assignment.

Since we normally hold a short vega portfolio as option sellers, we are exposed to volatility increases. We have to be careful with this exposure as volatility generally has velocity to the upside. This means volatility can quickly spike up, as it usually has a negative correlation with the market, which tends to have velocity to the downside. Managing our vega is important to ensure that we don’t have more exposure than we’re comfortable with from a portfolio perspective.

Typically, as implied volatility increases, the value of options will increase. That’s because an increase in implied volatility suggests an increased range of potential movement for the stock.

Let’s examine a 30-day option on stock XYZ with a $50 strike price and the stock exactly at $50. Vega for this option might be .03. In other words, the value of the option might go up $.03 if implied volatility increases one point, and the value of the option might go down $.03 if implied volatility decreases one point.

Now, if you look at a 365-day at-the-money XYZ option, vega might be as high as .20. So the value of the option might change $.20 when implied volatility changes by a point .

Source: Tastytrade and Optionsplaybook

Options Greeks: What is Theta? 2020-03-01T16:45:40+00:00

Time decay, or theta, is enemy number one for the option buyer. On the other hand, it’s usually the option seller’s best friend. Theta is the amount the price of calls and puts will decrease (at least in theory) for a one-day change in the time to expiration.

This graph shows how an at-the-money option’s value will decay over the last three months until expiration. Notice how time value melts away at an accelerated rate as expiration approaches.

In the options market, the passage of time is similar to the effect of the hot summer sun on a block of ice. Each moment that passes causes some of the option’s time value to “melt away.” Furthermore, not only does the time value melt away, it does so at an accelerated rate as expiration approaches.

An at-the-money 90-day option with a premium of $1.70 will lose $.30 of its value in one month. A 60-day option, on the other hand, might lose $.40 of its value over the course of the following month. And the 30-day option will lose the entire remaining $1 of time value by expiration.

At-the-money options will experience more significant dollar losses over time than in- or out-of-the-money options with the same underlying stock and expiration date. That’s because at-the-money options have the most time value built into the premium. And the bigger the chunk of time value built into the price, the more there is to lose.

Keep in mind that for out-of-the-money options, theta will be lower than it is for at-the-money options. That’s because the dollar amount of time value is smaller. However, the loss may be greater percentage-wise for out-of-the-money options because of the smaller time value.

Having negative theta means we are trading against the clock. The extrinsic value of our options will dissipate over time, which means we have to be directionally right quickly in order to see a profit, or we need implied volatility to expand more than theta will decay the option. This is why we always hedge our long options with a short option. It is preferable long vertical spreads, calendar spreads and diagonal spreads, compared to long naked options, because we can eliminate a lot of the decay.

Source: Tastytrade and Optionsplaybook

Options Greeks: What is Gamma? 2020-03-01T16:35:26+00:00

Gamma is the greek that gives us a better understanding of how Delta will change when the underlying moves. It is literally the rate of change of an option’s delta, given a $1.00 move in the underlying. For example, if a long call option has a gamma of 0.10 and a delta of 0.50, and the underlying moves up $1.00, the option will then have a delta of 0.60, all else equal. There are a few important concepts when it comes to gamma: Long option benefits, short option risks, and expiration risk.

Long Option Benefits of Gamma

Gamma is friendliest to long option holders. It accelerates profits for every $1.00 the underlying moves in our favor, and decelerates losses for every $1.00 the underlying moves against us. Since delta is the rate of change of an option’s price, and gamma increases an option’s delta as it moves closer to, or further in the money, in the example above the delta would just continue to increase. Every dollar the underlying increased would result in more and more efficient returns on the investor's capital. This phenomena also decelerates losses, as it works in the opposite way for every $1.00 the underlying moves against us.

Short Option Risks of Gamma

Because it can be beneficial for option buyers, that must mean that it can be risky for option sellers. From the seller’s perspective, it can accelerate losses, and decelerate directional gains. It is just the opposite side of the coin from the example above.

Expiration Risk & Gamma

The final aspect of gamma that is important to realize is expiration risk. As we get closer to expiration, our probability curve gets much more narrow. There is not a lot of time for the underlying to move to our far OTM strikes, and they will have a lower probability of being ITM because of that. Since we know the probability curve is more narrow, that also means our delta distribution is more narrow. The result is a more aggressive gamma. This can be good for option buyers, but especially bad for option sellers. It can quickly turn winning trades into losers, or losing trades into winners. We prefer to avoid these drastic swings, which is just another reason why we roll or close our positions 7-10 days prior to expiration.


Options Greeks: What is Delta ? 2020-03-01T16:27:43+00:00

It’s important to have realistic expectations about the price behavior of the options you trade. So the real question is, how much will the price of an option move if the stock moves $1? That’s where “delta” comes in.

Delta is the amount an option price is expected to move based on a $1 change in the underlying stock.

Calls have positive delta, between 0 and 1. That means if the stock price goes up and no other pricing variables change, the price for the call will go up. Here’s an example. If a call has a delta of .50 and the stock goes up $1, in theory, the price of the call will go up about $.50. If the stock goes down $1, in theory, the price of the call will go down about $.50.

Puts have a negative delta, between 0 and -1. That means if the stock goes up and no other pricing variables change, the price of the option will go down. For example, if a put has a delta of -.50 and the stock goes up $1, in theory, the price of the put will go down $.50. If the stock goes down $1, in theory, the price of the put will go up $.50.

As a general rule, in-the-money will move more than out-of-the-money, and short-term options will react more than longer-term options to the same price change in the stock.

As expiration nears, the delta for in-the-money calls will approach 1, reflecting a one-to-one reaction to price changes in the stock. Delta for out-of the-money calls will approach 0 and won’t react at all to price changes in the stock. That’s because if they are held until expiration, calls will either be exercised and “become stock” or they will expire worthless and become nothing at all.

As expiration approaches, the delta for in-the-money puts will approach -1 and delta for out-of-the-money puts will approach 0. That’s because if puts are held until expiration, the owner will either exercise the options and sell stock or the put will expire worthless.

So far we’ve given you the textbook definition of delta. But here’s another useful way to think about delta: the probability an option will wind up at least $.01 in-the-money at expiration.

Technically, this is not a valid definition because the actual math behind delta is not an advanced probability calculation. However, delta is frequently used synonymously with probability in the options world.

In casual conversation, it is customary to drop the decimal point in the delta figure, as in, “My option has a 60 delta.” Or, “There is a 99 delta I am going to have a beer when I finish writing this page.”

Usually, an at-the-money call option will have a delta of about .50, or “50 delta.” That’s because there should be a 50/50 chance the option winds up in- or out-of-the-money at expiration. Now let’s look at how delta begins to change as an option gets further in- or out-of-the-money.

As an option gets further in-the-money, the probability it will be in-the-money at expiration increases as well. So the option’s delta will increase. As an option gets further out-of-the-money, the probability it will be in-the-money at expiration decreases. So the option’s delta will decrease.

Imagine you own a call option on stock XYZ with a strike price of $50, and 60 days prior to expiration the stock price is exactly $50. Since it’s an at-the-money option, the delta should be about .50. For sake of example, let’s say the option is worth $2. So in theory, if the stock goes up to $51, the option price should go up from $2 to $2.50.

What, then, if the stock continues to go up from $51 to $52? There is now a higher probability that the option will end up in-the-money at expiration. So what will happen to delta? If you said, “Delta will increase,” you’re absolutely correct.

If the stock price goes up from $51 to $52, the option price might go up from $2.50 to $3.10. That’s a $.60 move for a $1 movement in the stock. So delta has increased from .50 to .60 ($3.10 - $2.50 = $.60) as the stock got further in-the-money.

On the other hand, what if the stock drops from $50 to $49? The option price might go down from $2 to $1.50, again reflecting the .50 delta of at-the-money options ($2 - $1.50 = $.50). But if the stock keeps going down to $48, the option might go down from $1.50 to $1.10. So delta in this case would have gone down to .40 ($1.50 - $1.10 = $.40). This decrease in delta reflects the lower probability the option will end up in-the-money at expiration.

Like stock price, time until expiration will affect the probability that options will finish in- or out-of-the-money. That’s because as expiration approaches, the stock will have less time to move above or below the strike price for your option.

Because probabilities are changing as expiration approaches, delta will react differently to changes in the stock price. If calls are in-the-money just prior to expiration, the delta will approach 1 and the option will move penny-for-penny with the stock. In-the-money puts will approach -1 as expiration nears.

If options are out-of-the-money, they will approach 0 more rapidly than they would further out in time and stop reacting altogether to movement in the stock.

Imagine stock XYZ is at $50, with your $50 strike call option only one day from expiration. Again, the delta should be about .50, since there’s theoretically a 50/50 chance of the stock moving in either direction. But what will happen if the stock goes up to $51?

Think about it. If there’s only one day until expiration and the option is one point in-the-money, what’s the probability the option will still be at least $.01 in-the-money by tomorrow? It’s pretty high, right?

Of course it is. So delta will increase accordingly, making a dramatic move from .50 to about .90. Conversely, if stock XYZ drops from $50 to $49 just one day before the option expires, the delta might change from .50 to .10, reflecting the much lower probability that the option will finish in-the-money.

So as expiration approaches, changes in the stock value will cause more dramatic changes in delta, due to increased or decreased probability of finishing in-the-money.

Don’t forget: the “textbook definition” of delta has nothing to do with the probability of options finishing in- or out-of-the-money. Again, delta is simply the amount an option price will move based on a $1 change in the underlying stock.

But looking at delta as the probability an option will finish in-the-money is a pretty nifty way to think about it.

Source: "Options"

The untold truth about Calendar Spreads
The untold truth about Calendar Spreadsmore_vert
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The untold truth about Calendar Spreads 2020-03-01T00:14:55+00:00close

Calendar spreads (or time spreads) are an options strategy that consists of buying and selling two options, either Calls or Puts, at the same strike price, but using different option chains (meaning different Days until Expiration). If a trader sells a near-term option and buys a longer-term option, with the same strike price, the resulting structure is a long calendar spread. To give an example is to sell a shorter term SPY Call at 300 17 APR 20 (currently at 48DTE) option and buy a longer term Call, again at 300, on the 15 May 20 chain (currently at 76 DTE).

In first fugure there is a chart for this trade.​

Long Calendars are entered for a debit. The trader pays more for the long-term option than he collects for selling the near-term option due to higher time premium from the longer term one. . In the figure example, the trader paid $1.79 for the call calendar on SPY. In a worst-case scenario, if the stock price moves significantly in either direction away from the chosen strike price, the max loss will be the price paid for the calendar spread.

When trading long calendar spreads, we expect the stock price to trade near the strike price as time passes. If it does, the front month (short option) will decay faster than the longer-term long option. This is what we intend and will result in profit. You can check in the image (trade profile) that there is positive Theta: this means time is on our favor. As time passes, the short option will lose more value than the long option, generating profits for a long calendar spread trader.

In the example given, the position has positive Theta of USD3.25. This value means a trader who owns this calendar spread should theoretically make USD3.25 in profit with each day that passes, all else being equal. The positive Vega value of USD10.96 indicates that the long calendar spread trader should profit by $10.96 if each option's implied volatility increases by 1%.

Because calendar spreads (long ones) are Vega positive (bought option implied volatility is greater than the Vega of the short option, resulting in a net positive Vega position) there is the general idea that when there is a Volatility increase the Calendar will benefit. It could be expected (for the novice trader) since the longer-term option has a higher Vega than the front month option, that the long option "would" gain more value than the short option when implied volatility increases. In the ideal world this could happen. In the real world this do not occur, especially in high IV spikes, where the short-term and long-term IV do not change in tandem, at the same rate.

When there is a huge volatility spike, the IV of the near-term option rises faster than the longer-term one. In the option chain image you can see on the right side the average implied volatility of SPY options chains. For example, the 11MAR20 has 49% average IV and 17APR20 has 35%. The current market options volatility structure is not normal (we are facing a huge IV spike due to Corona Virus) and is said to be in backwardation (similar to futures price structure). This is, in fact, a good situation to buy Calendar spreads due to the high IV of the near-term option (higher at the moment) and buying lower IV of the longer-term option. The position stated in the image shows an IV of 27.13% (on the shorted option) vs 24.97% (on the long option). In that example, we are silling High IV and buying low IV, which is good! So, when SPY start to settle and options IV decrease and move to a norma state of Contango, the trader will benefit and could have profits if the movement is not so violent to the upside. Near-term option IV will decrease faster than the other and profits will be cashed in. Even being a Vega positive trade in a lower IV environment!

So, despite the fact that long calendar spreads trade with positive Vega, they usually lose money from an increase in IV.

In resume, Calendar spreads usually are not good long volatility trades, even though they have positive Vega.

So, when can we use Calendar Spreads?

1. Long calendar spreads are good in case of low IV (where we expect small movements in the asset). In this case profits will come mainly from time decay (Theta);

2. Long calendars have positive Vega, although they can be highly profitable to entry in high IV environments due to volatility skew between both options chains. We are selling higher near-term IV and buying cheaper longer-term IV. If the market trades sideways for one or two days and volatility falls, the near-term IV should fall faster than the longer-term IV, translating to quick profits

Hope you have clear understanding on the dynamics of a Calendar Spread vis a vis IV!

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I love this market! QQQ and SPY ride new trades!
I love this market! QQQ and SPY ride new trades!more_vert
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I love this market! QQQ and SPY ride new trades! 2020-02-27T20:21:28+00:00close

With market at extremes, opportunities arise! This market with so high Vol (VIX is around 33 at this moment!) poses opportunities to trade. I know, a bit risky, but this market should settle in the coming weeks - this is my thesis!

We have 50 DTE on short options and the opportunity to move them one more month (to May) and continue with the position. In the /ES chart, you can see a nice support at current levels.

With added Put Calendars in both SPY and QQQ I reduced Delta a bit and added more theta to overall trades. But what I would like to highlight is the volatiltiy skew (Implied Volatility of the short option is higher than the bought option) in the Calendar structure. This is perfect when entering a Calendar trade! We are selling higher Volatility and buying lower volatiltiy! When market goes to a normal state, we will gain from volatility reduction! That is why I decided to had todays' trades!

Meanwhile, our hedges (Verticals bought) are doing their job!

Let's wait and see!

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VXX Surf Trade - I love this market!
VXX Surf Trade - I love this market!more_vert
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VXX Surf Trade - I love this market! 2020-02-27T20:03:59+00:00close

This market with so high Vol (VIX is above 32 at this moment!) poses opportunities to trade. I know, a bit risky, but this market should settle in the coming weeks - this is my thesis! In the /ES chart, you can see a nice support; hope the market holds here.

With current level of VXX (around 21), I added a new Surf Trade and rolled the Call to 17 Apr; this will reduce our theta, compared with the other Call we had in the position (27 Mar). Currently, we are short 200 shares and 2 Calls to cover (17 Apr). Theta is -5 and Delta above -70. Delta / Theta ratio is ok for the Surf Trade.

Let's wait for the market to settle in the coming weeks; hope to not have more adjustments.

PS: I added 5000USD to my account to add more positions, grabbing these opportunities!

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Trade added on VXX Surf Trade
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Trade added on VXX Surf Trade 2020-02-25T19:26:27+00:00close

Decided to close the 13Mar Call and Bought 20Mar Call (a Diagonal Trade) as VXX reached 19; captured profit of the other Call and opened a new one to increase negative Delta and maintain Theta. When we start to unwind Volatility we should start to benefit from Vol decrease.

Check in the chart that at the time of the trade, it was even further above the Bollinger Band (2x SD).

At the time of the trade VIX was ar 29!

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QQQ and SPY trade adjustments
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QQQ and SPY trade adjustments 2020-02-25T15:41:39+00:00close

Just BTO (Bought to Open) 2x Put Verticals on APR Chain on both Ride Trades to reduce Delta and prevent more downside loss from the market. These had reduced a bit Delta and maintain Theta at good levels: Delta / Theta ratio is under controlled risk.

We should avoid having too much trades under current market conditions due to wide bid/ask spreads. Probably we will see a capitulation before market moves up again and Volatility settles.

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Market Sell-Off Comment
Market Sell-Off Commentmore_vert
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Market Sell-Off Comment 2020-02-24T22:43:10+00:00close

Finally we got a big correction in the market with huge increase in volatility. At close, ES futures were down 3.3% and VIX was up 46% (VXX up 18.5%). Let's analyse both graphs together and try to figure out possible outcomes.

VXX price movement is above upper Bollinger Band, which means the huge move was above 2 Standard Deviations. This only happens about 5% of the days. Given the low probabilities of this move, it is expected it would come down soon; but before we need to see market to become a bit more stable and contango become in place. Currently, we are in backwardation (-3.8%).

Looking at /ES futures chart, we can see that we reached a strong support level at 3210 with a small bounce, at this moment. I do not know where we will be heading now, but if this level is broken, we will see more downside until 3150 level. This will also impact VXX price and we can see it reaching 19-20 level.

Impact on our trades:

1. VXX - we had no positions as the start of today - hence, no adjustments needed; Nevertheless, I entered a new Surf Trade with minimum risk level, waiting to capture profits if markets rebounds; if not I will consider to add new trade into this position.

2. QQQ and SPY Ride trades - we had to adjust both positions to decrease Delta and gain from current "backwardation" on options chains where we have positions. If market rebounds we will gather nice profits and recover losses. Nevertheless, Delta/Theta ratio on both positions are ok after the adjustments. Additionally we have time to recover until front month options expiry date to properly manage positions.

Let's wait and see where market closes tomorrow to take decisions.

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QQQ Ride Trade Adjustment
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QQQ Ride Trade Adjustment 2020-02-24T18:18:42+00:00close

I decided to make a small adjustment to this trade, although the lower side was not touched, to benefit from volatility skew of the options (between option chains) and reduce a bit Delta.

As you can see, we bouth the 2 Calendars with higher IV in the front month! This is good because we are selling expensive IV (26.05%) and buying cheaper one (23,57%). When market retracts, we should benefit from the volatility drop and turning back to "contango".

Our trade is well positioned with positive Theta and Delta that will benefit when market recovers.

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SPY Ride Trade adjustment
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SPY Ride Trade adjustment 2020-02-24T18:01:08+00:00close

Due to increase in Volatility with high market drop, our position needs an adjustment to reduce its Delta value. SPY price was below our lower calendar and we were forced to sell some upper strike Calendars (2) @337 and buy at lower strike (4) @316.

Images above show the position before and after the adjustment, as well as executed trades.

You can also see that the position also had potential losses due to inversion of volatilities of both options chains - meaning the t0 line (magenta) is below than when it was previously.

I though to buy a Put Vertical to hedge, but prefered to add more calendars to benefit from the "backwardation" of both options chains. When we bought the 4 Calendars @316 the front month sold option was with 21% IV and the bought one was with 19%. Very good positioning to profit when volatility comes down!

Trade is on track with nice positive theta!

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VXX Surf Trade entered
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VXX Surf Trade entered 2020-02-24T15:31:19+00:00close

Given the huge increase in Volatiltiy, I decided to add the new trade!

I entered with a bit more time, as Call choosen is from 13 Mar option chain. Not the traditional 2 week DTE.

Let's see how it goes.

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Understanding volatility mean reversion is key for any option trader
Understanding volatility mean reversion is key for any option tradermore_vert
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Understanding volatility mean reversion is key for any option trader 2020-02-23T19:27:21+00:00close

An options trader must also understand the concept of mean reversion property of Volatility. In the previous post I presented another key concept for options traders, which was implied volatility, that I recomend to read first.

Volatility is defined as a measurement of how much the price of an asset fluctuates over time, as discussed previously. It is also important to understand that the ultimate value of an option with in any strike price and duration (DTE – Days Till Expiration) is based on where the underlying asset price is likely to settle at expiration.

For example, if a stock is trading $100/share, and the stock has been trading in a tight range between 80USD and 120USD over the last 52 weeks, then short duration options with strike prices above 120USD and below 80USD will likely possess lower time premiums than options of stocks which fluctuate in price to a much higher degree (let’s say between 60USD and 140USD).

As discussed earlier, Implied volatility is the market price for volatility. This is also seen as the price of a particular option (strike price and duration) and observe at what price it trades. This value represents the current market price for volatility in an option (not related to historical volatitlity).

Mean reversion is the assumption that a financial instrument's price will tend to move to the average price over time. If we apply that definition to the implied volatility, then it is the assumption that an option's volatility price will tend to move toward its average over time. Consequently, a mean reversion trade expresses the thesis that an asset has deviated too far from its real value – or at least from its mean price – and that opportunities for profit exist when reversion to the mean occurs. This is especially seen on VIX (see above chart). When VIX is trading at around 30 or above it is normal to come down in a short period of time. Readings above 12 and below 15 are the most usual. It is difficult for Volatility to stay high for long periods of time. It is like an elastic that, when stretched, is willing to move again to its normal stated.

In a particular stock or Index, the implied volatility of its options with a certain duration poses trading opportunity to sell if the IV is high in the expectation that volatility will decrease in the near future. Hence, it has been observed that options prices are mean reverting on average over time.

SPY chart above is also plotting IV on the lower part of the graph. As you could see (left scale), IV closed at 17.54 (this is a 30 days IV). It had highs of above 21 (extreme readings), when markets crashed, but shortly it comes down!

Another characteristic of that indicator is that it plots the IV Rank which helps to identify trading opportunities. Implied Volatility Rank (IVR) informs whether implied volatility is high or low in an asset based on the past year of implied volatility data. For example, if SPY has had an implied volatility between 10 and 23 over the past year and implied volatility is currently at 17.54, it would have an IVR of 58%, as it states. It means it is high, but not at an extreme level like for example a reading above 85%.

IVR helps traders decide whether to sell or buy options on a particular asset. If there is an high reading better sell options because they are expensive and it is expected that Volatility would come down. This is due to the mean reverting nature of volatility.

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Implied Volatilility understanding is key to any option trader! 2020-02-23T09:50:30+00:00

Implied volatility, simply referred as Volatility or IV is one of the most important metrics to understand when trading options. IV is determined by the current price of option contracts on a particular asset (could be a stock or a future). It is represented as a percentage that indicates the annualized expected one Standard Deviation range for that asset based on the option prices. For example, an IV of 10% on a $100 stock would represent a one standard deviation range of $10 over the next year, with a certain probability to occur.

In statistics, one standard deviation (or SD) is a measurement that encompasses approximately 68.2% of outcomes (for 2 SDs it is 95,5%). When it comes to IV, one standard deviation means that there is approximately a 68% probability of an asset settling within the expected range - as determined by option prices. In the example of a $100 asset with an IV of 10%, it would mean that there is a 68% probability that the asset would be between $90 and $110 in one year. Some traders mistakenly believe that volatility is based on a directional trend in the asset price, which is not. Volatility is the amount of potential fluctuation, without regard for direction.

Options are insurance contracts, and when the future of an asset becomes more uncertain, there is more demand for insurance on that asset and options IV rises (as well as options prices). When applied to any asset, this means that its options will become more expensive as market participants become more uncertain about that stock’s performance in the future. When the uncertainty related to a stock increases and the option prices are traded to higher prices, IV will increase. On the opposite side when the fear and uncertainty related to a stock diminishes the IV will drop with consequent reduction in options prices.

Implied volatility isn’t based on historical pricing data on the asset. Instead, it’s what the market is “implying” the volatility of the asset will be in the future, that will have reflection on option prices . Historical volatility is also expressed on an annualized basis, but it relates to the real price fluctuations of the asset.

In summary, IV is a standardized way to measure the prices of options from any asset (stock or future) without having to analyze the actual prices of the options. IV can be also computed in graphs and traders will understand if it is high related to the asset average. When IV is high, it is good for options sellers; when IV is low, is good to consider buying options strategies.

What is VXX? 2020-02-22T18:18:58+00:00

The best definition of VXX I have ever saw is given on blog: VXX is a dangerous chimeric creature; it’s structured like a bond, trades like a stock, follows VIX futures and decays like an option. Handle with care!

Going into its definition, VXX is a volatility product designed to give traders exposure to changes in the VIX Index through near-term VIX futures contracts (/VX). Traders who buy VXX are anticipating an increase in the VIX Index or futures, while trades who sell VXX are anticipating a decrease in the VIX Index/futures!

The VIX Index, not tradeable since it is a computed figure, measures a constant 30-day weighting by using multiple SPX options expiration cycles, as stated by CBOE:

"Only SPX options with more than 23 days and less than 37 days to the Friday SPX expiration are used to calculate the VIX Index. These SPX options are then weighted to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index."

VXX tracks the S&P 500 VIX Short-Term Futures Index, which tracks the first and second month VIX futures contracts, as stated by Barclays:

"S&P 500® VIX Short-Term Futures Index utilizes prices of the next two near-term VIX® futures contracts to replicate a position that rolls the nearest month VIX futures to the next month on a daily basis in equal fractional amounts. This results in a constant one-month rolling long position in first and second month VIX futures contracts."

VXX's goal is to track the daily percentage change of a 30-day VIX futures contract. Since there isn't a VIX futures contract with 30 days to settlement on each trading day, they use the first-month and second-month VIX futures to achieve a 30-day weighted VIX futures contract. Everyday Barclays is rolling a bit the front month future to the following month. You can check the percentage of each one at their website:

If the first-month and second-month VIX futures decrease, VXX will lose value; conversely, If the first-month and second-month VIX futures increase, VXX will gain value.

Under "normal" market conditions, the VIX Index is typically below the near-term VIX futures contracts (under "contango"). As time passes, VIX futures contracts slowly converge towards the VIX Index. If the VIX Index is below the near-term VIX futures, the contracts will lose value over time, leading to losses in VXX. Majority of time futures are in “contango” and VXX will lose value over time. It's important to understand that from VXX's inception date to maturity date, the product underwent numerous reverse splits to keep the product's price from reaching 0USD. Currently, it is around 15USD and soon we would expect another reverse split (x4). Lower values of VXX are harder to trade, especially in more complex strategies like the “CROC Trade” where we want to capture premium.

By opposition, when the VIX Index is above the near-term VIX futures (called "backwardation"), the contracts will gain value over time, which leads to appreciation in VXX. This is not as usual as “contango”!

From VXX's inception date (January 2009) to maturity date (January 2019), the product lost 99.99% of its value because the VIX futures are usually in contango (circa 80% of time). And that is why we can capture this value! Nevertheless, we “should handle” with care because “Volatility take the stairs down, but the elevator up!”

QQQ Ride Trade Adjustment
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QQQ Ride Trade Adjustment 2020-02-21T19:13:30+00:00close

I felt the necessity to adjust this trade preventing a continuous decrease in QQQ price.

As you can see in the first image, Delta was becomeing too positive and to reduce risk I decided to close the upper Call Calendars (@245) and opened a new ones @221 (x3).

Delta was a lower and we had an increase in Theta. Our trade is currently presenting a loss of 180USD but we haven't finish with it yet!

Meanwhile, the QQQ hedge butterfly is doing its job! Check last image. I am trying to close it asap to collet some profit; its expiry dat is today; only a couple of hours before market closes...

Just a quick note on SPY Ride: is doing fine and no adjustment is needed!

PS: just closed @ 0.26!

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VXX Trade Close
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VXX Trade Close 2020-02-21T18:53:08+00:00close

Market is decreasing / Volatility increasing and better to assume losses and enter when we have signs that market is recovering. As you can see, profile of VIX futures curve is flat, which is sign that more down could come. Contango is below 2%...

Meanwhile, hedge placed yesterday worked well and captured profit that offsetted some loss in main Surf Trade!

As I told you, we need to keep pace, control risk and move on. I know I was a bit greedy yesterday adding more negative Delta... but it was a conscient decision!

Let wait for the market deliver other opportunities to profit from!

Trade wisely, trade safe!

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SPY and QQQ Rides on track!
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SPY and QQQ Rides on track! 2020-02-20T20:54:52+00:00close

Wanted to post this to give you an idea of the impact of the increase in Volatitlity / Market drop on both trades.

Neither SPY nor QQQ need adjsutment. Market price is still in between lower and upper strikes. Both trades have nice Theta. Only QQQ have a high Delta; nevertheless Delta /Theta ratio is about 3, which is ok. We have in place a QQQ hedge buttherfly that came from previous trade which defend us in case of market drop tomorrow! So, risk is controlled.

On SPY no hedge is necessary; Delta is low; Delta/Theta ratio is below 1, which is excelent!

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VXX Surf Trade adjustment and hedge
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VXX Surf Trade adjustment and hedge 2020-02-20T20:41:52+00:00close

I made a decision to not increase too much the overall risk of the trade making an adjustment as follows:

Sell the 3 protective Calls @14 Feb28 and buy new ones 3 @15 Mar6. Basically, I rolled it as a Diagonal trade for a very small credit (0.01)

The impacts: I gained more negative Delta, expecting the market to recover (VXX price to come down) and reduced a bit Theta. On the negative side, the maximum loss increased as you can see after the trade was entered (before was around 260USD, but now it is at 580USD).

That is why I am buying 2 Call Verticals @ 15 / 18 Feb28 for 0.24! If tomorrow volatility increases, I will exit both trades (Surf and Hedge) and assume a loss; but much lower than without a hedge; if volatility comes down I will remove the hedge and assume a small loss on it but the overall position will gain!

Check above images for full detail.

Remember! We never know how the market react tomorrow; better hedge and have a small loss than a bigger loss if we did not took this decision! Control risk is key on trading!

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/VX Feb 20 Futures expiry date
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/VX Feb 20 Futures expiry date 2020-02-20T19:13:02+00:00close

Today is the expiry date of the VIX Futures. Hence we need to analyse the above picture with some caution. As you can see the Spot VIX is close to the value of the future! Normal conditions for this day.

Hence, we should intepret Contango level as the next period and for our market analysis purpose, contango is 0.36%.

Market has decrease and VIX now sits above 15. VXX also increased more than 4%.

I am in a dead end: Should I increase risk level and enter a new trade in VXX, expecting it comes down (or maintain current position)? Or should remove money off the table and assume losses, expecting the market will fall and Vol continue to rise?

I will check what the market will do in the last trading hours to decide!

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QQQ "Ride" trade Closed! New Trade entered!
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QQQ "Ride" trade Closed! New Trade entered! 2020-02-19T21:40:57+00:00close

I decided to close previous QQQ Ride because we were entering the 30 DTE on the front month. We were a bit exposed to shorter term volatiltiy skew, Gamma and profit of the trade was good (470USD). So, better to close, take profits and move on! Enter a newer trade, better positioned, lower risk than previous and wait for the market to keep quiet. Better not to be greed!

New trade was entered and details of each Calendar is on image 2 - trades on green (open); red were trades closed.

Similar to SPY entered yesterday, this trade has 4 Put Calendars at -30 Delta (229), 3 Put Calendars at -50 Delta (238) and 3 Call Calendars at 30 Delta (245).

Let wait for market to develop and see if this trade needs adjustments. We need to proper manage, mainly Delta, of the position; in a second tier we should manage Theta.

Meanwhile, we continue to have in place the butterfly hedge.

As a comment for other portfolio positions, I will not enter new positions in VXX. We are with a high negative Delta, so better no increase our risk here with added Surf Trades. I also checked how much premium to be collected with a short Call Vertica, but it was only 0,60. No trade also here for this price level of VXX. Like CROC trade, probably we should wait for a reverse split to enter these trades; unless there is a Volatility increase.

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New SPY "Ride" entered !
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New SPY "Ride" entered ! 2020-02-18T21:20:40+00:00close

After closing previous "ride" for a nice profit (~450USD), decided to enter a new one with the following options chains:

17 Apr - 59 DTE - front month: (selling) - 4 @ -30 Delta 327 Put; -3 @ 50 Delta 337 Put ; -3 @ 30 Delta Call 344

19 jun -122 DTE - Cover month (buying) +4 Put 327 ; +3 Put 337 Put ; +3 Call 344

Total price paid: 4* 3.37 + 3* 3.67 + 3* 3.61 = 3532 USD (excl. commissions)

At the moment, I decided not to enter a butterfly hedge, although full trade has positive Delta. Waiting that market recovers a bit, after this down day, but we never know! Pretty decent t0 line (magenta), where it is pretty horizontal at current market price. We could have entered one more Put @ 327 to decrease a bit overall Delta, but let's hope market recovers (this is a personal judgement!) and we capitalize a bit the positive Delta.

Theta is ok at 11.5.

I do not like to consider Vega on calendars because implied volatility in both months of a calendar move independently. Most inexperienced traders like calendars because they are Vega positive, which means that when market falls implied volatility rises and bigger profits will come! This is not true! But this is a discussion not to have here, but later in a proper post!

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Current position on QQQ Ride
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Current position on QQQ Ride 2020-02-18T20:42:03+00:00close

I wanted to post today my current position on QQQ Ride. This trade is composed of 3 Calendars that, when entered, have -30 Delta (Put), 50 Delta (Put or Call) and 30 Delta (Call) of the selling options strike prices. When entering a trade I usually slelect 55 - 65 DTE for the front month of the calendar (options sold) and covered (options bought) with, not the next option chain, but the next one (about 120 days). Unlike the standard calendars that use two consecutive monthly expiry options chains, I prefer to gather more theta due to increased difference between options chains (circa 60 DTE covered with 120 DTE).

The goal of the trade is to maintain Delta either between a slight negative Delta and 0. This negative Delta will also act has an hedge against market corrections. Additionally, sometime it is better to hedge further using a butterfly (at a very short term option chain). Currently I have in place as you could see in the second image at 21 Feb option chain.

In resume, this trade is doing very good at the moment! Profit, including butterfly hedge is circa 400USD. Overall Delta is -21 and Theta is 20. Nice greeks, so no adjustments needed at the moment. Currently, market sits on the apex of the t0 line (flat part of the magenta line that you can see on graph 1. Also, current market price (~235) sits between the 2 lower (223) and upper (240) calendar strikes.

Today, I closed previous SPY "Ride" trade and entered a new "Ride" that we will follow from its very first moments - I will post a dedicated one for it.

Any comments / doubts welcomed!

Note: I will prepare a document with this strategy description, in more detail soon.

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Adjustment VXX Surf Trade
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Adjustment VXX Surf Trade 2020-02-18T19:26:20+00:00close

Given the small increase in Volatility today (+2,5% on VXX itself), I decided to reduce a bit the risk of this trade (from 6 lots to 4). Only sold 2 lots a few moments ago, as you can confirm by the 3 images above.

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The CROC Trade 2020-02-17T19:17:21+00:00

This document teaches an intermediate / advance level options trading technique based on VXX!

This is a new options strategy that I developed based on my past experience on SPX options spreads but, aplicable in a defensive way to VXX.

Due to its construction, there is no need to monitor it daily!

After reading the document you will have access to a very consistent and profitable options strategy, that you can apply to generate a monthly income!

The "Croc Trade" (named it due to its shape), has all any options volatility trader want in a trade:

1. A limited risk to the upside (self-hedged against volatility sudden spikes)!

2. Has a controled risk on the downside;

3. Benefits from VXX price decay (due to contango and roll yield)

4. Benefits from options time decay (Theta positive)

5. Low delta sensitivity, compared to the other strategies

6. Highly consistent!


Attachments (1)

VXX Trading Udemy_Croc_Patreon.pdf (1.4MiB)

The Volatility Surf Trade 2020-02-17T19:08:43+00:00

This document teach you a strategy that combines stock and options to profit from the price behaviour of Volatility ETNs, like VXX and UVXY. As you can understand from their structure, they loose value in the long term and this strategy seeks to profit from this property due to contango and roll yield.

This strategy is easy to implement. It will give you capital appreciation with loss protection benefiting from the properties of stock options - in this case a Call! It is a proven stock options strategy, with market edge, that will boost your portfolio returns!

This is one of my favorites when trading VXX!


Attachments (1)

Volatility Surf Trading_Patreon.pdf (3.5MiB)

The VXX Short Call Vertical 2020-02-17T13:38:24+00:00

This VXX strategy is based on the time decay of this Volatility ETN.

In this document you will learn an options based trading strategy, very easy to apply that will give you weekly capital appreciation! It is a proven options income strategy, with a market edge.

The document starts with the volatility analysis fundamentals and then moves to the development of the options trading strategy, including its rationale and proving its edge over market. Then moves to the strategy optimization and finishes with its options trading rules that will give you an easy implementation, in a controlled risk environment! Added profitability for 2018 and 2019 for proving its robustness.

After reading it you will have access to a very consistent and highly profitable options income strategy that some institutions and professional traders are applying!

The describes a full investment methodology with detailed explanation of its rationale, expected outcome and its optimization process. It includes details on several backtests developed to support its robustness and consistency as well as alternative tests presented to support the chosen criteria.

Starting account position
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Starting account position 2020-02-17T08:19:24+00:00close

At the time of launch of Patreon project, here you have my account balance and statistics on the 3 assets I am trading (VXX, QQQ and SPY). On 17th Feb, my YTD profit is about 800USD for an account size of 10k. I took out profits last year to enter this year with a round number!

Let's see how we will move from here!

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After being challenged, here you have it! 2020-02-16T15:32:20+00:00

First post in Patreon will be to present myself!

I am an options trader with experience for more than 10 years! After achieving consistency trading VXX based strategies, I decided to share me knowledge among other people that wanted to learn about options and, especially, deliver my research insights to others. I started teaching my strategies at Udemy and later on I wrote a book (last month launch its second edition) in a very practical way. A had read a lot of books about options but none delivered clear guidelines on hoe to trade a proper strategy. That is why I decided to write it down. It is called "the Volatility Trading Plan" and that is what it is: a proper trade plan on how to safely trade volatility assets with disclosed strategies that I teach at Udemy.

After more than 1000 students and excelent reviews, I decided to share my trades with everyone that is willing to follow them.

I am currently trading VXX based strategies and I consider myself a specialized person trading this ETN. Due to its characteristics it has an edge over market that we will explore. Combining options flexibility of risk management and some creative ideas (outside-the-box thinking!) I developed a powerful tool to become a succesful / profitable trader!

Currently I am launching a new trading strategy for SPY (and QQQ) that is delivering great results since december, when I decided to start trading it.

I got a certification from CBOE at Advanced level on options trading.


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