tastytrade: Market Measures: Recent Episodes
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It's not always easy to take the measure of a market, whether you've been trading for a day or a decade. On this segment we look under the hood—options probabilities, volatility, trading strategies, futures, you name it—so your trading mechanics are built to manage more winners.
Actual markets are often much messier than their theoretical counterparts, as indicated by concepts such as skew. Underlyings with skewed price distributions often deviate from Black-Scholes estimates. So today, let’s look at how breach distances change in the presence of skew. Join Tom and Tony as they discuss breaches in theory compared to breaches in practice.
Actual markets are often much messier than their theoretical counterparts, as indicated by concepts such as skew. Underlyings with skewed price distributions often deviate from Black-Scholes estimates. So today, let’s look at how breach distances change in the presence of skew. Join Tom and Tony as they discuss breaches in theory compared to breaches in practice.
To get an expectation of portfolio buying power allocation over time, the historical IV numbers coupled with our targets resulted in an average allocation of 31% of your portfolio net liq.However, since volatility tends to cluster in certain ranges (like 2022), you can expect the current allocation target to vary over time and not change much in the short-term. In 2022, despite the expectation of lower IV, the VIX traded in its top 30th percentile of values all year.
To get an expectation of portfolio buying power allocation over time, the historical IV numbers coupled with our targets resulted in an average allocation of 31% of your portfolio net liq.However, since volatility tends to cluster in certain ranges (like 2022), you can expect the current allocation target to vary over time and not change much in the short-term. In 2022, despite the expectation of lower IV, the VIX traded in its top 30th percentile of values all year.
We rely on probabilities when deciding what trades to put on and when to manage them. While these probabilities might bear out in the long term, year to year we expect some variation. Today, Jacob joins Mike and Nick to examine how the realized percentage of winning trades has varied over the years.
We rely on probabilities when deciding what trades to put on and when to manage them. While these probabilities might bear out in the long term, year to year we expect some variation. Today, Jacob joins Mike and Nick to examine how the realized percentage of winning trades has varied over the years.
By observing the average monthly returns following a month of a strong rally, it looks like there is a “trend” where a sharp move up implied some continuation.However, these high average returns come with even higher standard deviations, meaning that there was no statistical significance to this “trend” phenomenon because there was a lot of variability in the higher returns.
By observing the average monthly returns following a month of a strong rally, it looks like there is a “trend” where a sharp move up implied some continuation.However, these high average returns come with even higher standard deviations, meaning that there was no statistical significance to this “trend” phenomenon because there was a lot of variability in the higher returns.
Since roughly a third of all 16 delta strangles saw at least one breach throughout the 45-day cycle, knowing how to use a defensive tactic like rolling will often come into use. Rolling the untested side reduces delta exposure, increases net credit and increases the probability of breaking even in exchange for giving up the max profit potential on the original trade.
Since roughly a third of all 16 delta strangles saw at least one breach throughout the 45-day cycle, knowing how to use a defensive tactic like rolling will often come into use. Rolling the untested side reduces delta exposure, increases net credit and increases the probability of breaking even in exchange for giving up the max profit potential on the original trade.
The actual probability of expiring ITM (estimated by delta) will be different for the put and call depending the type of market the underlying was in.However, when you added the actual probabilities of the put and call together, the probabilities were very close to expectation. One of the reasons we prefer neutral strategies as opposed to directional biased ones is because range-bound probabilities hold over time regardless of market conditions.
The actual probability of expiring ITM (estimated by delta) will be different for the put and call depending the type of market the underlying was in.However, when you added the actual probabilities of the put and call together, the probabilities were very close to expectation. One of the reasons we prefer neutral strategies as opposed to directional biased ones is because range-bound probabilities hold over time regardless of market conditions.
The BPR for an iron condor is the widest spread minus the credit received, all times the number of shares. So, when the long wings are defined by delta, the BPR for the iron condor will be inflated according to the skew of the underlying. How would the probability of an iron condor reaching max loss change if there was no skew? Join Tom and Tony as they discuss how skew helps iron condors.
The BPR for an iron condor is the widest spread minus the credit received, all times the number of shares. So, when the long wings are defined by delta, the BPR for the iron condor will be inflated according to the skew of the underlying. How would the probability of an iron condor reaching max loss change if there was no skew? Join Tom and Tony as they discuss how skew helps iron condors.
Earnings season provides tastytraders with heightened credits thanks to the increased IV, but do those increased credits sufficiently compensate use for the risk incurred by short premium positions? In particular, we can observe how much the spot price varied following earnings compared to IV, contrasting earnings announcements dates with overall averages. Today, Tom and Tony check the data to see if increased earnings IV keeps pace with increased earnings price action.
Earnings season provides tastytraders with heightened credits thanks to the increased IV, but do those increased credits sufficiently compensate use for the risk incurred by short premium positions? In particular, we can observe how much the spot price varied following earnings compared to IV, contrasting earnings announcements dates with overall averages. Today, Tom and Tony check the data to see if increased earnings IV keeps pace with increased earnings price action.
In a volatile year like 2022, market volatility caused by the CPI report was roughly double what the rest of the year experienced. In a non-volatile period like 2015 onward, the CPI days actually were observed to be less volatile than the rest of the market.There was no directional bias observed to the CPI reports as ½ of them resulted in a down market and the other half spiked a rally.
In a volatile year like 2022, market volatility caused by the CPI report was roughly double what the rest of the year experienced. In a non-volatile period like 2015 onward, the CPI days actually were observed to be less volatile than the rest of the market.There was no directional bias observed to the CPI reports as ½ of them resulted in a down market and the other half spiked a rally.
Changing the delta on your short premium when IV goes up or down can help stabilize a portfolio’s exposure since all deltas are affected similarly by changes in IV.
Increasing the delta of a strangle can substitute for the lack of high IV, but there is less opportunity to be had on average, so scaling up the short delta strikes did not improve your P/L (at least in this study).
Changing the delta on your short premium when IV goes up or down can help stabilize a portfolio’s exposure since all deltas are affected similarly by changes in IV.
Increasing the delta of a strangle can substitute for the lack of high IV, but there is less opportunity to be had on average, so scaling up the short delta strikes did not improve your P/L (at least in this study).
Changing the delta on your short premium when IV goes up or down can help stabilize a portfolio’s exposure since all deltas are affected similarly by changes in IV.Increasing the delta of a strangle can substitute for the lack of high IV, but there is less opportunity to be had on average, so scaling up the short delta strikes did not improve your P/L (at least in this study).
Changing the delta on your short premium when IV goes up or down can help stabilize a portfolio’s exposure since all deltas are affected similarly by changes in IV.Increasing the delta of a strangle can substitute for the lack of high IV, but there is less opportunity to be had on average, so scaling up the short delta strikes did not improve your P/L (at least in this study).
Delta attempts to describe how option prices change when the spot price changes, but it is ignorant of the change in IV that tends to accompany changes in spot price. Vega describes how option prices change with changes in IV; by combining Vega with the anti-correlation between IV and spot price, we can arrive at extra, hidden, effective Deltas. Today, Tom and Tony explore both data and theory to see how we can construct short option positions that are as price neutral as possible.
Delta attempts to describe how option prices change when the spot price changes, but it is ignorant of the change in IV that tends to accompany changes in spot price. Vega describes how option prices change with changes in IV; by combining Vega with the anti-correlation between IV and spot price, we can arrive at extra, hidden, effective Deltas. Today, Tom and Tony explore both data and theory to see how we can construct short option positions that are as price neutral as possible.
Regardless on the time period you use to measure the relationships between major asset classes, it is fair to say that their price relationship over one time period may be similar to their price relationship in another time period.The increased liquidity and volume in nearly all markets means that we can expect price relationship to hold the same way it does 45 days as it does over five-minute periods, and most likely, any time period in between.
Regardless on the time period you use to measure the relationships between major asset classes, it is fair to say that their price relationship over one time period may be similar to their price relationship in another time period.The increased liquidity and volume in nearly all markets means that we can expect price relationship to hold the same way it does 45 days as it does over five-minute periods, and most likely, any time period in between.
Selling premium when IV is elevated comes with several benefits, including larger credits and a reduction in outlier risk (historically). Because IV is a reverting signal, high IV also comes with a higher likelihood of a volatility contraction. Let’s take a look at the IVs of some different assets to verify this. Join Tom and Tony as they look at how likely a volatility contraction is at a given IVR.
Selling premium when IV is elevated comes with several benefits, including larger credits and a reduction in outlier risk (historically). Because IV is a reverting signal, high IV also comes with a higher likelihood of a volatility contraction. Let’s take a look at the IVs of some different assets to verify this. Join Tom and Tony as they look at how likely a volatility contraction is at a given IVR.
Volatility is defined as the standard deviation of annual log-returns, but when it comes to predicting it there are several options. Historical volatility looks at the standard deviation of previous log-returns, whereas implied volatility uses current option prices and the Black-Scholes model. One looks backwards but requires no assumptions, the other looks forward but relies on a theory. Today, Tom and Tony check some fresh data to see why we tend to prefer the forward looking IV, even if the Black-Scholes model isn't perfect.
Volatility is defined as the standard deviation of annual log-returns, but when it comes to predicting it there are several options. Historical volatility looks at the standard deviation of previous log-returns, whereas implied volatility uses current option prices and the Black-Scholes model. One looks backwards but requires no assumptions, the other looks forward but relies on a theory. Today, Tom and Tony check some fresh data to see why we tend to prefer the forward looking IV, even if the Black-Scholes model isn't perfect.
Over the last 30 years, you could expect a streak of at least three 1% days to the same direction to happen less than 1% of the time, half being up-day streaks and half being down-day streaks. The day after the end of a large down streak usually results in an above-average up day (+2.3%), whereas the day after the end of a large up streak results in a completely average down day.
Over the last 30 years, you could expect a streak of at least three 1% days to the same direction to happen less than 1% of the time, half being up-day streaks and half being down-day streaks. The day after the end of a large down streak usually results in an above-average up day (+2.3%), whereas the day after the end of a large up streak results in a completely average down day.
The wings of an iron condor impact several aspects of the trade, including how likely it is to reach max loss. Tighter iron condors are more likely to reach max loss, but how likely are they to recover? And how does early management affect this performance? Join Tom and Tony as they look at SPY iron condors to investigate this.
The wings of an iron condor impact several aspects of the trade, including how likely it is to reach max loss. Tighter iron condors are more likely to reach max loss, but how likely are they to recover? And how does early management affect this performance? Join Tom and Tony as they look at SPY iron condors to investigate this.
The so-called “Santa Claus Rally” is an old adage that referred to the above-average market performance that occurred in the last week of the year (between Christmas and New Years). What is the statistical significance of this phenomenon, if any?
The so-called “Santa Claus Rally” is an old adage that referred to the above-average market performance that occurred in the last week of the year (between Christmas and New Years). What is the statistical significance of this phenomenon, if any?
With the winter holidays coming up over the next two weeks, traders may have a difficult time maintaining their portfolio while getting drunk on eggnog.
Today let’s cover some tips on how to set up a short options portfolio ahead of the holidays. Join Nick, Mike and Julia as they discuss how to set up a portfolio for the holiday season.
With the winter holidays coming up over the next two weeks, traders may have a difficult time maintaining their portfolio while getting drunk on eggnog.
Today let’s cover some tips on how to set up a short options portfolio ahead of the holidays. Join Nick, Mike and Julia as they discuss how to set up a portfolio for the holiday season.
Although there is evidence of “buying the dip” as IV climbs higher, we would trade it the same way we trade anything else: small size. When IV goes up, it becomes harder to hold a directional bias because prices move much faster with much bigger magnitude...according to this study, realized moves over 45-day periods have ranges that are at least 50% greater than periods of low IV.
Although there is evidence of “buying the dip” as IV climbs higher, we would trade it the same way we trade anything else: small size. When IV goes up, it becomes harder to hold a directional bias because prices move much faster with much bigger magnitude...according to this study, realized moves over 45-day periods have ranges that are at least 50% greater than periods of low IV.
When looking to increase exposure in defined risk trades, there are three obvious routes: moving closer to the money, widening the strikes, or increasing the quantity. How do these different approaches stack up? Today, Anton joins Tony and Liz to see what the data had to say for premium sellers in ETFs during the last decade.
When looking to increase exposure in defined risk trades, there are three obvious routes: moving closer to the money, widening the strikes, or increasing the quantity. How do these different approaches stack up? Today, Anton joins Tony and Liz to see what the data had to say for premium sellers in ETFs during the last decade.
In 2005, the worst recorded loss for a 45 DTE 16Δ SPY strangle managed at 21 DTE was -99% the initial credit. That worst loss was exceeded in mid 2007, when the worst loss for this strategy reached -101%. How likely is it for the worst loss of a strategy to be exceeded? Join Tom and Tony as they look at SPY strangles to find out.
In 2005, the worst recorded loss for a 45 DTE 16Δ SPY strangle managed at 21 DTE was -99% the initial credit. That worst loss was exceeded in mid 2007, when the worst loss for this strategy reached -101%. How likely is it for the worst loss of a strategy to be exceeded? Join Tom and Tony as they look at SPY strangles to find out.
Average implied, historical volatility, and price returns for the S&P 500 for triple witching months were all in line with the yearly average and all carried a large standard deviation...making the results as good as random.
The only observable seasonality occurred in volatility as it increased in the fall and spring relative to summer and winter.
Average implied, historical volatility, and price returns for the S&P 500 for triple witching months were all in line with the yearly average and all carried a large standard deviation...making the results as good as random.
The only observable seasonality occurred in volatility as it increased in the fall and spring relative to summer and winter.
Implied volatility rank (IVR) scales implied volatility to make it more comparable between underlyings. At tastytrade, we try to look for high IVR opportunities to sell premium, but how much does it really matter?
Today, Tom and Tony explore the data to see how much edge is gained by waiting for high IVR vs. how many trades are missed.
Implied volatility rank (IVR) scales implied volatility to make it more comparable between underlyings. At tastytrade, we try to look for high IVR opportunities to sell premium, but how much does it really matter?
Today, Tom and Tony explore the data to see how much edge is gained by waiting for high IVR vs. how many trades are missed.
In last Tuesday’s Market Measure, we discussed how much short options amplify losses when the underlying experiences drawdowns. Today, let’s look at how active management would have reduced per-trade losses in these cases. Join Tom and Tony as they discuss how much management saves you during a selloff.
In last Tuesday’s Market Measure, we discussed how much short options amplify losses when the underlying experiences drawdowns. Today, let’s look at how active management would have reduced per-trade losses in these cases. Join Tom and Tony as they discuss how much management saves you during a selloff.
Standard deviations provide context around typical fluctuations around daily returns or trade P/Ls that happen around 70% of the time. Comparing standard deviations of different option strategies or underlyings allows for a fair comparison of actual historical risk. Higher standard deviations mean higher risk. Be aware that outlier risk is not accounted for in standard deviations, and the only way to protect yourself from these is to stay small.
Standard deviations provide context around typical fluctuations around daily returns or trade P/Ls that happen around 70% of the time. Comparing standard deviations of different option strategies or underlyings allows for a fair comparison of actual historical risk. Higher standard deviations mean higher risk. Be aware that outlier risk is not accounted for in standard deviations, and the only way to protect yourself from these is to stay small.
As markets sell off quickly and rise quickly, we noticed an increase in the correlations between individual sectors and the overall market. When markets sold off, the correlation increase was the highest, but when market rallied, correlations also tightened since most up moves in a falling IV environment are very large.
As markets sell off quickly and rise quickly, we noticed an increase in the correlations between individual sectors and the overall market. When markets sold off, the correlation increase was the highest, but when market rallied, correlations also tightened since most up moves in a falling IV environment are very large.
Options are leveraged instruments, meaning that their P/Ls are amplified compared to their non-leveraged counterparts. Leverage is of particular concern when considering the downside outlier risks of short options.
Join Tom and Tony as they discuss how often short options amplify losses when the underlying experiences drawdowns.
Options are leveraged instruments, meaning that their P/Ls are amplified compared to their non-leveraged counterparts. Leverage is of particular concern when considering the downside outlier risks of short options.
Join Tom and Tony as they discuss how often short options amplify losses when the underlying experiences drawdowns.
Even slightly imperfect correlations between underlyings can result in significantly more diversification when comparing risk across portfolios.In this study, a portfolio that had one strangle in each SPY, IWM, and QQQ carried almost the same risk as the lowest volatility strangle across the study’s time period while having exposure in all three indexes.
Even slightly imperfect correlations between underlyings can result in significantly more diversification when comparing risk across portfolios.In this study, a portfolio that had one strangle in each SPY, IWM, and QQQ carried almost the same risk as the lowest volatility strangle across the study’s time period while having exposure in all three indexes.
Certain underlyings, such as SPY and UNG, have options that are skewed depending on where investors perceive the outlier risk. SPY, for example, has puts that are more expensive and further OTM than calls with the same delta because of fear to the downside. Join Tom and Tony as they discuss how the downside risk of short SPY strangles would change if SPY didn’t have skew.
Certain underlyings, such as SPY and UNG, have options that are skewed depending on where investors perceive the outlier risk. SPY, for example, has puts that are more expensive and further OTM than calls with the same delta because of fear to the downside. Join Tom and Tony as they discuss how the downside risk of short SPY strangles would change if SPY didn’t have skew.
Because short premium trades tend to be high POP trades by default, consecutive profits are far more likely than consecutive losses.
When consecutive negative P/Ls occur, the average P/L tended to be twice as large in magnitude as an average profitable trade. A long streak of consecutive losses, although unlikely, was coupled with larger than average negative P/Ls.
Because short premium trades tend to be high POP trades by default, consecutive profits are far more likely than consecutive losses.
When consecutive negative P/Ls occur, the average P/L tended to be twice as large in magnitude as an average profitable trade. A long streak of consecutive losses, although unlikely, was coupled with larger than average negative P/Ls.
Short premium traders are faced with a fundamental choice between using undefined risk and defined risk trades. Both BPR and CVaR provide insight into how much risk really lies in a given trade. Today, Tom and Tony explore the data to see how these two metrics stack up when considered whether to define risk or leave our options naked.
Short premium traders are faced with a fundamental choice between using undefined risk and defined risk trades. Both BPR and CVaR provide insight into how much risk really lies in a given trade. Today, Tom and Tony explore the data to see how these two metrics stack up when considered whether to define risk or leave our options naked.
When selling strangles, the key differences between larger and smaller deltas is the following: larger delta strangles have a lower win rate, lower P/L as % of the credit you receive, and less tail exposure. By choosing to manage early, you saw additional differences: win rate is more consistent across all deltas, your average trade P/L is lower, but your tail risk is much lower as well.
When selling strangles, the key differences between larger and smaller deltas is the following: larger delta strangles have a lower win rate, lower P/L as % of the credit you receive, and less tail exposure. By choosing to manage early, you saw additional differences: win rate is more consistent across all deltas, your average trade P/L is lower, but your tail risk is much lower as well.
Many variables in the options market change when IV is higher, such as the distances between option strikes and the underlying price. Changes in strike distances are particularly interesting for underlyings that exhibit skew.
Join Tom and Tony as they look at how call and put strikes scale with increasing IV for an underlying with significant skew, SPY.
Many variables in the options market change when IV is higher, such as the distances between option strikes and the underlying price. Changes in strike distances are particularly interesting for underlyings that exhibit skew.
Join Tom and Tony as they look at how call and put strikes scale with increasing IV for an underlying with significant skew, SPY.
Looking at beta weighted deltas is the way to make an apples-to-apples comparison of each position’s risk profile in your portfolio. The number of beta weighted deltas your portfolio has will tell you your directional exposure from the perspective of one underlying (usually SPY).
By knowing the beta weighted deltas in your portfolio, you are able to more precisely hedge away directional risk by buying/selling stock, options, or futures.
Looking at beta weighted deltas is the way to make an apples-to-apples comparison of each position’s risk profile in your portfolio. The number of beta weighted deltas your portfolio has will tell you your directional exposure from the perspective of one underlying (usually SPY).
By knowing the beta weighted deltas in your portfolio, you are able to more precisely hedge away directional risk by buying/selling stock, options, or futures.
Major U.S. elections are some of the most broadly significant binary events for traders. As premium sellers, tastytraders look to profit from uncertainty in the market, making these potentially very appealing trading opportunities. But how do elections differ from typical conditions? Today, Tom and Tony dive into the past to see how the market has behaved around elections.
Major U.S. elections are some of the most broadly significant binary events for traders. As premium sellers, tastytraders look to profit from uncertainty in the market, making these potentially very appealing trading opportunities. But how do elections differ from typical conditions? Today, Tom and Tony dive into the past to see how the market has behaved around elections.
To accurately gauge the scaling factor of our risk/reward when we are looking for an underlying to trade, we look no further than the underlying implied volatility adjusted by its price. Over time, the median P/L, best case P/L, and worst case P/L for a certain trade in any underlying should roughly scale with the implied volatility and price of the underlying's in question.
To accurately gauge the scaling factor of our risk/reward when we are looking for an underlying to trade, we look no further than the underlying implied volatility adjusted by its price. Over time, the median P/L, best case P/L, and worst case P/L for a certain trade in any underlying should roughly scale with the implied volatility and price of the underlying's in question.
Earnings trades are speculative, highly volatile trades intended to capitalize on the IV inflation often observed leading up to earnings. Earnings trades statistics vary significantly between underlyings, making it difficult to draw concrete conclusions regarding their past performance. However, we can apply a meta-analysis to earnings trades to potentially address this issue. Join Tom and Tony as they discuss a meta-analysis of earnings trades with mega-tech stocks.
Earnings trades are speculative, highly volatile trades intended to capitalize on the IV inflation often observed leading up to earnings. Earnings trades statistics vary significantly between underlyings, making it difficult to draw concrete conclusions regarding their past performance. However, we can apply a meta-analysis to earnings trades to potentially address this issue. Join Tom and Tony as they discuss a meta-analysis of earnings trades with mega-tech stocks.
Skew is never randomly placed in the stock market, and it tends to come from a combination of the future velocity of risk sentiment and also the result of market history. Historically, skew for current products is consistent with the magnitude of the product’s historical outlier direction.
Skew is never randomly placed in the stock market, and it tends to come from a combination of the future velocity of risk sentiment and also the result of market history. Historically, skew for current products is consistent with the magnitude of the product’s historical outlier direction.
Tastytraders rely on IVR to identify trading opportunities in liquid underlying's. The calculation for IVR depends strongly on the highest volatility for the underlying over the past year, which for equities means it is heavily skewed by the inflated volatility preceding earnings announcements. Today, Jacob joins Nicky and Mike to see what IVR looks like the other 8 months out of the year when we decide to ignore earnings.
Tastytraders rely on IVR to identify trading opportunities in liquid underlying's. The calculation for IVR depends strongly on the highest volatility for the underlying over the past year, which for equities means it is heavily skewed by the inflated volatility preceding earnings announcements. Today, Jacob joins Nicky and Mike to see what IVR looks like the other 8 months out of the year when we decide to ignore earnings.
Although rate spreads don’t make for a source for consistent long-term profits, they are one of the most in-play engagement trades in the market today. This segment puts context around the dollars-at-risk for rate products and rate spread trades on any given day. We computed the one standard deviation range of certainty (68%) that a single day’s P/L will be within that range.
Although rate spreads don’t make for a source for consistent long-term profits, they are one of the most in-play engagement trades in the market today. This segment puts context around the dollars-at-risk for rate products and rate spread trades on any given day. We computed the one standard deviation range of certainty (68%) that a single day’s P/L will be within that range.
Choosing a directional assumption can be a complicated task during regular market conditions, let alone during a bear market or selloff. What directional assumptions do the statistics support when the market is down? Today Join Tom and Tony as they compare how well bullish, bearish and neutral strategies have performed after a two-week period in a market downturn.
Choosing a directional assumption can be a complicated task during regular market conditions, let alone during a bear market or selloff. What directional assumptions do the statistics support when the market is down? Today Join Tom and Tony as they compare how well bullish, bearish and neutral strategies have performed after a two-week period in a market downturn.
On average, longer dated options priced the expected move slightly higher than the actual move when compared to shorter dated options. The 45-day timeframe carried a decent expected move overstatement along with a reasonable average daily P/L when compared to longer and shorter durations.
On average, longer dated options priced the expected move slightly higher than the actual move when compared to shorter dated options. The 45-day timeframe carried a decent expected move overstatement along with a reasonable average daily P/L when compared to longer and shorter durations.
Taking off risk comes at a cost... in this case, compared to a naked short 20∆ strangle in SPY, buying 10∆ wings to protect against adverse market moves cost 42% of the total P/L of the naked short strangle.
This does not make iron condors inefficient or unfair, but it does put context around how expensive it can be to define outlier risk over time.
Taking off risk comes at a cost... in this case, compared to a naked short 20∆ strangle in SPY, buying 10∆ wings to protect against adverse market moves cost 42% of the total P/L of the naked short strangle.
This does not make iron condors inefficient or unfair, but it does put context around how expensive it can be to define outlier risk over time.
Expected price range can give investors an idea of where an asset’s price is most likely to end up after a certain period of time, based on the sentiment of the market. Expected range can be calculated over any time frame, but estimates may capture future moves better over certain time frames compared to others.
Join Tom and Tony as they discuss how well the IVx estimate of expected range forecasts price movements over different time frames.
Expected price range can give investors an idea of where an asset’s price is most likely to end up after a certain period of time, based on the sentiment of the market. Expected range can be calculated over any time frame, but estimates may capture future moves better over certain time frames compared to others.
Join Tom and Tony as they discuss how well the IVx estimate of expected range forecasts price movements over different time frames.
The tail risk inherent to short premium means that the outlier losses of a strategy will always be much higher than the average risk/reward on a trade-by-trade basis. In order to combat this, positions must not be concentrated in any one strategy or underlying as to not get surprised when a single trade performs “worse than expected”.
The tail risk inherent to short premium means that the outlier losses of a strategy will always be much higher than the average risk/reward on a trade-by-trade basis. In order to combat this, positions must not be concentrated in any one strategy or underlying as to not get surprised when a single trade performs “worse than expected”.
For premium selling strategies, we can find the max return on capital (ROC) by dividing the initial credit by the buying power requirement (BPR).
Companies look at ROC to assess the efficiency in allocating capital to potentially profitable investments. The higher the potential ROC, the more likely a company is to invest in an opportunity.
What if we applied this strategy to options trading? Is there some threshold for ROC that makes trades seem more attractive?
Join Tom and Tony to find out!
For premium selling strategies, we can find the max return on capital (ROC) by dividing the initial credit by the buying power requirement (BPR).
Companies look at ROC to assess the efficiency in allocating capital to potentially profitable investments. The higher the potential ROC, the more likely a company is to invest in an opportunity.
What if we applied this strategy to options trading? Is there some threshold for ROC that makes trades seem more attractive?
Join Tom and Tony to find out!
With markets going lower and volatility staying well above historical averages, you are able to adjust commonly held options positions that result in a lower BPR, while maintaining a similar POP and/or credit received.
In this case, we started with a short 30 delta put in SPY and changed one facet to see how BPR changes while not making a big impact on the other variables.
With markets going lower and volatility staying well above historical averages, you are able to adjust commonly held options positions that result in a lower BPR, while maintaining a similar POP and/or credit received.
In this case, we started with a short 30 delta put in SPY and changed one facet to see how BPR changes while not making a big impact on the other variables.
The 2-year and 10-year Treasury yields have been in conversation for much of this year, with the 2-year having been greater than the 10-year for 40% of the year so far.
This year, we’ve also seen the major indices trade lower by 20% or more.
Is this just a coincidence? Or is there something else there? Is there a relationship between the yield curve being inverted and the direction of the market?
Join Tom and Tony to find out!
The 2-year and 10-year Treasury yields have been in conversation for much of this year, with the 2-year having been greater than the 10-year for 40% of the year so far.
This year, we’ve also seen the major indices trade lower by 20% or more.
Is this just a coincidence? Or is there something else there? Is there a relationship between the yield curve being inverted and the direction of the market?
Join Tom and Tony to find out!
Although we have seen a clear general uptrend in the US dollar and a downtrend in equities and bonds, we cannot conclude a long-term, daily, statistical relationship between either asset.
Even though equities and the dollar had a strong inverse correlation in the last three months, looking at the history of three month correlations, it seems like this moment is statistically insignificant compared to long term averages.
Although we have seen a clear general uptrend in the US dollar and a downtrend in equities and bonds, we cannot conclude a long-term, daily, statistical relationship between either asset.
Even though equities and the dollar had a strong inverse correlation in the last three months, looking at the history of three month correlations, it seems like this moment is statistically insignificant compared to long term averages.
With the major indices and many stocks near their 52 week lows, investors may be looking to add some long deltas to their portfolios.From ZEBRAs to Jade Lizards, there are a number of strategies that allow investors to reflect a potentially bullish bias.The question then becomes: which strategy should we utilize if we want to take a long shot?Join Tom and Tony to find out!
With the major indices and many stocks near their 52 week lows, investors may be looking to add some long deltas to their portfolios.From ZEBRAs to Jade Lizards, there are a number of strategies that allow investors to reflect a potentially bullish bias.The question then becomes: which strategy should we utilize if we want to take a long shot?Join Tom and Tony to find out!
Down days were observed to have a larger probability of seeing a reversal plus follow-through than the same magnitude up day… most likely due to higher IV that naturally exists during a down day.
When it comes to larger drawdowns and subsequent turnarounds, down days retain around a 2% chance of seeing a full reversal plus follow-through… large up days, however, almost never saw this happen.
Down days were observed to have a larger probability of seeing a reversal plus follow-through than the same magnitude up day… most likely due to higher IV that naturally exists during a down day.
When it comes to larger drawdowns and subsequent turnarounds, down days retain around a 2% chance of seeing a full reversal plus follow-through… large up days, however, almost never saw this happen.
With midterm elections coming up, political and legislative shifts may impact markets and particularly certain emerging sectors such as renewable energy, biotech, and cannabis. However, such shifts may not impact these emerging sectors as investors are anticipating. Join Tom and Tony as they look at the cannabis sector to understand why.
With midterm elections coming up, political and legislative shifts may impact markets and particularly certain emerging sectors such as renewable energy, biotech, and cannabis. However, such shifts may not impact these emerging sectors as investors are anticipating. Join Tom and Tony as they look at the cannabis sector to understand why.
When products in a portfolio are truly diversified (meaning the underlyings have correlations to SPY that are closer to zero,) the outlier risk to a portfolio is reduced. Outlier risk is reduced in two ways compared to a non-diversified portfolio assuming you are collecting the same premium/credit: Total dollar losses are spread out over time because non-correlated underlyings do not lose at the same time. Total dollar loss may be less.
When products in a portfolio are truly diversified (meaning the underlyings have correlations to SPY that are closer to zero,) the outlier risk to a portfolio is reduced. Outlier risk is reduced in two ways compared to a non-diversified portfolio assuming you are collecting the same premium/credit: Total dollar losses are spread out over time because non-correlated underlyings do not lose at the same time. Total dollar loss may be less.
With the midterm elections right around the corner, we could see a significant change on policy, laws, and foreign relations. This has led market participants to question what the impact may be on the stock market.
Do elections tend to lead to stronger market performance? Does volatility increase or decrease during election months? Is volatility significantly overstated?Join Tom and Tony to find out!
With the midterm elections right around the corner, we could see a significant change on policy, laws, and foreign relations. This has led market participants to question what the impact may be on the stock market.
Do elections tend to lead to stronger market performance? Does volatility increase or decrease during election months? Is volatility significantly overstated?Join Tom and Tony to find out!
The iron fly is to the straddle what the iron condor is to the strangle. By adding long wings, we are able to define the risk of a straddle or a strangle upon entry.
The iron fly is a more aggressive alternative to the iron condor, collecting more credit initially, but generally seeing greater volatility throughout the trade.
Is there a way to decrease this volatility and make the most of the high initial credit of the iron fly?
Join Tom and Tony to find out!
The iron fly is to the straddle what the iron condor is to the strangle. By adding long wings, we are able to define the risk of a straddle or a strangle upon entry.
The iron fly is a more aggressive alternative to the iron condor, collecting more credit initially, but generally seeing greater volatility throughout the trade.
Is there a way to decrease this volatility and make the most of the high initial credit of the iron fly?
Join Tom and Tony to find out!
With TLT trading being very one-sided, mostly to the downside, it is easy to assume that its implied volatility would continue to make record levels… In reality, the TLT’s IV has been larger than its daily HV roughly 91% of this year… this means that the velocity of actual moves on a weekly and monthly basis in TLT was smaller, or in line with, what the market was anticipating.
In the last two months, the S&P 500 and the other major market indices have declined 15%.Historically, when we’ve seen moves of this magnitude and speed, what happened next?Will the markets continue lower or will we get a bounce?Join Tom and Tony to find out!
In the last two months, the S&P 500 and the other major market indices have declined 15%.Historically, when we’ve seen moves of this magnitude and speed, what happened next?Will the markets continue lower or will we get a bounce?Join Tom and Tony to find out!
With directional and volatility risk running high, shifting your contract duration further in time could help lessen the risk in your portfolio on a daily basis. Longer dated options result in lower duration risk… compared to shorter dated options, the day-to-day risk is lower because breakevens are wider and theta decay lower. By shifting a 10 DTE strategy to a 60 DTE strategy, you would take roughly a third of the daily risk… the comparison differs depending on the expiration cycle you trade.
With directional and volatility risk running high, shifting your contract duration further in time could help lessen the risk in your portfolio on a daily basis. Longer dated options result in lower duration risk… compared to shorter dated options, the day-to-day risk is lower because breakevens are wider and theta decay lower. By shifting a 10 DTE strategy to a 60 DTE strategy, you would take roughly a third of the daily risk… the comparison differs depending on the expiration cycle you trade.
Option P/L is impacted by a number of variables including changes in underlying price, changes in IV and time. How do changes in time affect the correlation between daily option P/L and daily underlying price changes? Join Tom and Tony as they look at some statistics for short SPY options to answer this.
Option P/L is impacted by a number of variables including changes in underlying price, changes in IV and time. How do changes in time affect the correlation between daily option P/L and daily underlying price changes? Join Tom and Tony as they look at some statistics for short SPY options to answer this.
We can estimate how we expect bond prices to change when market rates rise by 10 basis points. With 30-year bonds affected 9x greater by the same 10 bps change as the two-year notes, every single bond future has seen a dramatic decline in its notional value because of a rapid rise in all rates along the yield curve.
We can estimate how we expect bond prices to change when market rates rise by 10 basis points. With 30-year bonds affected 9x greater by the same 10 bps change as the two-year notes, every single bond future has seen a dramatic decline in its notional value because of a rapid rise in all rates along the yield curve.
On the “Hear Me Out” episode from September 20th., Tom and Victor discussed Stanley Druckenmiller’s statement that “There's a high probability in my mind that the market, at best, is going to be kind of flat for 10 years...”This statement shook investors who have watched the markets and their long stock portfolios drop by 20% or more year-to-date.Well then, what’s the point of staying in the markets if we won’t go anywhere for a decade? Why would I deploy my capital in the markets when I could just go to bonds for a guaranteed 4% risk-free rate?Join Tom and Tony to find out!
On the “Hear Me Out” episode from September 20th., Tom and Victor discussed Stanley Druckenmiller’s statement that “There's a high probability in my mind that the market, at best, is going to be kind of flat for 10 years...”This statement shook investors who have watched the markets and their long stock portfolios drop by 20% or more year-to-date.Well then, what’s the point of staying in the markets if we won’t go anywhere for a decade? Why would I deploy my capital in the markets when I could just go to bonds for a guaranteed 4% risk-free rate?Join Tom and Tony to find out!
Over the last 30 years, you could expect a streak of at least three 1% days to the same direction to happen less than 1% of the time, half being up-day streaks and half being down-day streaks.The day after the end of a large down streak usually results in a very above-average up day (+2.3%), whereas the day after the end of a large up streak results in a completely average down day.
Over the last 30 years, you could expect a streak of at least three 1% days to the same direction to happen less than 1% of the time, half being up-day streaks and half being down-day streaks.The day after the end of a large down streak usually results in a very above-average up day (+2.3%), whereas the day after the end of a large up streak results in a completely average down day.
For the past month, equities have continued their path lower, whether it be due to rates, inflation, or geopolitical tension. With the Fed seemingly not ready to take their foot off the gas when it comes to raising rates, it’s possible that we are seeing more and more stocks approach 52-week lows.
How many stocks are within touching distance of their 52-week lows now? How does that compare to prior selloffs? Join Tom and Tony to find out!
For the past month, equities have continued their path lower, whether it be due to rates, inflation, or geopolitical tension. With the Fed seemingly not ready to take their foot off the gas when it comes to raising rates, it’s possible that we are seeing more and more stocks approach 52-week lows.
How many stocks are within touching distance of their 52-week lows now? How does that compare to prior selloffs? Join Tom and Tony to find out!
Although interest rates are correlated over different durations, yield spreads are not strongly correlated with changes in yields themselves. Therefore, it is reasonable to see a yield curve steepen or flatten in both a rising and falling rate environment. Catch Anton and Tom discuss this newfound correlation on today’s Market Measures.
Although interest rates are correlated over different durations, yield spreads are not strongly correlated with changes in yields themselves. Therefore, it is reasonable to see a yield curve steepen or flatten in both a rising and falling rate environment. Catch Anton and Tom discuss this newfound correlation on today’s Market Measures.
Spreads are a great strategy for traders with smaller accounts and/or a lower appetite for risk. We discussed the mechanics behind vertical spreads in great detail in this Options Jive. In the past, we’ve looked at how adjusting the width of vertical spreads can impact the overall performance of a trade. But, how does the width of a spread affect the volatility that we may see on a trade by trade basis? Is there a “sweet spot” for maximizing performance and minimizing volatility?Join Tom and Tony to find out!
Spreads are a great strategy for traders with smaller accounts and/or a lower appetite for risk. We discussed the mechanics behind vertical spreads in great detail in this Options Jive. In the past, we’ve looked at how adjusting the width of vertical spreads can impact the overall performance of a trade. But, how does the width of a spread affect the volatility that we may see on a trade by trade basis? Is there a “sweet spot” for maximizing performance and minimizing volatility?Join Tom and Tony to find out!
How many times should we expect to have an up day versus a down day? On any given month, the average expectation of the ratio of up/down days is 53% to 47%.
When deviating from that expectation, it is very reasonable to see months that have as few as 40% of and as many as 70% of the days be green. That can be loosely considered a one standard deviation range for the proportion of up days in a one-month period.
How many times should we expect to have an up day versus a down day? On any given month, the average expectation of the ratio of up/down days is 53% to 47%.
When deviating from that expectation, it is very reasonable to see months that have as few as 40% of and as many as 70% of the days be green. That can be loosely considered a one standard deviation range for the proportion of up days in a one-month period.
When opening an undefined risk trade, the BPR is used to determine whether the position is appropriate for a given account size and to estimate the max loss of the trade. However, this value typically doesn’t remain static throughout the duration of the trade. Join Tom and Tony as they discuss how dynamic BPR is on average.
When opening an undefined risk trade, the BPR is used to determine whether the position is appropriate for a given account size and to estimate the max loss of the trade. However, this value typically doesn’t remain static throughout the duration of the trade. Join Tom and Tony as they discuss how dynamic BPR is on average.
With respect to long term distributions and statistics, 2022 did not change general expectations about volatility by much: IV still carries upside velocity of risk and clusters below its average the majority of the time. However, adding half of 2021 and 2022 into account (just 5% of the total number of occurrences in the study), the distribution became less skewed and more normal because IV in 2022 was high but not an outlier.
With respect to long term distributions and statistics, 2022 did not change general expectations about volatility by much: IV still carries upside velocity of risk and clusters below its average the majority of the time. However, adding half of 2021 and 2022 into account (just 5% of the total number of occurrences in the study), the distribution became less skewed and more normal because IV in 2022 was high but not an outlier.
With more and more financial products becoming available to retail traders, we thought we would go back to basics.For indices, such as the S&P 500, Nasdaq 100, and Russell 2000, there exist a number of products which are all a variation of one another.Why have multiple products track the same thing? Are there benefits to trading futures, for example, compared to the underlying index?Join Tom and Tony to find out!
With more and more financial products becoming available to retail traders, we thought we would go back to basics.For indices, such as the S&P 500, Nasdaq 100, and Russell 2000, there exist a number of products which are all a variation of one another.Why have multiple products track the same thing? Are there benefits to trading futures, for example, compared to the underlying index?Join Tom and Tony to find out!
Timing long premium trades is near impossible because when the market is in a state of calm and IV is low, there is no statistical significant methodology to predict an upcoming expansion. Since IV overstates HV 83% of the time, we know that not only are short premium trades profitable more than 4 out of 5 times, but predicting a contraction in fear is MUCH more statistically viable since IV expansions usually last 12 days on average as opposed to a lull which lasts 42 days on average, but can last as long as a year or more.
Timing long premium trades is near impossible because when the market is in a state of calm and IV is low, there is no statistical significant methodology to predict an upcoming expansion. Since IV overstates HV 83% of the time, we know that not only are short premium trades profitable more than 4 out of 5 times, but predicting a contraction in fear is MUCH more statistically viable since IV expansions usually last 12 days on average as opposed to a lull which lasts 42 days on average, but can last as long as a year or more.
Liquid markets operate pretty efficiently and there is no inherent "edge" to one strategy over another, only trade offs of risk and reward. However, certain strategies may have been more efficient uses of buying power compared to others historically. Let’s use SPY strangles and iron condors to investigate this.
Liquid markets operate pretty efficiently and there is no inherent "edge" to one strategy over another, only trade offs of risk and reward. However, certain strategies may have been more efficient uses of buying power compared to others historically. Let’s use SPY strangles and iron condors to investigate this.
The VIX has seen some wild days in the past, but 2022 pales in comparison to the outlier moves we saw in 2020 and 2008. In 2022, the size of the biggest moves in the VIX were about 25% as large compared to 2020 and 2008.
The VIX has seen some wild days in the past, but 2022 pales in comparison to the outlier moves we saw in 2020 and 2008. In 2022, the size of the biggest moves in the VIX were about 25% as large compared to 2020 and 2008.
When implied volatility rises, you not only get more premium to sell (and ideally profit on), but you also have larger breakevens in case of a larger move, as well as a historical pattern where the fixed size outlier move in the markets (-2% in SPY) were less severe to expanding volatility than when volatility is low to begin with.
When implied volatility rises, you not only get more premium to sell (and ideally profit on), but you also have larger breakevens in case of a larger move, as well as a historical pattern where the fixed size outlier move in the markets (-2% in SPY) were less severe to expanding volatility than when volatility is low to begin with.
At the start of August, we discussed what the VVIX is and how investors can look at it in combination with the VIX to get a better gauge on where volatility is. At that time, VVIX was at a two year low, but with the sharp increase in VIX over the past few weeks, that is no longer the case.Looking at the VVIX/VIX ratio can provide insight into what the current volatility environment looks like, but can it provide insight into trade performance?Join Tom and Tony to find out!
At the start of August, we discussed what the VVIX is and how investors can look at it in combination with the VIX to get a better gauge on where volatility is. At that time, VVIX was at a two year low, but with the sharp increase in VIX over the past few weeks, that is no longer the case.Looking at the VVIX/VIX ratio can provide insight into what the current volatility environment looks like, but can it provide insight into trade performance?Join Tom and Tony to find out!
From today's research combined with insight from Tom and Tony, we discover two important things about the relationship between IV and price:1: When the S&P moves small, its implied volatility seems to be relatively independent. We see the true “inverse correlation” between the market and its IV happen when SPX moves greater than 1% either up or down.2: Holding short delta, therefore, provides a hedge when markets sell off big. That is when IV and price exhibit their strongest negative correlation and short premium portfolios are the most exposed.
From today's research combined with insight from Tom and Tony, we discover two important things about the relationship between IV and price:1: When the S&P moves small, its implied volatility seems to be relatively independent. We see the true “inverse correlation” between the market and its IV happen when SPX moves greater than 1% either up or down.2: Holding short delta, therefore, provides a hedge when markets sell off big. That is when IV and price exhibit their strongest negative correlation and short premium portfolios are the most exposed.
With many earnings coming after the October cycle and IVR being over 30 for 43% of the stocks in the S&P 500, this presents great opportunity for premium sellers.As we’ve shown in previous studies, selling premium when IVR is high provides a better risk-reward tradeoff than when IVR is low.So for traders looking to sell premium in stocks and ETFs with IVR over 30, is there a best way to manage these trades?Join Tom and Tony to find out!
With many earnings coming after the October cycle and IVR being over 30 for 43% of the stocks in the S&P 500, this presents great opportunity for premium sellers.As we’ve shown in previous studies, selling premium when IVR is high provides a better risk-reward tradeoff than when IVR is low.So for traders looking to sell premium in stocks and ETFs with IVR over 30, is there a best way to manage these trades?Join Tom and Tony to find out!
On today's Market Measures, Tom and Tony talk about how intraday ranges have decreased as volatility goes down. Although equity volatility is down over 30% across all major indexes (in terms of intraday ranges) compared to the first half of the year, other assets that have been volatile (crude, oil, and bonds) have actually increased in volatility in the second half of the year.
On today's Market Measures, Tom and Tony talk about how intraday ranges have decreased as volatility goes down. Although equity volatility is down over 30% across all major indexes (in terms of intraday ranges) compared to the first half of the year, other assets that have been volatile (crude, oil, and bonds) have actually increased in volatility in the second half of the year.
We focus many of our studies on probability of profit (POP), the average profit, and the risk associated with trading short options.We often look at how these metrics change across various volatility ranges, with the result being that higher volatility tends to lead to better performance.Let’s try to combine these metrics into a single unit, expectancy, so we can better compare the performance of strangles across volatility levels!Join Tom and Tony to find out!
We focus many of our studies on probability of profit (POP), the average profit, and the risk associated with trading short options.We often look at how these metrics change across various volatility ranges, with the result being that higher volatility tends to lead to better performance.Let’s try to combine these metrics into a single unit, expectancy, so we can better compare the performance of strangles across volatility levels!Join Tom and Tony to find out!
Although not guaranteed, the probability of seeing a continuation of a move in the VIX has almost always been less than the probability of seeing the VIX revert.Keep in mind that the probability of seeing an up or down move, even after a streak, is still wrapped around 50%. However, over long periods of time, you see mean reversion in VIX because the daily probabilities are slightly mean-reverting.After a streak of up or down days in the VIX, is there a clear, mean-reverting bias going forward?
Although not guaranteed, the probability of seeing a continuation of a move in the VIX has almost always been less than the probability of seeing the VIX revert.Keep in mind that the probability of seeing an up or down move, even after a streak, is still wrapped around 50%. However, over long periods of time, you see mean reversion in VIX because the daily probabilities are slightly mean-reverting.After a streak of up or down days in the VIX, is there a clear, mean-reverting bias going forward?
In a recent Market Measures, we looked at how often trades, specifically 16∆ strangles, turned around from hitting a mental stop loss of -200%.We found that there was a roughly 25% chance of this type of turnaround across a number of underlyings with varying volatility.That begs the question: how long should we hold out for a turnaround, and does waiting have a significant impact on our P/L?Join Tom and Tony to find out!
In a recent Market Measures, we looked at how often trades, specifically 16∆ strangles, turned around from hitting a mental stop loss of -200%.We found that there was a roughly 25% chance of this type of turnaround across a number of underlyings with varying volatility.That begs the question: how long should we hold out for a turnaround, and does waiting have a significant impact on our P/L?Join Tom and Tony to find out!
In this Market Measures, we continue our search in tradeoffs between our standard mechanics and some alternative ones. This time we look at extending our DTE for our short premium and see how that compares to our standard 45 DTE cycles. The key tradeoff between selling a strangle at 45 DTE compared to a longer dated strangle is the daily P/L that you see over time. Longer trades had slightly higher P/L's per trade, but when normalizing by day, it was a much slower trade. It would be reasonable to expect less overall risk on a daily basis for the longer DTE trades because you consistently made less money per day (taking average P/L divided by DTE).
In this Market Measures, we continue our search in tradeoffs between our standard mechanics and some alternative ones. This time we look at extending our DTE for our short premium and see how that compares to our standard 45 DTE cycles. The key tradeoff between selling a strangle at 45 DTE compared to a longer dated strangle is the daily P/L that you see over time. Longer trades had slightly higher P/L's per trade, but when normalizing by day, it was a much slower trade. It would be reasonable to expect less overall risk on a daily basis for the longer DTE trades because you consistently made less money per day (taking average P/L divided by DTE).
Certain assets tend to have put or call skew depending on the directional fears of the market. In this segment, we studied the S&P 500 Index ETF (SPY). We found that its put skew became more pronounced the fear index (VIX) went higher. We concluded that while risks are higher for premium sellers when market volatility is high, they are even more compensated for directional risk.
Certain assets tend to have put or call skew depending on the directional fears of the market. In this segment, we studied the S&P 500 Index ETF (SPY). We found that its put skew became more pronounced the fear index (VIX) went higher. We concluded that while risks are higher for premium sellers when market volatility is high, they are even more compensated for directional risk.
In the six key IV deflationary periods, the fastest amount of IVR deflation happened on its way from 90% to 50%, taking an average of 12 days. After IVR reaches 50%, we still tended to see a net decline going forward, but it took longer for premium to come out... up to 17 times longer for the same percentage point deflation than the initial decline.
In the six key IV deflationary periods, the fastest amount of IVR deflation happened on its way from 90% to 50%, taking an average of 12 days. After IVR reaches 50%, we still tended to see a net decline going forward, but it took longer for premium to come out... up to 17 times longer for the same percentage point deflation than the initial decline.
The 2-year and 10-year Treasury yields have been in conversation for much of this year, whether it be the initial inversion in April, or the continued inversion since July.
A normal yield curve shows a direct relationship between the duration and the yield, meaning as duration increases, so should the yield. Interestingly, that has not been the case this year. So that begs the following questions: how wide does the 10-2 spread go and when will it revert?
Join Tom and Tony and find out!
The 2-year and 10-year Treasury yields have been in conversation for much of this year, whether it be the initial inversion in April, or the continued inversion since July.
A normal yield curve shows a direct relationship between the duration and the yield, meaning as duration increases, so should the yield. Interestingly, that has not been the case this year. So that begs the following questions: how wide does the 10-2 spread go and when will it revert?
Join Tom and Tony and find out!
The key tradeoffs between shorter and longer DTE defined risk trades comes down to the number of occurrences, and potential to make (or lose) more money quickly. Shorter DTE trades can rack up higher profits in favorable markets but are much more exposed over a short period of time when markets crash. Longer DTE trades are actually the less risky option, all else equal, because the same risk is spread out over longer periods of time.
The key tradeoffs between shorter and longer DTE defined risk trades comes down to the number of occurrences, and potential to make (or lose) more money quickly. Shorter DTE trades can rack up higher profits in favorable markets but are much more exposed over a short period of time when markets crash. Longer DTE trades are actually the less risky option, all else equal, because the same risk is spread out over longer periods of time.
Because options are volatile instruments, they often have P/Ls that drift negative but revert back to positive sometime before expiration.How likely is it for a short strangle to have a positive P/L before expiration given a upside breach of a certain magnitude? What about a downside breach? Join Tom and Tony as they discuss some statistics around strike breaches.
Because options are volatile instruments, they often have P/Ls that drift negative but revert back to positive sometime before expiration.How likely is it for a short strangle to have a positive P/L before expiration given a upside breach of a certain magnitude? What about a downside breach? Join Tom and Tony as they discuss some statistics around strike breaches.
Throughout numerous studies, we’ve found that having a mental stop loss right around -200% of initial credit provided a good balance of risk and return. If we set our mental stops too low, we may close out of potentially winning trades, and if the stops are too high, we may suffer from too large of losers. With that said, what are the chances of a trade making a turnaround after reaching -200% of initial credit? Join Tom and Tony to find out!
Throughout numerous studies, we’ve found that having a mental stop loss right around -200% of initial credit provided a good balance of risk and return. If we set our mental stops too low, we may close out of potentially winning trades, and if the stops are too high, we may suffer from too large of losers. With that said, what are the chances of a trade making a turnaround after reaching -200% of initial credit? Join Tom and Tony to find out!
The Research Team conducted a few backtests using different strategies in order to determine what the best and worst case scenarios are when trading options with different risk profiles. Is there a difference to be found that puts one strategy better than another? Higher risk strategies yield more potential, but often they result in much greater portfolio uncertainty.
The Research Team conducted a few backtests using different strategies in order to determine what the best and worst case scenarios are when trading options with different risk profiles. Is there a difference to be found that puts one strategy better than another? Higher risk strategies yield more potential, but often they result in much greater portfolio uncertainty.
The VIX measures the 30-day expected volatility for the S&P 500 based on the options prices.To provide more insight for options traders and market makers, the VVIX was created to measure the volatility of the VIX. The calculation for VVIX is the same as VIX, but rather than using the options for the S&P 500, VVIX is calculated via VIX options.Last week we saw VVIX hit its lowest point in over three years. What could this mean for the markets and investors?Join Tom and Tony to find out!
The VIX measures the 30-day expected volatility for the S&P 500 based on the options prices.To provide more insight for options traders and market makers, the VVIX was created to measure the volatility of the VIX. The calculation for VVIX is the same as VIX, but rather than using the options for the S&P 500, VVIX is calculated via VIX options.Last week we saw VVIX hit its lowest point in over three years. What could this mean for the markets and investors?Join Tom and Tony to find out!
When the market goes up a certain percent on any given day, how many stocks follow the market’s direction? If the market makes a strong move, up or down, how many more stocks follow suit compared to when the market is up or down a little bit? We discuss all those topics and more on today’s Market Measure!
At tasty, we stress the importance of trading small and trading often, and have developed mechanics to support both of these principles. The reason we talk about trading often is that as we increase occurrences, we increase the chance that the probabilities will work out as we expect.Since weekly, and even daily, contracts are becoming more available and liquid, why not place shorter DTE trades to increase our total number of occurrences? How can decreasing our duration impact our win rates and long-term performance?Join Tom and Tony to find out!
At tasty, we stress the importance of trading small and trading often, and have developed mechanics to support both of these principles. The reason we talk about trading often is that as we increase occurrences, we increase the chance that the probabilities will work out as we expect.Since weekly, and even daily, contracts are becoming more available and liquid, why not place shorter DTE trades to increase our total number of occurrences? How can decreasing our duration impact our win rates and long-term performance?Join Tom and Tony to find out!
To an investor new to selling options, the intricacies of returns can be daunting. A question we get all the time from viewers is “what returns can we expect from selling options?” Join Nicky, Mike and Quentin as they discuss expected returns on short premium options strategies.
To an investor new to selling options, the intricacies of returns can be daunting. A question we get all the time from viewers is “what returns can we expect from selling options?” Join Nicky, Mike and Quentin as they discuss expected returns on short premium options strategies.
Throughout recent market history there have always been symbols that will sometimes have an implied volatility of over 100. Theoretically, this means that the underlying has a 50% chance to double and a 50% chance to go to zero. When this happens, what does the option skew look like in these underlyings? Join Tom and Tony as they discuss how implied volatility over 100 affects options skew.
Throughout recent market history there have always been symbols that will sometimes have an implied volatility of over 100. Theoretically, this means that the underlying has a 50% chance to double and a 50% chance to go to zero. When this happens, what does the option skew look like in these underlyings? Join Tom and Tony as they discuss how implied volatility over 100 affects options skew.
Strangles are a core strategy at tastytrade and a great way to sell premium and stay neutral in an underlying. How has this strategy fared in different products since 2005? Join Tom and Tony as they compare strangles across different products.
Strangles are a core strategy at tastytrade and a great way to sell premium and stay neutral in an underlying. How has this strategy fared in different products since 2005? Join Tom and Tony as they compare strangles across different products.
This year, we’ve seen volatility remain high across all markets, and crypto has been no exception. With the collapse of numerous crypto firms in the late spring and early summer, we saw volatility increase to the highest levels in a year.In the last few weeks, we have finally started to see volatility come in. Historically, what impact does this have on future volatility and price changes?Join Tom and Tony to find out!
This year, we’ve seen volatility remain high across all markets, and crypto has been no exception. With the collapse of numerous crypto firms in the late spring and early summer, we saw volatility increase to the highest levels in a year.In the last few weeks, we have finally started to see volatility come in. Historically, what impact does this have on future volatility and price changes?Join Tom and Tony to find out!
In the past year, commodities have seen volatile price action and significant moves in both directions. What have these moves looked like in the past? Join Tom and Tony as they discuss how commodities have moved over a certain threshold and reversals.
In the past year, commodities have seen volatile price action and significant moves in both directions. What have these moves looked like in the past? Join Tom and Tony as they discuss how commodities have moved over a certain threshold and reversals.
The choice of profit target has a significant impact on the potential risk of a position, particularly the tail risk. What exactly does that relationship look like, and is choosing a low profit target an effective risk management strategy? Join Tom and Tony as they discuss how outlier risk scales with the choice of profit target.
The choice of profit target has a significant impact on the potential risk of a position, particularly the tail risk. What exactly does that relationship look like, and is choosing a low profit target an effective risk management strategy? Join Tom and Tony as they discuss how outlier risk scales with the choice of profit target.
Earnings are a binary event that gives the stock an increased expected move and an equal probability of an up or down move. How does the move in the market impact this 50/50 shot? Join Tom and Tony as they discuss how stock correlation changes on the day of an earnings report.
Earnings are a binary event that gives the stock an increased expected move and an equal probability of an up or down move. How does the move in the market impact this 50/50 shot? Join Tom and Tony as they discuss how stock correlation changes on the day of an earnings report.
Recently, the market has seen volatile price action and significant drawdowns. How does this compare to other periods of market madness. Join Tom and Tony as they discuss how the intraday moves of various products in 2022 differ from the bear markets of 2020 and 2008.
Recently, the market has seen volatile price action and significant drawdowns. How does this compare to other periods of market madness. Join Tom and Tony as they discuss how the intraday moves of various products in 2022 differ from the bear markets of 2020 and 2008.
Today Michael Rechenthin, PhD (Dr. Data) introduces the new changes to lookback, tastytrade's free backtesting environment.It is improved and better than ever!
Today Michael Rechenthin, PhD (Dr. Data) introduces the new changes to lookback, tastytrade's free backtesting environment.It is improved and better than ever!
At tastytrade, we heavily advocate for selling options as an investing strategy. How does this stack up against the classic strategy of buying a stock and holding on to it?
Join Tom and Tony as they compare retail investing strategies of buy and hold vs selling premium.
At tastytrade, we heavily advocate for selling options as an investing strategy. How does this stack up against the classic strategy of buying a stock and holding on to it?
Join Tom and Tony as they compare retail investing strategies of buy and hold vs selling premium.
tastytrade has previously shown that most outlier losses come in times of low IV, not high IV. The VIX over the past couple of years has maintained an above average level for most of that time which is quite unusual. How has this affected the symmetry of volatility and the tail risk of strangles?
Join Tom and Tony as they discuss how high implied volatility impacts the outlier risk in SPY 16∆ strangles.
tastytrade has previously shown that most outlier losses come in times of low IV, not high IV. The VIX over the past couple of years has maintained an above average level for most of that time which is quite unusual. How has this affected the symmetry of volatility and the tail risk of strangles?
Join Tom and Tony as they discuss how high implied volatility impacts the outlier risk in SPY 16∆ strangles.
A front-ratio put spread is a variant of a short put, as it consists of buying one put closer to the money, and selling two further out of the money puts to route the trade as a credit. Simply, it is a long put spread and a naked short put.A put broken wing butterfly is a variation of the traditional butterfly, but with a higher probability of profit (POP). Simply, it is a long put spread and a short put spread. These two strategies are similar in approach, but how do they differ?Join Tom and Tony to find out!
A front-ratio put spread is a variant of a short put, as it consists of buying one put closer to the money, and selling two further out of the money puts to route the trade as a credit. Simply, it is a long put spread and a naked short put.A put broken wing butterfly is a variation of the traditional butterfly, but with a higher probability of profit (POP). Simply, it is a long put spread and a short put spread. These two strategies are similar in approach, but how do they differ?Join Tom and Tony to find out!
Iron condors are a great strategy to sell premium, keep neutral delta, and stay small in an underlying. Once you decide to use this strategy, the next question is how big do you want your position to be? Join Tom and Tony as they discuss what happens as you widen the wings of an iron condor.
Iron condors are a great strategy to sell premium, keep neutral delta, and stay small in an underlying. Once you decide to use this strategy, the next question is how big do you want your position to be? Join Tom and Tony as they discuss what happens as you widen the wings of an iron condor.
Black Swan events are rare, but when they do happen, market conditions can change rapidly and traders don’t always have much time to respond. Let’s take a look at how long it has taken the VIX to reach a certain degree of expansion historically. Join Tom and Tony as they discuss these turbulent times.
Black Swan events are rare, but when they do happen, market conditions can change rapidly and traders don’t always have much time to respond. Let’s take a look at how long it has taken the VIX to reach a certain degree of expansion historically. Join Tom and Tony as they discuss these turbulent times.
Buying power reduction can be a good indicator of a theoretical biggest expected loss on short naked options. Although rare when managed at 21 DTE , there can be losses that exceed the BPR of a 16∆ strangle. In 2022, how has BPR priced in the worst losses in different asset classes? Join Tony and Nicky Bat as they discuss buying power reduction for 16∆ strangles in various ETFs and the losses incurred in the first half of the year.
Buying power reduction can be a good indicator of a theoretical biggest expected loss on short naked options. Although rare when managed at 21 DTE , there can be losses that exceed the BPR of a 16∆ strangle. In 2022, how has BPR priced in the worst losses in different asset classes? Join Tony and Nicky Bat as they discuss buying power reduction for 16∆ strangles in various ETFs and the losses incurred in the first half of the year.
At tastytrade, we are always trying to stay diversified and have positions in all different types of underlying’s. When implied volatility is high in the market, can we sell premium in more stocks with high IVR? Join Tom and Tony as they shed light on how to successfully navigate the market in these volatile environments.
At tastytrade, we are always trying to stay diversified and have positions in all different types of underlying’s. When implied volatility is high in the market, can we sell premium in more stocks with high IVR? Join Tom and Tony as they shed light on how to successfully navigate the market in these volatile environments.
Most of the time when we discuss diversification, we focus on mitigating price risk by selecting assets that are not correlated with one another. However, just because two assets may be uncorrelated in terms of price changes, does that mean they are also uncorrelated in terms of volatility changes? As options sellers, an increase in volatility leads to a rise in options premium, which negatively impacts our P/L and increases our BPR. So, how correlated are the volatilities of various products and is there any way we can diversify some of this risk?Join Tom and Tony to find out!
Most of the time when we discuss diversification, we focus on mitigating price risk by selecting assets that are not correlated with one another. However, just because two assets may be uncorrelated in terms of price changes, does that mean they are also uncorrelated in terms of volatility changes? As options sellers, an increase in volatility leads to a rise in options premium, which negatively impacts our P/L and increases our BPR. So, how correlated are the volatilities of various products and is there any way we can diversify some of this risk?Join Tom and Tony to find out!
At tastytrade, we always discuss the performance of SPY strangles. Many people wonder, how does this strategy perform in other assets? Today, Tom and Tony take a look at how 25∆ strangles in TLT have performed since 2005 and 2021.
At tastytrade, we always discuss the performance of SPY strangles. Many people wonder, how does this strategy perform in other assets? Today, Tom and Tony take a look at how 25∆ strangles in TLT have performed since 2005 and 2021.
Many people associate raising interest rates with uncertainty in the market. Is there any correlation between interest rates and implied volatility? And if so, is that correlation tradable? Join Tom and Tony as they discuss the relationship between interest rates and implied volatility.
Many people associate raising interest rates with uncertainty in the market. Is there any correlation between interest rates and implied volatility? And if so, is that correlation tradable? Join Tom and Tony as they discuss the relationship between interest rates and implied volatility.
Target-date funds gradually rebalance and reallocate assets as investors get closer to retirement, shifting from riskier investments (stocks) to more conservative investments (bonds).According to Morningstar, roughly $3.3 trillion* is invested in target date mutual funds, and the majority of these funds are held in 401 (k) plans.Thought to be a “set it and forget it” strategy for retirement, has this year changed investors’ perception of these types of funds?Join Tom and Tony to find out!
Target-date funds gradually rebalance and reallocate assets as investors get closer to retirement, shifting from riskier investments (stocks) to more conservative investments (bonds).According to Morningstar, roughly $3.3 trillion* is invested in target date mutual funds, and the majority of these funds are held in 401 (k) plans.Thought to be a “set it and forget it” strategy for retirement, has this year changed investors’ perception of these types of funds?Join Tom and Tony to find out!
Triple witching is when expiration for stock options, stock index futures, and stock index options contracts fall on the same day. Could this lead to an implied volatility expansion or contraction? Join Tom and Tony as they compare implied volatility and historical volatility during the week of triple witching, the week after, and the average week.
Triple witching is when expiration for stock options, stock index futures, and stock index options contracts fall on the same day. Could this lead to an implied volatility expansion or contraction? Join Tom and Tony as they compare implied volatility and historical volatility during the week of triple witching, the week after, and the average week.
Generally, SPY is not significantly more likely to experience a downday following an upday, and vice versa. However, if SPY experiences a large upday or downday, do these statistics change in a meaningful way? Join Tom and Tony as they discuss the contrarian approach following large moves.
Generally, SPY is not significantly more likely to experience a downday following an upday, and vice versa. However, if SPY experiences a large upday or downday, do these statistics change in a meaningful way? Join Tom and Tony as they discuss the contrarian approach following large moves.
Beta is the relationship between the returns of a given underlying and the market benchmark, usually the S&P. For equities, traders look at the value to determine an underlying’s volatility relative to the market. If we look at the beta between VIX and the S&P however, we are specifically focused on determining how much VIX moves given a 1% move in the S&P.When we see outlier moves like we have in the past few days, how does the relationship between VIX and the S&P change?Join Tom and Tony to find out!
Beta is the relationship between the returns of a given underlying and the market benchmark, usually the S&P. For equities, traders look at the value to determine an underlying’s volatility relative to the market. If we look at the beta between VIX and the S&P however, we are specifically focused on determining how much VIX moves given a 1% move in the S&P.When we see outlier moves like we have in the past few days, how does the relationship between VIX and the S&P change?Join Tom and Tony to find out!
Rolling is one of the more nuanced tastytrade mechanics, much less straight forward and harder to comprehend as a new trader. This study explains the reasons to roll and the effect rolling has on a position. Join Tom and Tony as they discuss rolling the untested side of a strangle and how that impacts a trade's P/L and win rate.
Rolling is one of the more nuanced tastytrade mechanics, much less straight forward and harder to comprehend as a new trader. This study explains the reasons to roll and the effect rolling has on a position. Join Tom and Tony as they discuss rolling the untested side of a strangle and how that impacts a trade's P/L and win rate.
Over the past couple of years we have seen many underlying with an implied volatility of over 100. How does this affect expected move and average returns. In this study Tom and Tony discuss occurrences in all underlyings in the S&P 500 when IV went above 100 and the next 90 days of returns as well as the reasoning behind the statistics found in the study.
Over the past couple of years we have seen many underlying with an implied volatility of over 100. How does this affect expected move and average returns. In this study Tom and Tony discuss occurrences in all underlyings in the S&P 500 when IV went above 100 and the next 90 days of returns as well as the reasoning behind the statistics found in the study.
Beta weighted delta is a metric that measures your portfolio’s directional risk compared to SPY. This becomes a very important metric when trying to analyze and adjust your portfolio’s risk. In this study Tom and Tony discuss how the accuracy of beta weighted delta changes with correlation.
Beta weighted delta is a metric that measures your portfolio’s directional risk compared to SPY. This becomes a very important metric when trying to analyze and adjust your portfolio’s risk. In this study Tom and Tony discuss how the accuracy of beta weighted delta changes with correlation.
Historically, the median P/L for 45 DTE 16Δ SPY strangles is roughly 50% the initial credit at 21 DTE (median is the midpoint of the historic distribution). Because of this, we will often manage short premium strategies at 21 DTE or 50% the initial credit. Past research has shown this management scheme works well for this strategy, regardless of underlying, but what about different strategies? Should profit expectations change depending on POP? Join Tom and Tony as they discuss how profit expectations can be adjusted depending on strategy.
Historically, the median P/L for 45 DTE 16Δ SPY strangles is roughly 50% the initial credit at 21 DTE (median is the midpoint of the historic distribution). Because of this, we will often manage short premium strategies at 21 DTE or 50% the initial credit. Past research has shown this management scheme works well for this strategy, regardless of underlying, but what about different strategies? Should profit expectations change depending on POP? Join Tom and Tony as they discuss how profit expectations can be adjusted depending on strategy.
Option price skew is present in many underlyings. The price skew when selling options can significantly impact the losses taken. This study shows how the skew in UNG affected strangles and naked calls.
Option price skew is present in many underlyings. The price skew when selling options can significantly impact the losses taken. This study shows how the skew in UNG affected strangles and naked calls.
How reliable are results from backtesting option strategies? This is important to know, because if they are reliable we can use them in our everyday trading. We find that the backtests are reliable through comparing results from 2005-2021 to the past two years.
How reliable are results from backtesting option strategies? This is important to know, because if they are reliable we can use them in our everyday trading. We find that the backtests are reliable through comparing results from 2005-2021 to the past two years.
Over the last week, we saw intraday volatility and daily volatility in the S&P 500 (realized) decline by about 30% compared to what we saw over the last month. Implied volatility declined just 15% over the same period suggesting that premium is staying rich relative to the lower realized volatilities we observed over the last week.
Over the last week, we saw intraday volatility and daily volatility in the S&P 500 (realized) decline by about 30% compared to what we saw over the last month. Implied volatility declined just 15% over the same period suggesting that premium is staying rich relative to the lower realized volatilities we observed over the last week.
A naked short put is one of our favorite strategies to get long on an underlying, as the undefined risk and OTM strike provide us with a high POP.A front-ratio put spread is a variant of a short put, as it consists of buying one put closer to the money, and selling two further out of the money to route the trade as a credit. Simply, it is a long put spread and a naked short put.These two strategies are similar in approach, but with a short put, we get greater positive delta exposure, whereas with a put ratio spread, the delta starts as positive, but can fluctuate to negative depending on the movement of the underlying. In terms of performance however, how do these strategies differ?Join Tom and Tony to find out!
A naked short put is one of our favorite strategies to get long on an underlying, as the undefined risk and OTM strike provide us with a high POP.A front-ratio put spread is a variant of a short put, as it consists of buying one put closer to the money, and selling two further out of the money to route the trade as a credit. Simply, it is a long put spread and a naked short put.These two strategies are similar in approach, but with a short put, we get greater positive delta exposure, whereas with a put ratio spread, the delta starts as positive, but can fluctuate to negative depending on the movement of the underlying. In terms of performance however, how do these strategies differ?Join Tom and Tony to find out!
AMZN will split 20 for 1 on June 3rd, resulting in 20x more AMZN stock and options in existence at 1/20th the price. Since stock splits only change the ratio of price to quantity in the stock and options, there will be no P/L change for anyone holding stock or options positions through the split.
AMZN will split 20 for 1 on June 3rd, resulting in 20x more AMZN stock and options in existence at 1/20th the price. Since stock splits only change the ratio of price to quantity in the stock and options, there will be no P/L change for anyone holding stock or options positions through the split.
After testing most equity indexes and other assets and commodities, we find that an underlying with a strong and negative correlation with its IV, it seems the inverse relationship would imply put skew for that underlying. However, for an underlying that has a weak correlation with its IV, there is also insignificant option skew. This might indicate a symmetrical velocity of risk. Tom sees the potential, Tony disagrees, check out the debate on today's segment of Market Measures.
After testing most equity indexes and other assets and commodities, we find that an underlying with a strong and negative correlation with its IV, it seems the inverse relationship would imply put skew for that underlying. However, for an underlying that has a weak correlation with its IV, there is also insignificant option skew. This might indicate a symmetrical velocity of risk. Tom sees the potential, Tony disagrees, check out the debate on today's segment of Market Measures.
Worries about inflation, slowing growth, and rising interest rates has led many investors to move away from growth stocks and look for dividends and stability.Real Estate Investment Trusts (REITs) have been a place where investors look for those aspects, with high dividend yields, liquidity, and the potential to improve diversification being key characteristics of REITs.However, with rates expected to increase for the remainder of the year, there is growing concern about the impact these increases will have on REITs. What can we expect?Join Tom and Tony to find out!
Worries about inflation, slowing growth, and rising interest rates has led many investors to move away from growth stocks and look for dividends and stability.Real Estate Investment Trusts (REITs) have been a place where investors look for those aspects, with high dividend yields, liquidity, and the potential to improve diversification being key characteristics of REITs.However, with rates expected to increase for the remainder of the year, there is growing concern about the impact these increases will have on REITs. What can we expect?Join Tom and Tony to find out!
Whenever there is a non-symmetrical bias or assumption about a certain underlying (like SPY), it is easy to forget that those asymmetries are already priced into the underlying. The asymmetries are not visible when looking at the underlying price, but are observable in the options chain. For SPY, we know that upside moves tend to be smaller and less volatile than downside moves, and we see that reflected in the options.
Whenever there is a non-symmetrical bias or assumption about a certain underlying (like SPY), it is easy to forget that those asymmetries are already priced into the underlying. The asymmetries are not visible when looking at the underlying price, but are observable in the options chain. For SPY, we know that upside moves tend to be smaller and less volatile than downside moves, and we see that reflected in the options.
In the realm of options trading, delta is one of the terms that has a variety of meanings and uses.Most traders use delta to refer to an options “moneyness”, others use it to determine profit and loss based on changes in the underlying, and what we at tasty use most frequently is delta’s ability to approximate the probability of profit. To roughly determine the probability of profit for a short options strategy, we can take one minus the delta of the option.However, are there any limiting factors on delta’s predictive ability? What may cause delta’s accuracy to fluctuate?Join Tom and Tony to find out!
In the realm of options trading, delta is one of the terms that has a variety of meanings and uses.Most traders use delta to refer to an options “moneyness”, others use it to determine profit and loss based on changes in the underlying, and what we at tasty use most frequently is delta’s ability to approximate the probability of profit. To roughly determine the probability of profit for a short options strategy, we can take one minus the delta of the option.However, are there any limiting factors on delta’s predictive ability? What may cause delta’s accuracy to fluctuate?Join Tom and Tony to find out!
There was some evidence to suggest a reversal in price action, albeit small, three days following a large up or down move. However, because the average reversal was so small relative to the big move preceding it, the only valid conclusion would be that “if you are going to pick a side, it may as well be the reversal since it seems to be a non-50/50 result.” But it is most certainly not a guarantee.
There was some evidence to suggest a reversal in price action, albeit small, three days following a large up or down move. However, because the average reversal was so small relative to the big move preceding it, the only valid conclusion would be that “if you are going to pick a side, it may as well be the reversal since it seems to be a non-50/50 result.” But it is most certainly not a guarantee.
The expected price range of an asset is the price range we expect the asset’s future price to stay within with 68% certainty. The expected range can give traders an idea of how to structure short premium trades that are most likely to be profitable, but the estimate of expected range tends to change depending on which calculation is used. Join Tom, Tony and Julia as they discuss the pros and cons of each.
The expected price range of an asset is the price range we expect the asset’s future price to stay within with 68% certainty. The expected range can give traders an idea of how to structure short premium trades that are most likely to be profitable, but the estimate of expected range tends to change depending on which calculation is used. Join Tom, Tony and Julia as they discuss the pros and cons of each.
This market selloff looks more like a slow burn coupled with consistently elevated vol, and a 2008 ‘speed’ in general. This price action supports the claim as well. Most of the downside movement happened intraday like it did in 2008 which is relatively unique for a selloff. With a market that sells off slowly, keeping new and existing positions small is the only way to survive the above average wait for “normalcy”.
This market selloff looks more like a slow burn coupled with consistently elevated vol, and a 2008 ‘speed’ in general. This price action supports the claim as well. Most of the downside movement happened intraday like it did in 2008 which is relatively unique for a selloff. With a market that sells off slowly, keeping new and existing positions small is the only way to survive the above average wait for “normalcy”.
Letting your winning trades run and cutting your losing trades are two of the first sayings that many traders will learn as they start their journey. While this may sound simple, this is incredibly difficult for most people to do since we have an innate aversion to losses. We’d rather sell an investment that’s made money than to suffer the pain of selling a loser. This tends to be one of the things that hurts many investors, new and old alike.What if we stuck with this rule? Would we be able to outperform the market?Join Tom and Tony to find out!
Letting your winning trades run and cutting your losing trades are two of the first sayings that many traders will learn as they start their journey. While this may sound simple, this is incredibly difficult for most people to do since we have an innate aversion to losses. We’d rather sell an investment that’s made money than to suffer the pain of selling a loser. This tends to be one of the things that hurts many investors, new and old alike.What if we stuck with this rule? Would we be able to outperform the market?Join Tom and Tony to find out!
Options have many dimensions of risk that are always adjustable by active traders. By adjusting the options in your portfolio, you are able to construct a “distribution” that your portfolio will follow that has unique skew, spread, tails, mean, and probabilities. A distribution of stock returns is already set in stone by whatever underlying you trade - the only adjustable attribute is the general spread (volatility) of returns.
Options have many dimensions of risk that are always adjustable by active traders. By adjusting the options in your portfolio, you are able to construct a “distribution” that your portfolio will follow that has unique skew, spread, tails, mean, and probabilities. A distribution of stock returns is already set in stone by whatever underlying you trade - the only adjustable attribute is the general spread (volatility) of returns.
Dollar cost averaging is a passive strategy that consists of investing a fixed amount of money at regular intervals of time.At tasty, we focus on the benefits of being an active trader – risk management, increased probabilities, taking advantage of favorable situations (high IVR), etc. But active trading may not always be possible. With that said, for those who may be more risk averse at the current time, what are the benefits of dollar cost averaging into long-term positions?Join Tom and Tony to find out!
Dollar cost averaging is a passive strategy that consists of investing a fixed amount of money at regular intervals of time.At tasty, we focus on the benefits of being an active trader – risk management, increased probabilities, taking advantage of favorable situations (high IVR), etc. But active trading may not always be possible. With that said, for those who may be more risk averse at the current time, what are the benefits of dollar cost averaging into long-term positions?Join Tom and Tony to find out!
With directional and volatility risk very high, shifting your contract duration further in time could help mellow the risk in your portfolio on a daily basis. Longer dated options result in lower duration risk. Compared to shorter dated options, the day-to-day risk is lower because breakevens are wider and theta decay lower. By shifting a 10 DTE strategy to a 60 DTE strategy, you would take 35% of the daily risk comparison differs depending on the expiration cycle you trade.
With directional and volatility risk very high, shifting your contract duration further in time could help mellow the risk in your portfolio on a daily basis. Longer dated options result in lower duration risk. Compared to shorter dated options, the day-to-day risk is lower because breakevens are wider and theta decay lower. By shifting a 10 DTE strategy to a 60 DTE strategy, you would take 35% of the daily risk comparison differs depending on the expiration cycle you trade.
We’ve previously looked at why diversification is important, with the primary focus being on the ability diversification has to decrease the size and frequency of large losses.That study only looked at if we were to have a long portfolio with positions in stocks, bonds, and commodities. However, what would the impact of diversification be on an options portfolio with the same asset classes.Can diversification lead to lower risk when trading options? And does this have an impact on our returns?Join Tom and Tony to find out!
We’ve previously looked at why diversification is important, with the primary focus being on the ability diversification has to decrease the size and frequency of large losses.That study only looked at if we were to have a long portfolio with positions in stocks, bonds, and commodities. However, what would the impact of diversification be on an options portfolio with the same asset classes.Can diversification lead to lower risk when trading options? And does this have an impact on our returns?Join Tom and Tony to find out!
With markets going lower and vol staying well above historical averages, adjusting existing options positions can change the risk of your trade and actually increase the net credit you receive. Keeping track of the BPR usage, credit/debit paid, and net delta effect of the adjustment are the most important metrics to compare when looking to adjust a trade.
With markets going lower and vol staying well above historical averages, adjusting existing options positions can change the risk of your trade and actually increase the net credit you receive. Keeping track of the BPR usage, credit/debit paid, and net delta effect of the adjustment are the most important metrics to compare when looking to adjust a trade.
In a previous segment, we discussed how the credit collected and the distance of the strikes from at-the-money increase when implied volatility is higher. Knowing this information, does that mean that strikes are less likely to get tested when implied volatility is higher?Further, do calls and puts follow a similar pattern in regards to volatility and probability of touch?Join Tom and Tony to find out!
In a previous segment, we discussed how the credit collected and the distance of the strikes from at-the-money increase when implied volatility is higher. Knowing this information, does that mean that strikes are less likely to get tested when implied volatility is higher?Further, do calls and puts follow a similar pattern in regards to volatility and probability of touch?Join Tom and Tony to find out!
Portfolio margin is a great alternative to standard margin for those with large accounts that want margin relief for positions that are uncorrelated, or act as hedges. Keep in mind that the trade you put on with Reg T or PM has the same risk and opportunity, but PM calculations will generally have lower BPR, and it will be different with every trade depending on the composition of your account.
Portfolio margin is a great alternative to standard margin for those with large accounts that want margin relief for positions that are uncorrelated, or act as hedges. Keep in mind that the trade you put on with Reg T or PM has the same risk and opportunity, but PM calculations will generally have lower BPR, and it will be different with every trade depending on the composition of your account.
While earnings trades don’t tend to make up a large portion of our portfolios, we still put them on as engagement trades.Earnings offer high risk, high reward trades due to the sharp increase and, usually, subsequent decrease in IV.This earnings season, as with many prior, we’ve seen some large moves, predominantly to the downside. But, have these earnings moves been outside the expected range, or have most moves been “in” moves?Join Tom and Tony to find out!
While earnings trades don’t tend to make up a large portion of our portfolios, we still put them on as engagement trades.Earnings offer high risk, high reward trades due to the sharp increase and, usually, subsequent decrease in IV.This earnings season, as with many prior, we’ve seen some large moves, predominantly to the downside. But, have these earnings moves been outside the expected range, or have most moves been “in” moves?Join Tom and Tony to find out!
Staying small with lot sizing is important even when it seems that a strangle or short put are much less risky than a long stock position and you can afford to add more lots. When taking the short side of premium, the dynamic nature of options only works against us since negative gamma and spikes in IV are usually coupled together and cause exponentially more portfolio exposure.
Staying small with lot sizing is important even when it seems that a strangle or short put are much less risky than a long stock position and you can afford to add more lots. When taking the short side of premium, the dynamic nature of options only works against us since negative gamma and spikes in IV are usually coupled together and cause exponentially more portfolio exposure.
From a young age, we’ve always been told “don’t put all your eggs in one basket”. This proverb can be applied in all aspects of life, but is most fitting when discussing investing and trading. After seeing years of above average returns, it didn’t matter which stock, ETF, or crypto that we chose, as there was a high chance that it would be worth more when we went to sell it. Why diversify if any trade made money?Well, the first four months of 2022 have been a wake up call for traders about the detriments of putting too many eggs in one basket. Join Tom and Tony as they dive into why diversification is important.
From a young age, we’ve always been told “don’t put all your eggs in one basket”. This proverb can be applied in all aspects of life, but is most fitting when discussing investing and trading. After seeing years of above average returns, it didn’t matter which stock, ETF, or crypto that we chose, as there was a high chance that it would be worth more when we went to sell it. Why diversify if any trade made money?Well, the first four months of 2022 have been a wake up call for traders about the detriments of putting too many eggs in one basket. Join Tom and Tony as they dive into why diversification is important.
Smaller delta strangles carry a much higher POP but they are prone to more outlier risk as a multiple of how much premium they carry. Since the outliers on a 5∆ strangle tend to be so much more severe as a multiple of credit than higher delta strangles, it becomes nearly impossible to size up… so even though you get a much smaller credit, each dollar in credit you receive could be exposed to more than twice the outlier risk than each dollar in credit of a larger delta strangle. Currently, a 5∆ strangle in SPY is trading for around $2.00 and a 25∆ strangle at $12.00 (in June). If you wanted to trade six 5∆ strangles to get the same premium as the 25∆ but with the higher POP, you would actually be carrying more than twice the total outlier risk than just selling one 25∆ strangle.
Smaller delta strangles carry a much higher POP but they are prone to more outlier risk as a multiple of how much premium they carry. Since the outliers on a 5∆ strangle tend to be so much more severe as a multiple of credit than higher delta strangles, it becomes nearly impossible to size up… so even though you get a much smaller credit, each dollar in credit you receive could be exposed to more than twice the outlier risk than each dollar in credit of a larger delta strangle. Currently, a 5∆ strangle in SPY is trading for around $2.00 and a 25∆ strangle at $12.00 (in June). If you wanted to trade six 5∆ strangles to get the same premium as the 25∆ but with the higher POP, you would actually be carrying more than twice the total outlier risk than just selling one 25∆ strangle.
In previous segments, we’ve discussed how allocating a small portion of your portfolio towards cryptocurrencies can potentially lower your overall portfolio risk due to diversification.However, for investors new to the crypto markets, it may be challenging to choose one or two specific cryptos. With 25 cryptos now offered on tastyworks, it is intimidating to figure out which crypto might provide the best exposure.As a means of gaining exposure to the crypto market, how much does the choice in asset matter?Join Tom and Tony to find out!
In previous segments, we’ve discussed how allocating a small portion of your portfolio towards cryptocurrencies can potentially lower your overall portfolio risk due to diversification.However, for investors new to the crypto markets, it may be challenging to choose one or two specific cryptos. With 25 cryptos now offered on tastyworks, it is intimidating to figure out which crypto might provide the best exposure.As a means of gaining exposure to the crypto market, how much does the choice in asset matter?Join Tom and Tony to find out!
Considering the effect that rising rates have on options, we have to separate the effect into two parts: the actual increase in the cost of money, and the added market risk indirectly caused by rising rates. The effect that rising costs of money have on an option is measured by the greek, rho. This is usually insignificant and not tradable. Think of it like a scheduled dividend that adjusts the prices of options to account for it. The added market risk caused by rising rates is factored into the implied volatility, therefore, it is already considered when we place a trade.
Considering the effect that rising rates have on options, we have to separate the effect into two parts: the actual increase in the cost of money, and the added market risk indirectly caused by rising rates. The effect that rising costs of money have on an option is measured by the greek, rho. This is usually insignificant and not tradable. Think of it like a scheduled dividend that adjusts the prices of options to account for it. The added market risk caused by rising rates is factored into the implied volatility, therefore, it is already considered when we place a trade.
So far this year, cryptocurrencies, like bitcoin and ether, and crypto-focused companies, like Coinbase, have struggled to match the prior year’s performance. This is not unique to these two assets, as many other risk assets have seen a decrease in value alongside heightened uncertainty and an increase in interest rates.Many traditional equity traders have flocked to crypto-focused stocks to gain exposure to the crypto market, but has this been a successful alternative to the underlying cryptocurrencies? How has the performance of the two asset classes compared, and why might there be some discrepancies?Join Tom and Tony to find out!
So far this year, cryptocurrencies, like bitcoin and ether, and crypto-focused companies, like Coinbase, have struggled to match the prior year’s performance. This is not unique to these two assets, as many other risk assets have seen a decrease in value alongside heightened uncertainty and an increase in interest rates.Many traditional equity traders have flocked to crypto-focused stocks to gain exposure to the crypto market, but has this been a successful alternative to the underlying cryptocurrencies? How has the performance of the two asset classes compared, and why might there be some discrepancies?Join Tom and Tony to find out!
When we trade often, the benefit is never observed in the short term because portfolio volatility is a long-term measurement. The average return of a portfolio of 50 random stocks has a much higher likelihood of being closer to an expected return (in this case, the S&P 500 return) than the average return of a portfolio with 5 stocks.
This concept can be applied the same way to option strategies. Combined with trading small, “trading often” leads to the same goal of reducing the uncertainty in a portfolio’s expected return.
When we trade often, the benefit is never observed in the short term because portfolio volatility is a long-term measurement. The average return of a portfolio of 50 random stocks has a much higher likelihood of being closer to an expected return (in this case, the S&P 500 return) than the average return of a portfolio with 5 stocks.
This concept can be applied the same way to option strategies. Combined with trading small, “trading often” leads to the same goal of reducing the uncertainty in a portfolio’s expected return.
Some of the hosts at tasty tend to trade delta neutral strategies, relying on theta decay and implied volatility overstatement as the driving force behind profits rather than directionality.For example, they may put on a 16 delta strangle, which is delta neutral at entry. However, throughout the life of the trade, the overall delta for that position will inevitably change. How much can we expect delta to change and what can we do to manage these changes?Join Tom and Tony to find out!
Some of the hosts at tasty tend to trade delta neutral strategies, relying on theta decay and implied volatility overstatement as the driving force behind profits rather than directionality.For example, they may put on a 16 delta strangle, which is delta neutral at entry. However, throughout the life of the trade, the overall delta for that position will inevitably change. How much can we expect delta to change and what can we do to manage these changes?Join Tom and Tony to find out!
At tasty, we generally recommend allocating between 25% and 50% of a portfolio’s buying power to short premium strategies, with the percent varying depending on the current value of VIX.This year, for example, VIX has remained above 15, so if we follow the allocation guidelines, we would have always allocated 30% of our portfolio.In an average year, how often can we expect VIX to be in a given range, and how much can we expect to allocate throughout the year?Join Tom and Tony to find out!
At tasty, we generally recommend allocating between 25% and 50% of a portfolio’s buying power to short premium strategies, with the percent varying depending on the current value of VIX.This year, for example, VIX has remained above 15, so if we follow the allocation guidelines, we would have always allocated 30% of our portfolio.In an average year, how often can we expect VIX to be in a given range, and how much can we expect to allocate throughout the year?Join Tom and Tony to find out!
Core positions will be the ones that are responsive for most of the P/L of a portfolio over long periods of time. These are the positions where we focus on short theta, short IV, high POP, and defined profit.Engagement trades may not necessarily help or hurt a portfolio over time, so they should be done with extra small size since statistically. The value in engagement trades lies in the market awareness that builds a foundation to understand trading better.
Core positions will be the ones that are responsive for most of the P/L of a portfolio over long periods of time. These are the positions where we focus on short theta, short IV, high POP, and defined profit.Engagement trades may not necessarily help or hurt a portfolio over time, so they should be done with extra small size since statistically. The value in engagement trades lies in the market awareness that builds a foundation to understand trading better.
The probability of touch (POT) is the probability that at some point before expiration, the underlying price will reach the strike of the option. POT is calculated by multiplying the delta by two, so if you have a 10 delta put, the POT = 10 * 2 = 20%.Previously, we looked at the impact that early management had on probability of touch (POT), finding that when managing 16∆ options at 21 DTE, the POT was roughly equal to ½ the delta. But that was a small sample, simply looking at 16∆ calls and puts. What if we expanded the study?When managing early, can we estimate POT to be equal to ½ of delta? Or is there a different calculation that can apply broadly to all deltas?
The probability of touch (POT) is the probability that at some point before expiration, the underlying price will reach the strike of the option. POT is calculated by multiplying the delta by two, so if you have a 10 delta put, the POT = 10 * 2 = 20%.Previously, we looked at the impact that early management had on probability of touch (POT), finding that when managing 16∆ options at 21 DTE, the POT was roughly equal to ½ the delta. But that was a small sample, simply looking at 16∆ calls and puts. What if we expanded the study?When managing early, can we estimate POT to be equal to ½ of delta? Or is there a different calculation that can apply broadly to all deltas?
When aiming to gain exposure to a particular underlying, the limiting factor is the buying power requirement of the trade. Expensive underlying's are tradable with virtually any account size, but the appropriate strategy is going to depend on the total buying power of a portfolio. Join Tom and Tony as they compare the BPR requirements for different types of neutral strategies.
When aiming to gain exposure to a particular underlying, the limiting factor is the buying power requirement of the trade. Expensive underlying's are tradable with virtually any account size, but the appropriate strategy is going to depend on the total buying power of a portfolio. Join Tom and Tony as they compare the BPR requirements for different types of neutral strategies.
In the second half of March, we saw the major market indices move up +10% in just two weeks. Many of the most traded stocks that powered this move were up 20% or more.When we see such strong moves in a short period of time, what comes next? Does the market continue its rally, or does it give back some of its gains?Join Tom and Tony to find out!
In the second half of March, we saw the major market indices move up +10% in just two weeks. Many of the most traded stocks that powered this move were up 20% or more.When we see such strong moves in a short period of time, what comes next? Does the market continue its rally, or does it give back some of its gains?Join Tom and Tony to find out!
When markets get volatile, there is virtually no similarity in performances between selling premium and being long on stock. Since the expansion and contraction of volatility is the most important factor that affects premium selling, our trade mechanics and management revolve around managing volatility risk with less focus on price direction. This is why the returns tend to be very different in years like 2008 and 2020.
When markets get volatile, there is virtually no similarity in performances between selling premium and being long on stock. Since the expansion and contraction of volatility is the most important factor that affects premium selling, our trade mechanics and management revolve around managing volatility risk with less focus on price direction. This is why the returns tend to be very different in years like 2008 and 2020.
The news of stock splits in the past two years sparked rallies as retail traders piled in. We’ve seen this in AMZN, GOOGL, and TSLA just this year.However, a split doesn’t affect a company’s business, and with fractional shares available at most brokers, why does this happen? It may be possible that retail investors perceive a lower stock price to be better “value,” causing a fund increase into that stock.Does an increase in stock splits coincide with market peaks? And after seeing stock splits, does the broad market perform better or worse than average?
The news of stock splits in the past two years sparked rallies as retail traders piled in. We’ve seen this in AMZN, GOOGL, and TSLA just this year.However, a split doesn’t affect a company’s business, and with fractional shares available at most brokers, why does this happen? It may be possible that retail investors perceive a lower stock price to be better “value,” causing a fund increase into that stock.Does an increase in stock splits coincide with market peaks? And after seeing stock splits, does the broad market perform better or worse than average?
The ratio of premium of /MBT and /BTC to a one-lot BITO is around 1.6 times and 16 times, respectively. By multiplying that ratio by the price of BITO options, you will know the difference in size of the futures options notional relative to the ETF.
The ratio of premium of /MBT and /BTC to a one-lot BITO is around 1.6 times and 16 times, respectively. By multiplying that ratio by the price of BITO options, you will know the difference in size of the futures options notional relative to the ETF.
The probability of touch (POT) is the probability that at some point before expiration, the underlying price will reach the strike of the option. POT is calculated by multiplying the delta by two, so if you have a 10 delta put, the POT = 10 * 2 = 20%.In previous studies, we discovered that the actual POT is lower than the theoretical more often than not. These studies all looked at options held until expiration, but at tasty, we champion early management to decrease volatility and increase occurrences.So, what would happen to the POT if we managed our trades at 21 DTE? Would actual POT be even lower, and if so, by how much?
The probability of touch (POT) is the probability that at some point before expiration, the underlying price will reach the strike of the option. POT is calculated by multiplying the delta by two, so if you have a 10 delta put, the POT = 10 * 2 = 20%.In previous studies, we discovered that the actual POT is lower than the theoretical more often than not. These studies all looked at options held until expiration, but at tasty, we champion early management to decrease volatility and increase occurrences.So, what would happen to the POT if we managed our trades at 21 DTE? Would actual POT be even lower, and if so, by how much?
Changing the delta on your short premium when IV goes up or down can help stabilize a portfolio’s exposure since all deltas are affected similarly by changes in IV. With IV going down for now, increasing the delta of your strangle can help make up for less premium but at the cost of some probability of profit.
Changing the delta on your short premium when IV goes up or down can help stabilize a portfolio’s exposure since all deltas are affected similarly by changes in IV. With IV going down for now, increasing the delta of your strangle can help make up for less premium but at the cost of some probability of profit.
Over numerous studies, we’ve concluded that a profit target right around 50% tends to provide the most optimal balance of risk and reward. These studies were conducted on some of the more common tasty strategies, such as 16∆ strangles, puts, and calls.Recently, we’ve looked at selling ITM puts as an alternative to covered calls, but that begs the question, at what level do we manage these options?Since we are collecting a much larger initial credit when selling ITM options, should we manage at a smaller profit target? Or, should we still keep our profit targets at 50%?
Over numerous studies, we’ve concluded that a profit target right around 50% tends to provide the most optimal balance of risk and reward. These studies were conducted on some of the more common tasty strategies, such as 16∆ strangles, puts, and calls.Recently, we’ve looked at selling ITM puts as an alternative to covered calls, but that begs the question, at what level do we manage these options?Since we are collecting a much larger initial credit when selling ITM options, should we manage at a smaller profit target? Or, should we still keep our profit targets at 50%?
Since we know that implied volatility (IV) tends to overstate realized volatility, approximately 75% of the time in the S&P, we sell options to get an “edge” from this overstatement.At tasty, we often focus on implied volatility as the basis of whether there is opportunity for an underlying. When implied volatility is as high as it is currently, it’s pretty easy to find attractive trades. However, at some point, volatility will contract, and we will be left looking for trades.Implied volatility is forward looking and historical volatility is backward looking, but what if we compare the spread between these two statistics? Can it help us find more trades? Do trades perform better when the spread is narrow or wider?Join Tom and Tony to find out!
Since we know that implied volatility (IV) tends to overstate realized volatility, approximately 75% of the time in the S&P, we sell options to get an “edge” from this overstatement.At tasty, we often focus on implied volatility as the basis of whether there is opportunity for an underlying. When implied volatility is as high as it is currently, it’s pretty easy to find attractive trades. However, at some point, volatility will contract, and we will be left looking for trades.Implied volatility is forward looking and historical volatility is backward looking, but what if we compare the spread between these two statistics? Can it help us find more trades? Do trades perform better when the spread is narrow or wider?Join Tom and Tony to find out!
Running a regression for short and long term rates over the last year, we found that for every 10 ticks that short term rates move, long term rates moved only 6 to 9. When we see less long term rate sensitivity, we tend to see a flattening yield curve, and heightened implied volatility for interest rate products.Usually long term rates are more sensitive to short term rate movement, so this last year was an anomaly, which is conducive with the rest of the market.
Running a regression for short and long term rates over the last year, we found that for every 10 ticks that short term rates move, long term rates moved only 6 to 9. When we see less long term rate sensitivity, we tend to see a flattening yield curve, and heightened implied volatility for interest rate products.Usually long term rates are more sensitive to short term rate movement, so this last year was an anomaly, which is conducive with the rest of the market.
We focus many of our studies on probability of profit (POP), the average profit, and the risk associated with trading short options.Risk, return, and probability are inherently related, meaning that you cannot have high probability, high returns, and limited risk.This is best seen when looking at expectancy, so let’s take a look at some popular tasty strategies to see what to expect when trading.Expectancy is equal to: (win rate x average size of win) + (loss rate x average size of loss)
We focus many of our studies on probability of profit (POP), the average profit, and the risk associated with trading short options.Risk, return, and probability are inherently related, meaning that you cannot have high probability, high returns, and limited risk.This is best seen when looking at expectancy, so let’s take a look at some popular tasty strategies to see what to expect when trading.Expectancy is equal to: (win rate x average size of win) + (loss rate x average size of loss)
Most markets have seen their IVs increase in the last few months, but some IVs and skew went up more than others, meaning the increase in position risk has not been the same.
Comparing crude and equities, the premium in crude options has nearly tripled compared to a modest increase in equity indexes...this means the same size position in crude carries three times greater risk as it did in October.
Equity indexes, however, carry only 30% more risk for the same size, even though their IVs have gone up proportionately to something like crude. It is skew, underlying price, and IV that determine the overall premium and risk level of an option strategy.
Most markets have seen their IVs increase in the last few months, but some IVs and skew went up more than others, meaning the increase in position risk has not been the same.
Comparing crude and equities, the premium in crude options has nearly tripled compared to a modest increase in equity indexes...this means the same size position in crude carries three times greater risk as it did in October.
Equity indexes, however, carry only 30% more risk for the same size, even though their IVs have gone up proportionately to something like crude. It is skew, underlying price, and IV that determine the overall premium and risk level of an option strategy.
With the broad markets seeing heightened volatility, investors are reassessing their portfolios to determine the best way to hedge existing positions.The traditional market hedges, such as gold and bonds, have shown their effectiveness over time, but with new digital assets, some are beginning to wonder how they compare existing hedges.Can investors and traders utilize digital assets, such as Bitcoin, to hedge their portfolios in a similar manner to assets like gold?Join Tom and Tony to find out!
With the broad markets seeing heightened volatility, investors are reassessing their portfolios to determine the best way to hedge existing positions.The traditional market hedges, such as gold and bonds, have shown their effectiveness over time, but with new digital assets, some are beginning to wonder how they compare existing hedges.Can investors and traders utilize digital assets, such as Bitcoin, to hedge their portfolios in a similar manner to assets like gold?Join Tom and Tony to find out!
In today's episode Tom and Tony talk about wheat, which currently has the highest implied volatility of any commodity trading, including oil.
In today's episode Tom and Tony talk about wheat, which currently has the highest implied volatility of any commodity trading, including oil.
Diversification is a popular method in which an investor can decrease their overall portfolio risk. However, when the markets move down quickly and volatility increases, we’ve noticed that the correlations across nearly all asset classes converge to 1.In the past month, we’ve seen the major indices fall as tensions in Ukraine have ramped up. Compared to the start of the COVID pandemic, how do the correlations across asset classes look now?Join Tom and Tony to find out!
Diversification is a popular method in which an investor can decrease their overall portfolio risk. However, when the markets move down quickly and volatility increases, we’ve noticed that the correlations across nearly all asset classes converge to 1.In the past month, we’ve seen the major indices fall as tensions in Ukraine have ramped up. Compared to the start of the COVID pandemic, how do the correlations across asset classes look now?Join Tom and Tony to find out!
Usually when volatility goes up in one main asset class, other assets become more volatile as well. Since major asset IVs are currently in the top 10% historically, putting on small trades is imperative since the risk in most assets has gone up for the same size trade.When trading higher IV products like crude oil, keep in mind that the “risk” of an asset does not increase linearly when there is a doubling of IV. An IV of 40% is much “riskier” than trading two contracts in a stock with an IV of 20%. This is because outlier options skew the IV number heavily.
Usually when volatility goes up in one main asset class, other assets become more volatile as well. Since major asset IVs are currently in the top 10% historically, putting on small trades is imperative since the risk in most assets has gone up for the same size trade.When trading higher IV products like crude oil, keep in mind that the “risk” of an asset does not increase linearly when there is a doubling of IV. An IV of 40% is much “riskier” than trading two contracts in a stock with an IV of 20%. This is because outlier options skew the IV number heavily.
In the markets, a correction is defined as a decline of 10% of more in the price of an asset since its most recent peak.In the past three months, we’ve seen the S&P, Nasdaq, and Russell all enter into correction territory with the largest decline that we have seen since the start of COVID.How long do these type of corrections normally last and what can we expect next? Join Tom and Tony to find out!
In the markets, a correction is defined as a decline of 10% of more in the price of an asset since its most recent peak.In the past three months, we’ve seen the S&P, Nasdaq, and Russell all enter into correction territory with the largest decline that we have seen since the start of COVID.How long do these type of corrections normally last and what can we expect next? Join Tom and Tony to find out!
Although last week’s market move came as a bit of a shock to people, in reality, there is almost never any consistent follow-through in the market when there is a report or event that is supposed to be “good” or “bad”.The market remains unpredictable even when it seems that an event or action would make it move one certain way.
Although last week’s market move came as a bit of a shock to people, in reality, there is almost never any consistent follow-through in the market when there is a report or event that is supposed to be “good” or “bad”.The market remains unpredictable even when it seems that an event or action would make it move one certain way.
In mellow markets, implied volatility actually does not exhibit strong negative correlation with equity prices. The stronger negative correlation between SPX and VIX happens when SPX moves greater than 1%.
Holding short delta may provide a hedge when markets start to sell off big since that is when IV and price exhibit their strongest negative correlation.
In mellow markets, implied volatility actually does not exhibit strong negative correlation with equity prices. The stronger negative correlation between SPX and VIX happens when SPX moves greater than 1%.
Holding short delta may provide a hedge when markets start to sell off big since that is when IV and price exhibit their strongest negative correlation.
In the majority of our studies, we look at the markets indices and ETFs as the underlyings for our options trades since they have slower movement and no earnings risk.However, in the pursuit of higher volatility, we often find ourselves trading individual stocks. With that comes a variety of risks, such as earnings volatility and liquidity. But, is the size of a company something that we should also consider as a potential risk?Simply put, does the size of a company impact our risk and return when trading strangles?Join Tom and Tony to find out!
In the majority of our studies, we look at the markets indices and ETFs as the underlyings for our options trades since they have slower movement and no earnings risk.However, in the pursuit of higher volatility, we often find ourselves trading individual stocks. With that comes a variety of risks, such as earnings volatility and liquidity. But, is the size of a company something that we should also consider as a potential risk?Simply put, does the size of a company impact our risk and return when trading strangles?Join Tom and Tony to find out!
Some pairs have correlations that are mean reverting. In this study we focused on IWM-QQQ. If a pair has a mean reverting correlation, it does not mean that the pair price itself will mean revert.
Remember, trading pairs (one long, one short) with high correlation means a pair with less overall risk. With the correlation between IWM and QQQ at two year highs, the risk of trading this pair has declined since the 2020 selloff.
Some pairs have correlations that are mean reverting. In this study we focused on IWM-QQQ. If a pair has a mean reverting correlation, it does not mean that the pair price itself will mean revert.
Remember, trading pairs (one long, one short) with high correlation means a pair with less overall risk. With the correlation between IWM and QQQ at two year highs, the risk of trading this pair has declined since the 2020 selloff.
One of the most challenging aspects of the options learning curve is understanding the mathematics that these complex instruments are founded on. A dive into the mathematics of options can easily lead to a seemingly endless void of technical indicators, probability theory, and stochastic calculus. Although the scope is broad, most options trading decisions can be made with a pretty superficial understanding of a handful of mathematical concepts and statistics. Join Tom, Tony and Julia as they cover some of the most important math concepts for trading options strategically.
Check out Julia and Tom's latest book, "The Unlucky Investor's Guide to Options Trading."
To preview go to Wiley.com.
Available on Amazon: https://www.amazon.com/Unlucky-Investors-Guide-Options-Trading/dp/1119882656
One of the most challenging aspects of the options learning curve is understanding the mathematics that these complex instruments are founded on. A dive into the mathematics of options can easily lead to a seemingly endless void of technical indicators, probability theory, and stochastic calculus. Although the scope is broad, most options trading decisions can be made with a pretty superficial understanding of a handful of mathematical concepts and statistics. Join Tom, Tony and Julia as they cover some of the most important math concepts for trading options strategically.
Check out Julia and Tom's latest book, "The Unlucky Investor's Guide to Options Trading."
To preview go to Wiley.com.
Available on Amazon: https://www.amazon.com/Unlucky-Investors-Guide-Options-Trading/dp/1119882656
When trading or gambling wide spreads (or commissions) will cause a significant drag on your probability of making money over defined time periods and overall P/L if you transact a lot. Luckily we don’t have to engage with those products because there are many liquid products out there. Additionally, increasing trade size as % of total capital result in lower POP over time but carries much greater upside if you are right.
When trading or gambling wide spreads (or commissions) will cause a significant drag on your probability of making money over defined time periods and overall P/L if you transact a lot. Luckily we don’t have to engage with those products because there are many liquid products out there. Additionally, increasing trade size as % of total capital result in lower POP over time but carries much greater upside if you are right.
Options on futures allow traders exposure to more markets that are still liquid and may provide greater diversification than trading only equity options.With technology rapidly expanding, trading both equity and futures options from one place has never been easier. With the technical differences handled in the backend, the trading experience for both products is very consistent.
Options on futures allow traders exposure to more markets that are still liquid and may provide greater diversification than trading only equity options.With technology rapidly expanding, trading both equity and futures options from one place has never been easier. With the technical differences handled in the backend, the trading experience for both products is very consistent.
As premium sellers, one of the main ways we profit is because the market often overstates implied volatility, meaning that the realized volatility is lower than the implied volatility (IV).We’ve done numerous studies in the past discussing the frequency of IV overstatement in the S&P, finding that IV was overstated 75-80% of the time, depending on the time frame of the study.If we dig in deeper, how does IV overstatement look like across the S&P sectors? Are there sectors that have been overstated more often than others?Join Tom and Tony to find out!
As premium sellers, one of the main ways we profit is because the market often overstates implied volatility, meaning that the realized volatility is lower than the implied volatility (IV).We’ve done numerous studies in the past discussing the frequency of IV overstatement in the S&P, finding that IV was overstated 75-80% of the time, depending on the time frame of the study.If we dig in deeper, how does IV overstatement look like across the S&P sectors? Are there sectors that have been overstated more often than others?Join Tom and Tony to find out!
Options are leveraged instruments, meaning that it is possible to gain or lose more than the initial investment of a trade. Leverage may be unappealing to investors because of its association with risk, but, when used properly, the capital efficiency of options is a powerful tool.
Learn more today as Tom, Tony and Julia cover one key takeaway from Chapter 5 of The Unlucky Investor’s Guide to Options Trading.
tastytrade Book Promotion: https://info.tastytrade.com/investorsguide
Wiley Landing Page/Vendor List: https://www.wiley.com/WileyCDA/WileyTitle/productCd-1119882656,descCd-buy.html
Preview Available on Amazon: https://www.amazon.com/Unlucky-Investors-Guide-Options-Trading/dp/1119882656
Options are leveraged instruments, meaning that it is possible to gain or lose more than the initial investment of a trade. Leverage may be unappealing to investors because of its association with risk, but, when used properly, the capital efficiency of options is a powerful tool.
Learn more today as Tom, Tony and Julia cover one key takeaway from Chapter 5 of The Unlucky Investor’s Guide to Options Trading.
tastytrade Book Promotion: https://info.tastytrade.com/investorsguide
Wiley Landing Page/Vendor List: https://www.wiley.com/WileyCDA/WileyTitle/productCd-1119882656,descCd-buy.html
Preview Available on Amazon: https://www.amazon.com/Unlucky-Investors-Guide-Options-Trading/dp/1119882656
At tasty, two primary management strategies that we utilize are managing at 50% profit and managing at 21 DTE.
We’ve done studies recently looking at these strategies individually, as well as together, to find what is optimal.
But, as volatility changes, should we also consider changing the way we manage our trades? When IVR is low should we manage differently than we do when IVR is high?
Join Tom and Tony to find out!
At tasty, two primary management strategies that we utilize are managing at 50% profit and managing at 21 DTE.
We’ve done studies recently looking at these strategies individually, as well as together, to find what is optimal.
But, as volatility changes, should we also consider changing the way we manage our trades? When IVR is low should we manage differently than we do when IVR is high?
Join Tom and Tony to find out!
For equities and equity portfolios, the Sharpe ratio is a simple, effective tool for comparing strategies - the higher the Sharpe, the better the expected performance.
For options and options portfolios, however, the Sharpe ratio doesn’t show a complete picture.
Join Tom and Tony as they use some examples of 16Δ strangles to understand why.
For equities and equity portfolios, the Sharpe ratio is a simple, effective tool for comparing strategies - the higher the Sharpe, the better the expected performance.
For options and options portfolios, however, the Sharpe ratio doesn’t show a complete picture.
Join Tom and Tony as they use some examples of 16Δ strangles to understand why.
Over the last 30 years, you could expect a streak of at least three 1% days to the same direction to happen less than 1% of the time, half being up-day streaks and half being down-day streaks. The day after the end of a large down streak usually results in an above-average up day (+2.3%), whereas the day after the end of a large up streak results in a completely average down day.
In today's episode of Market Measures, Tom and Tony look at what happens after streaks of up or down days.
Over the last 30 years, you could expect a streak of at least three 1% days to the same direction to happen less than 1% of the time, half being up-day streaks and half being down-day streaks. The day after the end of a large down streak usually results in an above-average up day (+2.3%), whereas the day after the end of a large up streak results in a completely average down day.
In today's episode of Market Measures, Tom and Tony look at what happens after streaks of up or down days.
In the past two weeks, we’ve seen IVR across the major indices between 30 and 140.
Here at tasty, we frequently discuss volatility contraction following a spike like this, which is why we look for high IVR when selling premium.
As IVR increases, does that mean that profits come in sooner? If we managed at 50% profit across various IVR ranges, is there any significant difference?
Join Tom and Tony to find out!
In the past two weeks, we’ve seen IVR across the major indices between 30 and 140.
Here at tasty, we frequently discuss volatility contraction following a spike like this, which is why we look for high IVR when selling premium.
As IVR increases, does that mean that profits come in sooner? If we managed at 50% profit across various IVR ranges, is there any significant difference?
Join Tom and Tony to find out!
Certain types of short premium positions have positive expected values, but it is critical for traders to have a sufficient number of occurrences to realize those benefits. What is the minimum number of trades that one should aim for to maximize the chances of reaching positive long-term averages? What are the potential consequences of having too few occurrences? Find out today as Tom, Tony and Julia cover one key takeaway from Chapter 3 of The Unlucky Investor’s Guide to Options Trading.Feeling lucky? Learn more about the guide. See the publisher. Check out the authors: Tom Sosnoff, Julia SpinaAlso available on Amazon.com
Certain types of short premium positions have positive expected values, but it is critical for traders to have a sufficient number of occurrences to realize those benefits. What is the minimum number of trades that one should aim for to maximize the chances of reaching positive long-term averages? What are the potential consequences of having too few occurrences? Find out today as Tom, Tony and Julia cover one key takeaway from Chapter 3 of The Unlucky Investor’s Guide to Options Trading.Feeling lucky? Learn more about the guide. See the publisher. Check out the authors: Tom Sosnoff, Julia SpinaAlso available on Amazon.com
We’ve seen choppy markets this year, with three days last week having a greater than 3% high to low range in the major indices. Combine that with the outsized earnings moves and it has been an unpredictable start to the year.However, is it possible that the direction of the market over the course of the week can be determined by the direction of the move to start the week?Join Tom and Tony to find out!
We’ve seen choppy markets this year, with three days last week having a greater than 3% high to low range in the major indices. Combine that with the outsized earnings moves and it has been an unpredictable start to the year.However, is it possible that the direction of the market over the course of the week can be determined by the direction of the move to start the week?Join Tom and Tony to find out!
Since 1993, there was evidence of larger average positive returns over 45 day periods when implied volatility increased and coincided with falling markets. However, the range of possible returns over 45 days also increased, meaning significant moves to either side became more likely. There was no easy way to take advantage of the larger average return if you increased trade size or decided to trade directional long, and the only way to work through volatile markets is to stay small enough where you are not overexposing your portfolio to big moves in either direction. Tom and Tony explain.
Since 1993, there was evidence of larger average positive returns over 45 day periods when implied volatility increased and coincided with falling markets. However, the range of possible returns over 45 days also increased, meaning significant moves to either side became more likely. There was no easy way to take advantage of the larger average return if you increased trade size or decided to trade directional long, and the only way to work through volatile markets is to stay small enough where you are not overexposing your portfolio to big moves in either direction. Tom and Tony explain.
Last week, we looked at how wide strangles get across various implied volatility (IV) levels, finding that the strikes were pushed out two times further from ATM when volatility is high. Combine this with an increase in initial credit received, and overall return on capital improved in higher IV.Now that we know how changing IV impacts 16 delta strangles, how does the impact translate across various deltas?Join Tom and Tony to find out!
Last week, we looked at how wide strangles get across various implied volatility (IV) levels, finding that the strikes were pushed out two times further from ATM when volatility is high. Combine this with an increase in initial credit received, and overall return on capital improved in higher IV.Now that we know how changing IV impacts 16 delta strangles, how does the impact translate across various deltas?Join Tom and Tony to find out!
We know that over long periods of time, the expected ratio of up days to down days is 53 to 47, but how much can we expect this ratio to change or vary when looking over shorter time frames, like months?
Key Takeaways:* Over the last month, the S&P 500 is down around 10% with implied volatility reaching their top 3% of historical occurrences. * Along with the amount of intraday reversals we have seen, another unique feature of this selloff is the actual ratio of down days to up days.The long term ratio of seeing an up day versus a down day is 53/47. * The chance of seeing a month with 7 or less up days (as we have just experienced) is 1%. When looking “outlier” months, where there was a heavy concentration of only up days or down days, the outlier month will almost always mean a lot of up days.
We know that over long periods of time, the expected ratio of up days to down days is 53 to 47, but how much can we expect this ratio to change or vary when looking over shorter time frames, like months?
Key Takeaways:* Over the last month, the S&P 500 is down around 10% with implied volatility reaching their top 3% of historical occurrences. * Along with the amount of intraday reversals we have seen, another unique feature of this selloff is the actual ratio of down days to up days.The long term ratio of seeing an up day versus a down day is 53/47. * The chance of seeing a month with 7 or less up days (as we have just experienced) is 1%. When looking “outlier” months, where there was a heavy concentration of only up days or down days, the outlier month will almost always mean a lot of up days.
We’ve seen VIX get above 30 this week due to greater uncertainty across the market, so the potential expected move for the S&P has increased as well.
When volatility expands or contracts, how does that impact the strikes for strangles? How wide do strangles get across varying volatility levels? Join Tom and Tony to find out!
We’ve seen VIX get above 30 this week due to greater uncertainty across the market, so the potential expected move for the S&P has increased as well.
When volatility expands or contracts, how does that impact the strikes for strangles? How wide do strangles get across varying volatility levels? Join Tom and Tony to find out!
There have been pretty significant intraday and overnight price swings across the market over the past few weeks. What is considered a “bad” intraday move and how likely is it for an asset to recover from one? Similarly, what is a “bad” overnight move? Is an asset any more or less likely to recover from a “bad” overnight move compared to a “bad” intraday move?
Join Tom, Tony and Julia as they use probability distributions to compare intraday and overnight moves.
There have been pretty significant intraday and overnight price swings across the market over the past few weeks. What is considered a “bad” intraday move and how likely is it for an asset to recover from one? Similarly, what is a “bad” overnight move? Is an asset any more or less likely to recover from a “bad” overnight move compared to a “bad” intraday move?
Join Tom, Tony and Julia as they use probability distributions to compare intraday and overnight moves.