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Educational Articles

Leonardo Valencia

This page features periodic articles by Leonardo Valencia on better understanding options trading and the methodology and lexicon underlying his Gamma Optimizer.


New VIX Levels Tue Feb 13th 2018

After a healthy correction of 10% from the top the question in everyone’s mind is the following: At what level will VIX reset ? In other words, after years of low VIX values what would be the new normal level? 12 ? 15? 20 ? Of course it is hard to come up with an estimate right now but looking at certain immediate statistical measurements can provide us with good clues.

Liquidity is not Volume Wed Feb 7th 2018

 For the past several sessions I have been harping consistently about liquidity in the markets. More exactly about the lack of liquidity we are experiencing right now so I want to use this opportunity to dispel some misconceptions about what liquidity really is. The most important takeaway from this post is that liquidity is not volume.

Reading VIX and VXST Mon Feb 5th 2018

By now you folks must know that I post a detailed view of the term structure of SPX options during the day, also you can get the a realtime curve by using the GammaCentral tool. However sometimes we don't need anything that fancy to draw some conclusions here. For instance pay attention to VXST and VIX right now. Remember that VXST is implied variance for the next 9 calendar days, while VIX is implied variance for the next 30 days. The current readings are: VXST = 20.18 and VIX = 18.

ES futures and SPX Mon Feb 5th 2018

Those of you with good eyes have noticed that ES futures trade sometimes at a discount to SPX and other times they seem to trade at a premium. Right now they look discounted (cheaper than SPX) but last week they were a tad higher, why is that ? The explanation resides in the fact that ES futures trade closely the SPX forward value expected at settlement day.

Long Gamma/Short gamma hedging effects. Mon Feb 5th 2018

I can't find any material about this subject even though I'm sure I have posted about this before :) the gist of the long gamma/short gamma threshold that I publish is this: 1. Below the threshold, SPX option dealers are short gamma in the aggregate. 2. Above the threshold SPX option dealers are long gamma in the aggregate. That is important because: 1. Long gamma hedging always happens against the market.

The non-scientific 1997 Hypothesis Fri Feb 2nd 2018

For those of you curious about the 1997 thing, back in Jan30 I posted this: explaining that 2788 "could" be the bottom for this move if 2018 were in fact following that year (based on another earlier post about 97% correlation for the January action).

NDLA analysis Thu Feb 1st 2018

Ubah has done a very interesting analysis for the NDLA that he shared on this thread: in case some of you are interested on looking at the numbers.

NDLA performance since 2017 Wed Jan 31st 2018

This has been requested so I'm putting it here for those of you that want to play with the performance of the new DLA algo with data since 2017 until Jan 24 2018. Here is the link for the .csv file: You can run your own statistical analysis with it. The high level take away from that data is this: Precision: 71.19% (This is the amount of signals >=0.

Why is VIX so high right now Tue Jan 23rd 2018

During the early days of 2018 we have seen a consistent and huge move upwards in price in the SPX index, it has been a relentless move that is pushing the index to all time highs on a daily basis for almost all of the sessions in January so far.

Ambiguity Thu Jan 18th 2018

I know some folks here are interesting on coding their own Ambiguity and Probability of Negative returns heuristics (which is an step towards coding their own DLA's :). As you can imagine my implementation of those concepts is secret sauce and won't see the light of the day anytime ever (trade secrets). However the ideas behind them are public and available to any of you that want to pursue them.