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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.

 

Current Trades Fri Mar 17th 2017

Repeating this post to have it in a more visible place: Here is a summary of what the positions we are carrying around so far with their performance. That is what I love butterflies in general (I know you must be tired of hearing the same thing over and over :) ) We are currently bottom-fishing GDX expecting a wave 3 with a GDX fly that is now at 2.16 ( 59% from entry) and still going strong.

Exotic Options Part II Tue Mar 14th 2017

Continuing with the discussion about contingent options here are some general guidelines to replicate them with vanilla options. A contingent call option is made of: A long vanilla call for the strike and expiration desired. A number of vertical put spreads for the same expiration: short strike/long strike+width. Remember that width has to be the minimum for your underlying.

Exotic Options Tue Mar 14th 2017

A contingent option is an exotic product that is usually traded in OTC markets, in other words outside the reach of retail traders. However the product can be useful to express certain lotto style plays and also for hedging certain kind of catastrophic events. From the outside a contingent option looks very similar to a normal vanilla option, you can buy a contingent put or contingent call and they behave exactly like a normal call or put.

Video links Thu Mar 2nd 2017

Just a quick post with links to the different video tutorials that we have: The original video tutorial for the Gamma Optimizer tool: https://youtu.be/qOg40JiXgvI How to use the Gamma Optimizer for hedging: https://youtu.be/o5c0TTBfBGE Optimizing vertical spreads in the Gamma Optimizer: https://youtu.be/inxY85nikUo An introduction to Gamma and Convexity: https://youtu.be/mk-diJbRfMk

Mini-apps links Thu Mar 2nd 2017

Time for refreshing the links to our mini-apps available here in addition to the Gamma Optimizer. Eventually those will appear on the main section. Kurtosis App: https://gamma-trader.shinyapps.io/kurtosis/ The kurtosis app displays the realized volatility and statistical measures (including kurtosis) for the 4 major indexes in the US. Very helpful to see for trends or anomalies in the markets. The M5 Momentum tool: https://gamma-trader.shinyapps.

Binary Options Mon Feb 13th 2017

This is a post about Nadex which is a US Exchange that deals in Binary Options, Spreads and other exotic derivatives for a lot of instruments out there. I don’t have any affiliation with Nadex, I’m just one user of the products. Binary options have been in the mainstream periodically, it seems that there are bubbles of popularity and then they deflate.

Acquisition Arb part II Thu Feb 9th 2017

The list for the potential acquisition targets consist of 5 stocks so far: Mondelez Campbell Soup General Mills Kellogg CocaCola Now, to play the acquisition stat arb with options we need to figure out first if the option chain for those stocks is liquid enough so it is easy to get in and out of our positions. Also we need to see how expensive options are compared with recent and long term realized volatility to figure out if the market is already starting to price acquisition risk on those stocks.

A simple Arbitrage Trade Sun Feb 5th 2017

Hello folks, so far we have been generating some alpha in this room by pursuing short term mispricing opportunities mostly in Index call options (which are consistently mispriced). We have been able to parley very cheap instruments (in essence call binary options expressed as vertical call spreads) into monster lottos. So even though we have been successful with that there are plenty of other opportunities out there, in particular for certain individual stocks.

Going long Implied Volatility Fri Feb 3rd 2017

This is a very short educational post that will cover the most efficient way to trade the long side of volatility instruments. As you might have noticed already, implied volatility has a directional connection with SPX. More exactly it has an inverse correlation with price level in SPX. In other words, when SPX falls implied volatility goes up and vice versa.

Complex Orders Thu Feb 2nd 2017

As many of you have realized by now my favorite trade structures with options are complex trades. Most of the trade ideas that I post in the G.O room are trades that have 2 or more legs in different combinations: -Vertical spreads -Butterflies -Iron Condors -Calendar spreads -Strangle swaps There are many reasons why I prefer to deal with complex orders as opposed to just buying or selling a single option. However the most important one is price.