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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.


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.

Options and Liquidity Providers Mon Jan 30th 2017

Most of you are very familiar with buying and selling stocks and futures. Sadly most of you also love to take liquidity from the market by using market orders, or limit orders that buy at ask and sell at bid. Taking liquidity is never a good idea, in fact all of the exchanges penalize liquidity takers by adding extra commissions/charges on them.

Designing a long term Trade Thu Jan 12th 2017

This educational post is inspired by a question that I got in the room some days ago and by a more recent exchange where I helped someone to fully design a long term trade with GDXJ. I’m planning on making a video about this however that would have to wait until I fully recover my voice. So in the meantime here is this little post that shows one way of designing trades with options.

The art of trading Deep ITM Options Sun Jan 8th 2017

I have been getting a series of very good question in the G.O room that deserve answers that are more detailed than just a simple post. In particular I have been getting questions about In the Money options and designing trades that have a long time horizon (several months duration at least).

P-Values Wed Jan 4th 2017

The connection between weird odds and p-values Understanding p-values at a formal level requires some statistical background, however we could get a high level explanation by looking at certain daily events.  Imagine that we let a glass cup fall to the ground so it breaks into a lot of small pieces that scatter over the kitchen floor. Because that has happened to us before we know that we obtain more or less a random distribution of pieces, both in sizes and locations.

VIX true value Mon Jan 2nd 2017

I got a very interesting question in one of the threads so I'm going to post the answer here. The question is why even though VIX closed at 14.04 on Friday I claim that the true value is in fact 14.90 (I computed that when VIX was around 14.13) We know that VIX closed at 14.04 but the real value is 14.80 because of the way options are priced.