Options Trader

[00:00:17.16] - Speaker 1
Right. So the next, the next type of trading style that we are going to go over is options traders. Options in my opinion are one of the most powerful tool that we have in the market, but it's also one of the fastest way to potentially blow up your account because if you don't know how to trade options, you could actually lose money very, very fast. So some traders for example, buy options hoping for explosive returns. Let me go to the next slide.

[00:00:51.01] - Speaker 1
And basically. But they end up overpaying for premium, right? So that's why we've built like our volatility models. Other traders sell options looking for steady income, but they underestimate the risk and they underestimate our volatility could actually change very fast. So the, the really truth is that most option traders don't really understand the flaws that drive the option pricing.

[00:01:16.20] - Speaker 1
And that's why we want to show you some example today on how you can, on how you can use that. So for people that are looking to buy options or premium buyers, it's very, very, it's a very, very good way of trading because there's less leverage, there's more leverage so you need less capital. But most of the time if you don't understand how to read volatility, you can actually really lose everything that you paid for. So you can actually lose the full premium and you can actually, your option could actually go to zero if you are a seller of premium. So if you're actually using options to get premium and you love the fact that you are getting income, you could actually blow up very fast if you don't look at volatility spikes and if the market actually goes through your strikes.

[00:02:05.19] - Speaker 1
Right. So in both cases trader fails because they ignore flow positioning and volatility.

[00:02:16.14] - Speaker 1
Some of the mistakes, again we want to go over this pretty fast. But for people who are buying options, most like most of the time you're overpaying so you're buying when implied volatility is very high, you are buying into breakouts. So you're buying when we have strong gamma walls that are actually causing resistance. You can actually lose money because even if you get the right direction, but you're actually miscalculating Theta or Ivy crash, you could actually lose money on your premium. This is what happened with the GameStop saga.

[00:02:48.25] - Speaker 1
A lot of investors were buying call option, the price was still going up, but they bought at the highest point of implied volatility. So then you still lose money on the premium. If you are selling options in a cal market, you might not be looking at how volatility can change. So you might be mispricing the risk because you actually don't look at dealers positioning, so you're actually confusing premium with free money. And again, there's no free money.

[00:03:17.07] - Speaker 1
So most option traders, they look at charts and they don't look at option chain and dealers positioning in details. Right. Institutions on the other hand, they look at big open interest data, gamma exposures, where is the market position? They look at volatility surfaces and they look at risk. Right.

[00:03:40.06] - Speaker 1
So institutions are trading using data and that's what we're trying to deliver here. So we're going to show you some examples.

[00:03:49.22] - Speaker 1
So what can we provide? So we can provide you with gamma levels. These are really support and resistance areas created by dealer hedging. We can provide you with volatility models and we're going to show you some example today. And then the Q scores really can be your barometer to understand if the market is calm or if we are moving into a more volatile environment and therefore adjust your strategy.

[00:04:14.14] - Speaker 1
Right. So you don't want to sell premium when you are getting into a volatile environment or a too volatile environment because that could go against your strategy. So the idea really is trading smarter using data and use the same approach used by, by institutions. So now let's go through an example. So let's say that you are bullish on Tesla.

[00:04:37.12] - Speaker 1
The chart looks great. We're going to go and look at Tesla in a second. Momentum is strong and you buy calls. Right. But here is what you can actually see from the Mentor queue dashboard.

[00:04:48.13] - Speaker 1
Implied volatility is at the highest. So you are overpaying for premium. Dealers are moving into a negative gamma environment. So the volatility risk is really high. And, and then of course you have a strong gamma wall ahead.

[00:05:03.29] - Speaker 1
So strong core resistance. Right. So again, this is a very big resistance levels that could actually turn against you. So as a result, Tesla moves sideways. Your calls are actually losing premium because you're, you're, you're, you're, you're losing time.

[00:05:19.27] - Speaker 1
So the theta decay is affecting your premium. And even if you were right on the direction, you're actually losing money. So what we're going to show you in a second with some of the examples is you can now understand if it's a good time to buy or sell option. Maybe you should use spreads instead, or maybe you just want to wait and you don't want to burn capital without context.

[00:05:45.06] - Speaker 1
The other example, and we're going to talk about SPX in more details. Let's Say that you are an SPX Iron Condor seller. The market has become volatility is low and you know, premium looks great. Like it's like free money, right? But hey, what about if you start seeing that dealers are shifting into negative gamma?

[00:06:06.03] - Speaker 1
The volatility scores goes from zero to five means that we are now in a high volatile regime. And implied volatility of SPX is actually rising slightly as well. So on the surface everything looks safe, nothing has changed, there's no headlines. But underneath actually there's fragility and there's a fear building up. So what happens is that you see a sharp move that goes through your strikes and you know the income you know that you generated is actually causing you a massive loss because you have taken too much risk, right?

[00:06:41.04] - Speaker 1
So your months off or weeks of profits are now at a loss because you had a bad day selling Iron Condors.

[00:06:52.05] - Speaker 1
Then let's look at another example.

[00:06:56.14] - Speaker 1
We're going to go into earnings. So when you look at Apple, an example, most traders do one of two things. Before earnings they either buy, call or put and when volatility is very high and they lose when volatility goes down. So we normally have the concept of IV Rush and IV crush and we're going to have an event on Monday next week to talk about that, talk about earnings. So stay tuned there.

[00:07:23.13] - Speaker 1
Another mistake that traders do is they sell naked options. So this is also very risky. So always never naked option carry a lot of risk. So be cautious when you do that. So let's imagine that you now open your mentoky dashboard and you see a steep volatility surface that shows that IV is overpriced.

[00:07:48.14] - Speaker 1
Gamma is positioned at around key levels so there's a really strong probability of a pinning effect there. And obviously the flaws are dampening the moves. So instead of gambling, you actually structure a smarter play which is looking at credit spreads. You are looking to capture an expensive premium with controlled risk, right? So you're now trading with the data, you're not just betting or gambling on the outcome.

[00:08:17.10] - Speaker 1
So the message really to for option traders, for our users that are trading options, you as a buyer, if you're looking to buy, you need to look at stop overpaying for premium, especially if you see a fragile setup. If you are a seller you need to start understanding the volatility risk so we can provide you with the tools to do that. So with mentor queue you can actually look at when implied volatility is cheap enough to buy, when is dangerous to sell and how to align that with your strategy based on flow. So options are not just about direction, they're about positioning flow and volatility. And we're going to show you how we can give you some an edge on that.

[00:09:02.02] - Speaker 1
But before we do that, let's go back to the basics. Right, so this is really in the basic theory of options trading. You want to sell option when volatility is high and you want to buy option when volatility is low. Right? You're going to have the more probability of success if you do this.

[00:09:19.20] - Speaker 1
Because if you are buying option when volatility is high, it doesn't matter about the direction. Your premium probably will lose because of the concept of theta decay and IV crush. So to do that you could actually use a simple indicator that we also provide which is the IV rank. So when the IV rank of a Stock is between 70 and 100, that means that the premiums are pretty high compared to the past one year. So option selling strategies with more risk are better in this scenario, when the IV rank is from 50 to 70, then maybe you want to start considering lower risk strategies.

[00:09:58.23] - Speaker 1
And when the IV rank is very low, then selling options is risky because again the risk is that volatility will increase faster. So again, this is very, very short checklist. This is one indicator. We're also going to look at our VRP model. So please guys, send me any question.

[00:10:14.28] - Speaker 1
I'm going to go into the dashboard now in a second.

[00:10:53.06] - Speaker 1
All right, so the first thing we want to do is when we, when we analyze options or trade on options, we want to look at different things. So we're going to use Tesla as an example. So the first thing we do is we look at the Q score, right? And this, whether you're selling premium or buying premium, you also want to understand what's the best outcome. Is buying a put a good, a good outcome now with Tesla or is buying a call a better outcome with Tesla?

[00:11:23.24] - Speaker 1
So we see that again we are in a positive game environment. So like calmer environment on, on, on, on the daily trade. So the moves are less volatile. We have a very high option score. So we are at the top.

[00:11:38.18] - Speaker 1
So we are in a very, very bullish bias and we are in a very and also seasonality is pretty, is pretty high. The volatility score is still neutral. So we're not in a calm or we're not in a high volatile environment just yet coming from the score. But now we're going to look at other, other tools that you can use for that. Then we move into the Net GAM exposure chart, you want to look at positioning across all expirations as well as positioning across the weekly expiration.

[00:12:08.24] - Speaker 1
So especially if you are doing shorter term trades. And we can see that we don't really have a lot of negative positioning to the downside here. We have our put support at 250 and we have a strong core resistance at 450. But we also have a very big jax level around 400. Yeah.

[00:12:28.06] - Speaker 1
Right. So those could be your levels for that. Then we also want to go and look at our swing trading model. Right. So the swing trading model, again we are in a bullish bias.

[00:12:40.29] - Speaker 1
Right. And we are, we are. We have a lower band at 384 and we have a risk trigger of 458. So those levels could actually become your levels for your strike price, for a spread or for selling options if you are thinking that is the right strategy for you. So you can see the back testing.

[00:13:01.16] - Speaker 1
You can see that over the past 119 days if you were to sell premium below the lower band level you would have been right on 88% of the cases. If you sell above the risk trigger again, the risk trigger was respected on 74% of the cases over the past 119 days. So that's very, very important. But now let's actually go and look at volatility and we're going to start from this section of the dashboard which is our VOL models here. Right.

[00:13:34.06] - Speaker 1
So we're going to start from here. We're going to go do some example on gold and silver and some other asset. So the first model, this was released last week but it's very, very important is our cross asset volatility tracker. So what this does is comparing today's historical and implied volatility versus the three months historical and implied volatility percentile to understand if volatility today is higher compared to its history or it's lower compared to its history. So from here what we can already see, we're going to focus on silver and gold where we are seeing that gld, implied volatility and historical volatility are had the highest percentile here.

[00:14:18.07] - Speaker 1
Right. So, so here we see that, you know, the implied volatility of GLD is actually at the highest it has been over the past three months. Okay. And then you can also look at other asset like QQQ and you can see how these are positioned in the quantum. Then we can look at for example the volatility risk premium.

[00:14:37.18] - Speaker 1
So we can also see that the volatility risk Premium of GLD over the past year is actually almost at the 100 percentile range. So the volatility risk premium for gold is actually, or GLD is actually very high. Right. So now what we can do is we can go back to our dashboard and let's actually go into gld.

[00:15:04.02] - Speaker 1
All right, so GLD again, we look at the Q score, we're in a bullish bias. We look at the momentum bullish bias, and then we can look at the new VRP model on gld. So what this is telling me is that we are at the 98th percentile over the past three months. We were at the 93% percentile over the past year. So we are now almost at the highest level of risk premium compared to the past.

[00:15:34.29] - Speaker 1
The risk premium is essentially the difference between the implied volatility versus historical volatility. But just by knowing the difference without context is not useful. So this model tells you how is the risk premium today compared to the past. So you're now seeing that you are in an overvalued IV stage. So you might think, okay, it's probably a good time to sell options.

[00:15:57.23] - Speaker 1
Right? But before we go into that, let's go over all the different models. So you actually have our swing model here. So you have 331 and 347. But again, selling options alone could be also dangerous because we are looking at an asset that is a whole time high and there's been a lot of activity recently.

[00:16:18.14] - Speaker 1
If we look, for example, at the term structure, you see something very, very interesting that you didn't capture from the previous model. So you can see that the green line is a term structure from today, and the other lines are the term structure from yesterday, five days ago, and one month ago. So look, look at the structure of the term structure for gld. We're seeing a higher volatility in the shorter maturities compared to the longer maturities. And we also have seen a shift in the curve from a month ago.

[00:16:52.25] - Speaker 1
So from a month ago we were in a different structure. Now we are seeing like a completely different structure. We are now pricing higher volatility on the shorter term maturity compared to the previous one. So that means that the market is actually expecting a stronger move on GLD in the near future compared to the, to the tail, tail end of the curve. So again, that could actually put you in perspective and see, okay, maybe I want to sell options on gld, but I need to be cautious because the market is also pricing a stronger move in the shorter term.

[00:17:29.00] - Speaker 1
Right?

[00:17:35.12] - Speaker 1
All right. So this is really using, you know, a bottom up approach. So I start from an asset and I do the analysis. But with the, with our screeners we can also use a top down approach. So we can actually use our screeners to potentially find trade ideas for option plays.

[00:17:53.14] - Speaker 1
So you can go on our Q score screeners and you could actually go on for example our highest volatility score here so you can see which of the assets have the highest volatility score. So here we have Costco, we have Goldman Sachs, we have Coconut Phillips, Pfizer, etc so they have an option score, a volatility score of 4. You could also do the opposite and you could actually look for low volatility score or you could actually look for changes in volatility score. So who has seen the highest volatility score increase over the past day? So again Pfizer AT&T and so on.

[00:18:38.18] - Speaker 1
So this can give you some really interesting idea. Within the options screener you also have our volatility screener so you could actually look at high IV rank, low IV rank and again formulate ideas based on this course right here and then use it for your trading.