How to Price Options and find opportunities

[00:00:25.21] - Speaker 1
Foreign.

[00:00:40.20] - Speaker 2
Welcome back and happy New Year to you Ryan. We are back on our volatility corner. Very excited. This is the first session for the year and I think there's a lot of interesting things we're going to talk about today. But welcome back.

[00:01:00.10] - Speaker 1
Thank you. Thanks for having me. Good to be back. Hope everyone had good holidays and your trading is off to a great start in 2026. Today we're gonna start by doing our, our standard kind of market roundup market review of implied volatility markets. Then we're going to talk about a few different trading strategies and we're going to really try to break down into the, you know, the nitty gritty details like just the most basic stuff right so we can think about. You know I think the biggest challenge still is for some of our listeners is just getting over the hump how to trade an option. What are the basic mechanics, what, what's going out the door, what's coming back, how do I generate returns. So that's kind of be our next step and we'll talk about a few fun advanced strategies at the end. So to start with, let's get this, we're just going to do our quick review once again. You know I, I highly recommend getting all these pages set up with some of your favorites. I always like to start with the S P and the QS then you know golden. You know Nvidia are now my other kind of go to's to check Nvidia just because it's driving such a big percentage of the market, you know, you know really all the Mag 7.

[00:02:15.02] - Speaker 1
You could justify having any of the Mag 7 but I feel like Nvidia has been a pretty good proxy for a lot of these, you know, a lot of these companies. It's become, I think last I checked it was something like 33 of the S P is now encapsulated with just a few, with a few mega cap tech stocks. So we've got to know what they're doing if we're going to have a view on the broader market. And then yeah, like I said, you know gold is important to check. Right now it's been have an amazing like kind of 12 month run. So without any further ado we'll get into it. So we'll first start with spx. You know these are kind of the main screens that I'm using right now. My volatility risk premiums always my favorite for screening out kind of what we should be looking at in the first place and, and making sure that we're kind of on the right side of things, and I'll review how we use that. I'm sure people have gotten a little rusty over the holidays. Then. I like to check the option score and. But the biggest one for me is always the term structure.

[00:03:21.25] - Speaker 1
I love this ball surface 2D. When we are ready to really drill down and think about what strikes to trade, and then the key levels and swing model as well. When we're really trying to, like I said, thinking about those, those strikes, how we want to position our trade, both our potential exposure and our potential gain. So these key levels to me are the, the most important part, and I've said this a lot for any of our regular listeners, but, you know, as a trader, the single biggest mistake that I see your kind of average retail trader make is the. They talk about gains and losses, you know, kind of in dollars, in, you know, in a kind of generic terms like, oh, yeah, you know, I made, I made a thousand dollars on this trade, or I made a 77 return on this, on this trade. But usually they're getting that right off their brokerage site, right? And that's just 77 is just, you know, where they bought it and where they sold it or, you know, a return on the, on a premium. And those, if they're trading an option. And it's very important that we think about our return based on how much money we were risking.

[00:04:34.14] - Speaker 1
So rather than just saying, I made a thousand dollars or I made this, really to even begin to do a good trade, you have to start with saying, how many dollars am I putting at risk on this trade? And then what am I hoping to make? And if I'm successful, then taking how much you make and dividing that by how much you were putting at risk, that's your true return. Because when you use options, you use leverage, which means you're borrowing money, you know, to trade. Whether you realize that or not, you can also use leverage just on futures or even on regular stocks. You can buy or sell stocks on leverage, but in options, you always are. You always have leverage. And the reason for that is because, you know, you can end up buying or being short the underlying, but you only have to pay or receive a little bit of money, the premium to do that, right? And so you could be put into a much bigger risk position, but when you trade the option premium, your only exposure is that premium. And then what it costs to buy it back if you want to get out of the position until it's exercised.

[00:05:37.00] - Speaker 1
At that point, suddenly it becomes a much Bigger risk position in terms of dollars. But really the right way to think of it is, you know, you were always at risk for those dollars. So let's like walk through a quick example, right? If you're in Spy and you sell or you know, if you sell an SPX put, let's say that you're looking at these key levels here or you know, you go look at your five day swing model, you decide, hey, this is bearish. So I'm actually going to sell a call, I want to sell a call option at, you know, 70, 50, because I don't think we're getting above there. So if you just sell that call, you're going to collect premium, right? And then you're, and then, you know, if nothing happens, it almost feels like infinite return, right, because you made money and you didn't have to put much capital at all. But of course that's not really how it works because if the market were to rally, you're going to end up being short SPX here. And so you're going to be on the hook for that. And so, and vice versa, if you sold put here, you're going to have to, and you get, get assigned, if it goes below 6,800, you're going to have to come up with $6,800 a share, you know, to buy those securities.

[00:06:51.25] - Speaker 1
So there's always some capital involved. So we really want to define how much capital we're putting at risk and we want to think about how much we can make or lose based off of that. And before I jump back into it, I just want to give everybody a quick couple of quick reminders. So the, and the first one is of course, if you have questions, please throw them in the chat. We're always happy to answer question questions and if you have very specific questions or trade ideas you'd like us to discuss or analyze, you can always email those and Fabio will flash the email there for you hopefully. But you can always email us and you know, just throw in the subject line volatility corner or volatility with riot and what you'd like us to talk about. And so then the second thing I want to remind everybody is use call spreads and put spreads because they make the math way simpler. It's very difficult for any trader. Even the most senior traders have, you know, the most experienced traders have a difficult time thinking, okay, when I sell a call option, how much can I lose?

[00:07:58.10] - Speaker 1
I mean, in theory the market can go to infinity, but that's not a very useful risk measure. So we have to think about how much we could lose. And then you have to bring in some, some sort of model. Like you have to do some sort of stress test or what we use it at big, kind of big banks and hedge funds. Is, is var, which we call value at risk. And we're literally stressing the market, say for a 99th percentile, move to the up or downside and you can use tests like that. But probably a lot of you, your, your eyes are rolling back in your head and you're going, wow, this sounds really boring. You know, why would I like, why do I want to. I'm not going to try to keep a VAR model and think about what a 99th percentile 3 standard deviation move is. I agree with you. You shouldn't. So how can you cheat and basically have the same kind of risk control as the pros? Simple. Sell a call spread. If you sell a call spread or buy a put spread, how much are you risking? It's very simple.

[00:08:58.07] - Speaker 1
You're risking exactly the amount of the width of the spread minus however much premium you got. So if you sell a call spread, I'll just get a quick example for you on Spy. So if we, if we were to. So if you were to buy the. Well, this is expiring tomorrow. Let me get next week. So if we were to look at the next week's the weekly put spread on Spy, it's currently trading at about 33 cents for a $1 wide put spread. So the 694. 693 put spread. Right? So that's a very tight put spread. Usually you won't trade them that tight, but this, this helps us do some basic math, right? So if you buy the 694 put and sell the 693 put, obviously the 693 put's gonna be worth less. Cause it's further from the money. The 694 is worth about two and a quarter a share and the 693 is worth about a buck, a little over buck 90. So the net is about 33 cents. So we can do some very handy math there. And we can basically say, all right, if, you know, if my risk is $1, right, because I'm buying a 694 put and I'm selling a 693 put.

[00:10:22.17] - Speaker 1
So the most I can lose is $1. Because my. Or, sorry, the most I can make is $1 if I'm buying the put spread. If I'm selling, the same put spread will be the exact Opposite. So if you buy it, the most you can make is a dollar because that 693 put you sold will start losing money as fast as the put that you bought. Once we go below 693 and vice versa. If you sell the 694 and buy the 693, you'll start making money or, sorry, you'll start making money on the one that you sold the 690. On the one that you bought on the 693 as fast as the one that you sold the 694. That's confusing. I recommend just pulling up a quick Google explainer on put spreads and call spreads again to remind you. But the simple thing to remember is your maximum risk or your maximum gain on the put spread or call spread is always the width of the spread. So if we're talking about buying the 694,693put spread on spy, what is our potential gain? It's $1. That's going to cost us 33 cents.

[00:11:29.14] - Speaker 2
Brian, sorry to interrupt you. Are you sharing something else? Because we can see the swing model here.

[00:11:34.08] - Speaker 1
Oh, I'm not sure if I have a good way to share quotes on the screen, so I just wanted to kind of talk through one. But here I can pull up Excel real fast and we can kind of just write these numbers down so that everybody can see them. That's a great call out. Thank you, Fabio. So if we go spy here, let me zoom in so everyone can see 694 put, 693 put. So our strike 694, 693. So and then the premium for these right now is roughly 2.25 and 1.92. I am not fluent in Trading View. Good question. I need to get better at Trading View. I'm not sure about getting options quotes, but I will get up to speed. So we can start using Trading View. But you're welcome to follow along and I'll spell it out real slow so that you can, you know, put these prices into whatever. Especially because a lot of folks, you know, use different brokers or whatever to execute their strategies. So the basic idea of this strategy, right. Is, and this is why I was saying call spreads and put spreads dramatically simplify your risk measures.

[00:13:09.17] - Speaker 1
Right. So if you. So if you were to say, buy this put, you pay $2 and 25 cents, but you have no idea how much you could possibly make. I guess you could make $694 if you're going to zero, but that's not Very realistic. Right. And so you have to kind of think about, you kind of have to think about like where could it go. But if you buy this and sell this, your risk is exactly $1. So you're risking $1 because you'd make a dollar as we go below 693. And what are you going to pay for that? Well, you're going to buy this one. So we're going to buy this and sell this. So we're going to pay 225 and we're going to receive 192 which is going to give us a net premium of this. So we can make $1 and we're paying 33 cents for that. Right. So what's the percentage? You know, what's the probability to be, the market's telling us the probability that we go below 693 by next week, it's 33%. Very straightforward, right? Very simple math. Just 0.33 over 1 is 33. It's 0.33, of course, but you could do the same math, you know, if you were buying say a 690 put SP, we have to go, it'd be suddenly a four dollar wide put spread.

[00:14:40.15] - Speaker 1
But the premium is going to be different. I can, we can check that. So let's say we do the 690. So if we do the 690 this, we're only going to collect 1.07, so 1.18. So now you can see, let me put this in percentage form for you. So what you can see here is that the market's telling us that There's a roughly 29 and a half 30% chance that we'll finish next week below 690 on the S P. So and again these, these are approximations. But I love this because we took something that was very, very vague. How much money can I make or lose when I buy a call or sell a put or whichever? And we've turned it into very precise numbers just by using this trick of buying one and selling another. So we, we created a capped exposure. In this case, we're buying the right to make $4. And if the market goes up, then we're gonna, then you know, we're gonna lose the whole thing. Right? We're gonna lose in this case a $18. If it goes down to 690, we're going to make $4. And you know, we're paying 29 and a half percent for the right to do that.

[00:16:01.28] - Speaker 1
So we're actually going to net on net, we're going to make 4 minus 118. So we're going to make $2.82. So when would you do this trade should be pretty straightforward, right? If you think that there's more than a 30% chance of us going below 690, then this trade's a pretty good deal, right? If you think there's a 50% chance of this happening, then you would expect this put spread to be worth how much? $2. You'd expect this to cost $2. If you think there's a 50% chance we'll be below 690 next week. So if you think that's the case, if you're looking at your model, if you're looking and saying, hey, you know, this is, this is bearish right now, you know, if I'm looking at the swing and I'm seeing that we're kind of bearish, we're bumping up against the top of the range, whichever technical model you like to use. If you think there's at least a 50% chance we're going to be at 690, then I don't want to say this is free money. But the idea is that you have a positive expected value because you think this is worth two bucks, you're only paying a buck 18.

[00:17:05.03] - Speaker 1
So on average you'd expect to make, you know, 80. 80 cents, call it. And if you make 80 cents on average, then you know, what's your return on a dollar? It's pretty darn good, right? Sorry, this is on $4. Oh, actually it's on your premium. It's on your premium. Sorry. So you know, if you're making 80 cents on a $18, that's going to be an 80%, 70 something percent return. So you can make a 70% return every time you get it right now obviously you're going to lose probably half of them. You're going to win half of them. But even if that's the case, you're still going to end up with a pretty high return, something like a 35 return. And maybe on another call on another stream, we could try to walk through the exact math and I'll do some, some pre work and we'll calculate exactly what the return on a strategy like this would be. But today I just want to give everyone a quick reminder because I talk so much about, you know, how much money you're risking and, and how much you can gain. And again, I just wanted to clarify that we're gonna, I think we're gonna start real, really straightforward and basic.

[00:18:22.00] - Speaker 1
We Just always think about put spreads and call spreads. And if you make it a dollar wide, you know, that's always the easiest way. It makes the math just really fall out right there. So if we again, the dollar wide put spread is. 180, It's about 33 cents. And everything I just said works in the exact opposite. Right. So if you're bullish and you want to sell this put spread. Sorry. So if you sell and buy, nothing exactly changes. I mean it's just in this case you're going to receive 33 cents and your risk is now 1 $1. Right. So, so you're getting paid 33 return on your cash. So if you, if you outlay a do every dollar you put at risk in this strategy, if the market goes up, you'll get a 33% return and. Great. I just got a question. Is there, do we give one on one coaching on this? The answer is absolutely. You can email Fabio. We do offer private courses and training and I'm always happy to help with that. You know, it's something we're very interested in doing, I think or last time we checked. So please reach out to us if you're interested in learning more about, you know, more courses.

[00:19:52.23] - Speaker 1
So yeah, so you know, again, it's the exact inverse. When you buy a put spread versus sell it, it's just a question of how much you can make versus how much you can lose. So if you buy the dollar wide put spread, you can make $1. If you sell the dollar wide put spread, you can lose $1. If you buy the put spread, you pay the premium. If you sell the put spread, you receive the premium. Right? So in this example, you're gonna make 33% every week that the, you know, that the market, that the market goes up. And so if you think the market's gonna go up most of the time you'll end up with a pretty good return. Even if it only goes up half the time, you'll do all right here. Right. So yeah. So anyhow, so that's kind of the basics of the put spread call spread. And so now we'll kind of go back to our kind of walkthrough and, and seeing what the ball markets are telling us about the, the market. So spx. So we talked about this throughout the course of last year. When Vol gets this cheap, boy, it's.

[00:21:05.10] - Speaker 1
I would really want to, I'd really want to be buying volatility here. You'd be real careful. All my Vol sellers out there, you know, we've talked about this a lot before. I talked about, don't be, you know, you want. Most of us are, are bears or bulls or, you know, we like to sell options, we like to buy options. The best traders can kind of swing back and forth and, and, and buy and sell or you know, pay and receive premium depending on what the market tells us to do. That's hard to do. We tend to all at least have a bias. And so if your bias is selling volatility, be really careful right now. Right? Be really careful. You know, I'm looking at SPX here and seeing 10 volatility, that's about as low as we go. You can get into single digits. I never say never. It can definitely happen. But that is just, it's, it's rarely sustainable.

[00:21:58.28] - Speaker 2
Ryan, sorry to interrupt you. Like, I think one of the key things here, like maybe you want to explain how we can read this chart.

[00:22:06.09] - Speaker 1
Oh yeah.

[00:22:06.27] - Speaker 2
For those who are not familiar with it.

[00:22:09.08] - Speaker 1
Yeah, absolutely. So this chart tells us what the implied volatility is. And that's the, and the implied volatility for those who aren't familiar, that's what, that's kind of the key input that drives option prices. As a reminder for those who are rusty, there are three key drivers of option prices. The first one is how close or in the money is it? So obviously the, and the easy way to remember this is if you tell yourself what makes an option more valuable. If it's closer to the money or even in the money, that's going to make it more valuable. How much time do we have to get a chance for it to go in the money and then how volatile is the underlying? So how much of a chance do I have for it to move? A lot in my favorite. Because if you're buying an option right, you want maximum movement. You don't even actually care. It turns out if it's away from you, you just want, you know, the math behind options. You don't have to worry about the complicated math. But we assume kind of normal distributions going back to your kind of high school math.

[00:23:06.02] - Speaker 1
And we, and so we assume that if something's more volatile, it's as likely to go up as it is to go down. You know, maybe it's a log normal or whatever, but we won't worry about those details today. The key is more volatility is good for options holders. So those are the three key drivers being closer to the money. The actual, which is the actual underlying price of the option, how close your strike is, how much time to expiry and how, and how volatile the underlying is. What this tells us is how much volatility the market is implying based on what people are willing to pay for options right now. And this is a really useful chart because even if you don't trade options, you can just, you can just do basic risk management. You can just kind of have a sense of what's going on in the macro economy based off of looking at a chart like this. So what this tells you is that first off, if you can look at a long term history of the VIX and let me see, I can probably, I can almost certainly get that right away.

[00:24:16.08] - Speaker 1
Yeah. So if we look at a long term history of the vix. So you can kind of see where the VIX has gone historically. So it kind of ranges between about 10% and when there's a panic you can get up as high as 80%. Right. So that just gives you a quick idea of what volatility can be in the market. So now we're looking at this term structure for the same thing. Vix's volatility for the S P. And so where are we? 10 to 14 and where did that chart range go? 10 to 80. So you can see that we're at the absolute bottom end of the range. But that being said, it spends a lot more time near the bottom and it only very rarely spikes. So that's the trade off. It's not a symmetrical thing. But what this tells you, if you're reading, if you're trying to read the tea leaves about the market doesn't tell you what will happen. But what traders are currently expecting is that realized volatility will be historically low. We're just not going to get a big move. Right. And this number is the expected annualized one standard deviation move.

[00:25:33.18] - Speaker 1
Or said another way, if we were to look at the 365 day option, so the one year option and it's trading at 15%, it's saying that you know the kind of expected move, the $0.01 expected one standard deviation move for the stock market over the next year would be 15. Now of course these are much more short dated and there's a little math you have to do behind it. I'm gonna, for anybody who's kind of watching writing this down. I'll give you the number here. Let me get this. So. See square root of 250. Yeah. 15.8 all. Yeah. So basically you can take the amount of, so you can figure out the daily expected move by dividing by the square root of 250. So oops. So if the market's implying, call it 11 volatility for kind of short dated, then we take 11% of the. The square root of 250 is about 15.8. So that means that the market's implying so 11 of let's see, SPX is trading. We'll just use spy and say 6 94. 694. So 11 of 694. Do some simple math. So if we want to take 11% volatility, price is 694.

[00:27:34.06] - Speaker 1
Time adjustment equals the square root of 252. That's the number of trading days in a year. So what we can do is we can take this times this, this is the annual move. So what this is telling you is that over the next year the market, if we have 11 volatility, you'd expect the market to move about $76 up or down. So we would be likely to be at either. Somewhere. So we'd expect to finish somewhere between 770 and 617. That's kind of the expected range over the next one year. And then so that's over the next one year. But what about over the next day? So we can take this implied annual move and that's going to be equal to this divided by 15.875, about 4 bucks a day. $4.8 a day is the expected move on spy. So again, maybe that's a little more math than you care for. But the key here, the key thing to realize is what this number is fundamentally telling us is how much the market's expected to move, whether that's over a day or over a year. But these, but implied volatility is always presented in annualized terms, always in annualized terms.

[00:29:19.17] - Speaker 1
So it tells you, you know, how much you'd expect to move over a year. But you can always convert it to a daily move. So you could take the long term move. You know, if you're looking out at a one year option, you could convert it to a daily, or you can look at a zero DTE and convert it to daily using the math I just gave, which is basically you figure out the annual move and divide by 15.8. Okay, so what this number tells us is so, so that's what the implied volatility means on the left hand side. Then this tells us how long the options are, how much time there is to expiry for different options. So we'd be looking at the same strike option saying at the money call in this example for spx and you know, maybe the short dated zero te that's zero dte is going to be a little more expensive in volatility terms. Why? Because people are always nervous about what can happen in a single day. And so you tend to see a little bit of a premium for those zero dtes, which is why so many people like to sell them.

[00:30:23.07] - Speaker 1
They're also good though for managing your risk if you just need to buy protection for a day, but then it immediately comes down and then slowly slopes up. The professional term for this is contango, when something is sloping up higher. But the key here is that what this is really telling you is that the market just doesn't see anything to drive movement. Right now there's very little actual realized volatility in spy. I think we said that the expected move was like four bucks a day. We, we are moving 3.97. We're up today. And if you look at over the last five days, we've kind of just barely been making that. And so usually what's happening in this sort of scenario when we get contango in this curve, meaning when we have very low volatility that slowly works its way up, that's really traders telling you that right now it's not moving, but they don't think that's going to continue. At some point something's got to give. At some point there's got to be some news, some exogenous factors, some fear that comes into the market and drives volatility a little higher. So what people are saying is like, I don't want to own volatility now, but I'd sure like to own it later, you know.

[00:31:38.16] - Speaker 1
And so, so the traders are trying to kind of get short or get out of as much short term volatility as they can. And they're kind of moving back further out on the curve so that they can be protected against the fact that eventually something's got to give. We saw that chart on Vix, right 10 to 80. We're right here at the baseline. They're saying you might get about as little volatility as you can hope for over the next couple of weeks. But at some point something's gotta give. But notice, but just so you're aware, even 14% is still awfully cheap for long term volatility. So again, to my volatility sellers out there, those of you option sellers, be really careful. Your risk reward is much worse than when volatility is much higher. So you really wanna be cautious with selling Volatility scale down, reduce your risk, or at the very least make sure to buy, you know, to make it a spread you can, you know, sell. If you're selling calls, sell a call and buy another call above it. If you're selling put, sell a put, buy another, put below it to protect yourself.

[00:32:39.27] - Speaker 1
You could even if you're interested in volatility, we talked about this on one call last week. You could sell an Ethan Money option and use it to finance two options or even three. We call this like the one by two call spread or the one by three call spread. And that'll actually, if we get a huge move, you can start to make money without paying any premium. So there's some pretty interesting strategies as we get more advanced to take advantage of low volatility without shelling out a lot of premium. But yeah, fundamentally that's what this is telling us. Yeah, no, I totally agree. I'm seeing some of the comments. I mean, it is, it's definitely the time to be buying. The challenge is just how much money can you bleed buying options? You know, that's, that's always the challenge for every professional trader. You can almost know something's coming. But you know, betting on that means paying out premium and then that can really drain your bankroll while you wait for it to happen. And sometimes people just get kind of stopped out because they bleed too much in option premium. So I got this question, so would it be a good time to buy options since volatility is low?

[00:33:42.27] - Speaker 1
In another saying, you know, let's buy puts it, I would say if you are an option, you know, I think it's hard to say just go out and buy options. Right, because, and buying options is always tougher than selling options, in my opinion. And the reason for that is because, you know, you buy an asset, but sometimes you buy it with low volatility, but it just goes the other direction. So what if you buy a call and then the market goes down? What if it goes down a lot? I mean, you were right about the volatility, but you know, but you got the market direction wrong. So one way we can deal with that is to buy a straddle. Another way is we can delta hedge, so you can buy a call and then sell some of the underlying. So there's a few different ways to do it. So. But generally, yes, you want, I would say when ball is this cheap, you generally want to be long volatility. But more importantly, I think because most people don't just if you're not familiar with Buying options, you shouldn't just run out and buy options tomorrow.

[00:34:42.04] - Speaker 1
I think more importantly, you need to adjust your current strategy to consider that volatility is cheap. So if you're, if you're an option seller, you should reduce your risk or try to limit your risk by say buying back that outer strike or just reduce the amount that you're doing. If you normally sell 10 contracts, maybe sell five and then wait and wait for a spike involved to sell the, the next five, things like that. So just good basic risk management principles. If you're an option buyer, though, the opposite is true. I would be starting to ramp up, you know, like whatever you're. If you've been, you know, if, when, when volatility was high back last spring, you were only buying a couple options at a time or you were out of the market, now's the time to start buying for sure if that's already fits your strategy. But again, you need to think about what your strategy is. And usually for professional traders, we're never just buying or just selling. It's usually some sort of combination call spreads and put spreads, but also thinking about more relative value. And I'll talk through really quickly here at the end a couple of those relative value strategies that you can do real quick.

[00:35:54.05] - Speaker 1
I just want to remind you of something. If you are interested in buying options. Oops, That's weird. Sorry, just having a quick moment of technical difficulty.

[00:36:15.17] - Speaker 2
You want to refresh maybe, right?

[00:36:18.16] - Speaker 1
Yeah, it's weird. How do I hard refresh? I can't get it out of full screen here. There we go. Okay, quick reminder about theta decay. So this is the chart for your option expiry. Oops, here it is. This is how options decay. So you can see that at the beginning of an option like from 75 days. If you buy an option that has 75 days to expiry between 75 days and 60 days. So over the first 15 days you own it, it is not going to lose a ton of value. All else equal, if the market underlying market price doesn't move a ton or volatility doesn't change a lot, it is not going to lose a lot of value. And same from 60 to 45. But then as you start to get to 30, 15 and 0, that volume comes pouring out of it and it very rapidly approaches zero if it's out of the money. And so the thing that I want to emphasize to people is, and I've said this on all my volatility corners when we talk about buying options. But the biggest mistake That I see from rookie traders is that they buy the cheapest option rather than the option that's going to hold its value.

[00:37:36.16] - Speaker 1
When you buy very cheap options, very short dated options, the issue is that a lot of times they're just going to expire worthless and that value's gone right away. Even if volatility spikes, if you don't get the direction right or it doesn't get in the money for you right away, it's too late. Whereas if we buy a 60 day option, it's going to cost much more premium. But what you'll find is if 15 days go by and volatility spikes, even if the market itself hasn't moved that much, you can still make a lot of money. So a lot of the strategies that I like to do involve selling shorter dated options and buying longer dated options. Those are a lot of the most common kind of professional trading strategies is selling the short end of the curve and buying the long end. So I might do what we call a diagonal put spread where I sell a short dated put because I have a bullish view on a stock or just because I like volatility, selling volatility at those levels and then I go out and buy a long dated out of the money put to protect myself and I end up net paying premium.

[00:38:38.13] - Speaker 1
So this is actually a trade we're doing right now is we'll look at something like Nvidia. You can sell a weekly option for between a dollar and $2 if you sell a weekly close to the money option. Buying an out of the money put, you know, costs about, call it eight bucks for a year of protection. So you know, I buy that out of the money put for about 8 bucks. I make about a buck, buck 50 a week. So you know, if I only do that a few times, I'm actually losing money. Right. It's all risk, no reward. But after about five, six weeks of doing that strategy, I've paid for my protection and now my whole risk is just, is, is tapped. I can only lose down to the put that I bought. And if the market keeps, if I keep repeating that strategy now, it's all kind of gravy. I have a fixed loss of maybe call it 30% of, of, of the price, which on Nvidia like 185, call it 185 times 0.3. So maybe I'm risking 55 bucks, but I make 2 bucks, you know, a buck 50 a week for the, for the next 46 weeks in the year.

[00:39:50.02] - Speaker 1
So you know, so 46 times one and a half. You know, I can make about 70 bucks. So you have pretty high return potential with a strategy like that. But you have to be patient. You know, it's going to take, you're going to be losing money, you know, for the first month of its life before it plays out. And so that's kind of the one that I've been playing with and that I like a lot is, and, and I've, I'm new to doing on some of these high volatility stocks like Nvidia, but we've done that for years trading, you know, different futures and commodities, which was my original background. You know, we want to be long the long end of the curve and short the short end of the curve. Generally of course that's a little hard when the term structure is shaped this way. Ideally it would be shaped in backwardation, which is when the front is higher. And then you really like that position when you can sell the front and buy the back. But again, you know, everything, everything changes sometimes we take the exact opposite view. Right now you could justify taking the opposite view.

[00:40:50.13] - Speaker 1
You know, you could buy a bunch of, you could do a, buy a bunch of short dated options. If you think, I think something's going to happen, I think it's going to happen sooner rather than later. Then you could justify buying a bunch of, you know, a bunch of short dated options and you could sell a long dated option, make, try to make it volatility neutral if you're that sophisticated. But I won't go any more detail about those kind of complex spreads today. But just know that you can weight your spreads, you know that you can do ratios so that you're volatility neutral or volatility long or you know, whatever you want to do. You know, we've, we'll talk about that in future classes too when we talk about, you know, calculating the vega on your options and, and how to weight that. Okay, so we talked about a little bit about what the S and P looks like today. So again it's really boring right now. The market's telling us we're just not going to get that much move, maybe three, four bucks a day. We do think it's going higher. We do think it's going higher.

[00:41:50.18] - Speaker 1
It's going to probably pick up from 4 bucks a day to, let's see, 0.14 times 695 divided by 15.8 up to about 6 bucks. So the market's telling us longer term we'd expect it to move more like 6 bucks a day right now. You're lucky if you get four. You can see the market's pretty right, pretty accurate. We're up 3.97 today. And so, so that's basically what is, is going on here is we've just got for us, for us people who are long volatility, we got to survive for us for short volatility, we want to be careful to not take too much risk here and get run over when things go haywire, as inevitably they always eventually do. So that's, that's the quick roundup of S P. I'm not going to look at the key levels on this because we're not going to do a trade yet. But you know, now let's jump through and kind of quickly check the others. So usually S, P and Q's are pretty related except for the cues have a little more fall, you know, same deal here. So you see this kind of upward sloping, just a little bit higher level base.

[00:43:05.29] - Speaker 1
Rather than 10 to 14, we're going to 14 or 15 to 19. That's pretty typical about a 4 or 5 volatility premium for the queues. Gold's really interesting for those who have been following this over the last year. When we look at gold, you know, historically gold ball was, you know, closer to 14% and over the holidays look at that, we got back down to like 14. But we seem to have just leveled up a whole new level up into the 20s for goldfall, which is historically more around 15. We've just seen a resetting of volatility here short and long term. Doesn't really matter what the timeline is. The market's pretty consistent around 22% volatility. People know I've been talking about there's a potential opportunity. Still haven't traded, probably been a good thing. I'm not very bullish gold here just because of the size of the rally and I tend to be a contrarian trader but you know, but I've been staying out of it because you always want to be careful not to get run over in the initial momentum if you're going to take the other side of things. But I do think there's going to be an opportunity here with gold at 22 volatility.

[00:44:22.15] - Speaker 1
You know, some of the trades we'll be talking about this year are comparing gold versus the S P. You know, historically the S and P has much higher expected returns than gold. And so, you know, it seems inevitable to me that some sort of strategy of buying S P calls against selling gold calls should over the long run generate positive returns, especially if gold has much higher implied volatility. I mean this is a 12% premium or 10 premium. Call it over. S P volatility, you know, well, obviously it matters what gold realized volatility has been as well and we'll look at that next. But and last we'll check equity and then we'll kind of talk about realized versus implied. So, you know, Nvidia looks the same way, but much higher base. So if I'm an option seller, you know, I definitely feel better about these higher volatility stocks. And if I was looking at Nvidia, I'd probably stay away from selling these 0 to 30 days and probably try to focus on 40 days and out on the implied volatility spectrum. And usually when you see a spike like that, there's some expected earnings or something going on.

[00:45:42.27] - Speaker 1
So I haven't checked the Nvidia calendar yet, but I guess we're a little over a month away from earnings. Is that right?

[00:45:54.20] - Speaker 2
Yeah, they should start, you know, the tech company should start in a couple of weeks.

[00:45:58.22] - Speaker 1
So. Yeah, yep. So there you go. So that's what's happening is people are starting to say that's when, when Nvidia is really going to get frothy. That's when it's going to get interest. Cool. See here. Yeah. So, alrighty. So last thing is we've got about 10, 15 minutes. We talked a lot about implied volatility today, but we've got to talk about, you know, realized volatility of course as well, because implied volatility is only a piece of the puzzle. This is my favorite screener actually. Even before, you know, I kind of went backwards today. We always started with, we started with some of the main benchmarks, but if I'm trying to figure out a single stock or you know, an asset class to be looking at, this is where I love to start, this cross asset monitor. And this tells us something pretty interesting. It tells us the difference between the implied volatility and the realized volatility. So here, this is really interesting to me right now. I love this chart. This is one of my favorites. But I'm going to tell you right now I think it's pretty useless and I'll tell you exactly why.

[00:47:11.17] - Speaker 1
Because what this is telling us is that implied volatility is at a big premium over realized volatility for SPX and QQQ, which generally suggests a sale. Right. Most times, probably 7 out of 10 times when maybe even 9 out of 10 times when implied volatility is much higher than realized volatility. You think to yourself, sale, right, spx significantly higher volume. It's one of the tops. Not quite as crazy as xle, but one of the tops. But what's the problem with that? Realized volatility is so low. Implied volatility is also historically low. It's just that realized volatility is even lower. So personally I'd say this is one of those two out of 10 times, three out of 10 times when you just want to completely ignore this chart. This chart is utterly useless when, when you're trying to be contrarian and you feel like you're at an extreme. And so again I'm saying that kind of tongue in cheek because I love this chart. It's my, it's my main go to. And as a trader, comparing realized versus implied is the core of what we do as an option trader. But you just got to know as a trader that any, any tool can be helpful.

[00:48:27.24] - Speaker 1
But every now there's going to be those, those corner cases where it can really get you into trouble. And this is one of those. So if you looked at this and just said great, I'm going to sell the heck out of SPX and I don't want to sell gold because it's fairly valued, you would end up kind of trading what we'd call like you'd be a momentum trader if you did that right. You'd be basically saying I'm going to sell S and P volatility because right now the realized is super low and implied is still higher than we're realizing. And I'm gonna buy gold because it's pretty close. Implied and realized are really close. But what's interesting is gold volume is historically high, both realized and implied, which is why this number is about flat. Whereas SPX fall, the realized is, is ridiculously low and the implied is also fairly low. So you'd be selling low and buying high if you did that strategy. That doesn't mean it won't work, mind you. Short term momentum trading absolutely can work, right? Buying high and selling low. But you want to be careful with those strategies because when things flip, like when that short term kind of momentum based rally or decline, whether that's in flat price or volatility breaks, it can go very, very hard the other way.

[00:49:48.12] - Speaker 1
So if you're a momentum person or you have a very rules based model I said earlier, like if you're a rules based trader, this is when you want to just be you step up your risk management. So if you say I always sell the top percentile volatility risk premiums, so I'm going to sell everything above 80. And that's your strategy. I'd say fine, that's a good strategy. You'll probably make money over the long run doing that strategy. You might make quite a lot of money. But, and here's the big but, I would be, I would reduce my risk right now when absolute level of. You gotta, you gotta tie this against this. So when the absolute level of volatility is really low, you need to de risk this strategy. When the absolute level. Now if you get this same chart and the absolute level of implied volatility is high, sell away. That's your absolute best kind of best case scenario. Then you're getting paid a really healthy premium in absolute implied volatility terms. And it's a premium to realized volatility. So most option strategies are going to make a lot of sense that sell volatility.

[00:50:59.02] - Speaker 1
Yeah. And same thing goes with this. So if you're buying something cheap like xlp because hey, it's realizing more than implied. You just got to be careful. Is that because is implied really high and, and imply. And realize this also been even higher. And is that because we just had some sort of event like earnings or something event driven, that's not likely to persist. Because if absolute levels of volatility are high, stay away. But if you get to a scenario where it's both realizing and implied pretty low, just realizing, but realizing more, then that's a great buy. Right. Because you've got the ability to short term make money and if, and if things reverse, you can make even more. So again, this is, I love this chart. You just got to always kind of have perspective in the back of your mind. You got to look at this chart and then drill down. So you got to look at SPX and you got to get a, a history. And I do like the term structure but make sure to do a little more digging. You know, make sure that you get that you go back and get a little more history.

[00:52:02.29] - Speaker 1
Because right now these are still a little bit light on history. Like this is only going one month. But you really want to have perspective as a trader on what's happened over the last 10 years and what's happened in a major crisis. So that's kind of the roundup there. So we looked at, we looked at this and unfortunately I don't see a lot jumping out from our basic volatility screener or rather I see a lot jumping out. But as we just discussed. I'm real nervous about these things. I still like selling gold volatility here because it's pretty fairly priced. I think it's, you know, it's, it's only 3% over, but that means that, you know, it's only a little bit over that kind of 50% mark. But we also know that implied volatility for gold is pretty high if we've been following it. And so I think that's a pretty safe sale. If I'm a volatility seller, I'd be looking to stay away from the stock market entirely and looking at things like gold and other asset classes to try to diversify for that exact reason. Yeah, and so that's, you know, personally, like, that's kind of the kind of.

[00:53:13.11] - Speaker 1
My theme for the year is, and this has really been the theme for my fund for something called Capital, which I founded, you know, for the last couple of years is the market has been on, on a tear. We've never seen a rally really like this without any major pullback, any major bear market since 2008. How long can it last? But if you bet against that, you miss out. You can miss out on a lot of upside. So that's the big challenge for all of us as traders is how do we continue to participate as much as possible, but continue to manage that downside so we don't get carried out when it reverses. Because it was a similar deal leading up to 2008, 2007, when a lot of traders were making a lot of money. Everybody was showing off their new cars and how much money they were making day trading and buying houses and flipping houses. And it all came to a screeching halt very fast. And so, you know, so for all of my listeners and followers, that's what I want to encourage you is, you know, just be constantly thinking about risk management.

[00:54:12.08] - Speaker 1
How can I define how much I can lose on this trade? Remember, the easiest way to do that is a call spread or a foot spread. And by the way, for those of you who are primarily single stock traders or stock traders in general and not options traders, you're just dipping your toe. You're trying to understand what these volatility markets are telling us. And you can also define your risk better by using an option. You don't have to do trade put spreads and call spreads. If you buy an option and buy a put. So that was a great idea that we just heard earlier. Right. So I think it was black mamba trader put out there buy puts with this fall Here's a great way you could build a strategy, right? Let's, let's figure this out. So if the s and P1 year put, put. Let me figure out what that would be for you guys before we go. Well, actually, I don't know that we're gonna have time for that. But let me give you a quick example. You know, if the S P put, you know, one year output could be bought or put spread maybe could be fairly out of the money, could be bought for, call it 2, 3, 4% and you could get, and you think you can get a 15 return in the stock market or the mix of stocks that you're buying, you could look at buying that, that long dated put and then you're just gonna have to net that against your returns.

[00:55:38.13] - Speaker 1
Right? The stock markets return something like 17 a year annually over this bull market run. So the way you think about it is if you set out of the market holding cash saying I think the market's overpriced, you missed out on a serious amount of return. But maybe you're thinking to yourself, I want to get in, I want to participate, but I'm, I don't want to risk a 50 pullback if the crash finally comes. And it's definitely possible a 50 pullback. And so if that happens, how do I protect myself? Well, maybe you can buy a 20 out of the money put, right? And yeah, it costs you a couple percent, but, but you know, so instead of a 16 return annually, you make up 14 annual return. I'm not necessarily saying everyone should go do that strategy, but if you're afraid to get into the market, if, if for you it comes down to staying out of the market or getting in, then how. That's the way to take advantage of cheap volatility, right? Better to be in the market with some cheap protection than out of the market entirely. Because sitting in cash for too long, you know, over years just doesn't generate the long term historical returns to grow your portfolio and build wealth.

[00:56:49.13] - Speaker 1
So, so again, should everyone go out and buy stocks and buy puts? Not necessarily. But again, if you're on the sidelines or you're afraid, this is when you can use things like low volatility to your advantage. So yeah, that's kind of my. So that's kind of my quick rundown for today. Hope, welcome back. Hope everybody enjoyed it. I saw a lot of good questions. I love it. I couldn't get to all of them today, but I'll take a look. And if your question didn't get answered, please hit that email up info at mentorq. Com and we'll try to get it addressed in the next volatility corner.

[00:57:28.03] - Speaker 2
Awesome. Thank you, Ryan. And this was awesome. And thank you guys for watching and see you very soon.

[00:57:33.24] - Speaker 1
Thanks. All right.