Market Outlook by using Volatility

[00:00:00.07] - Speaker 1
Sam.

[00:00:42.05] - Speaker 2
Good morning everyone and welcome back to this third session for today. I'm back with Ryan. Very excited to have you here. This is going to be a very, very good session around volatility. Welcome Ryan and thanks for having me.

[00:00:55.06] - Speaker 1
Hello again. Welcome back everyone to Volatility Corner. Here we do our bi weekly roundup of the options markets and implied volatility. And you know what that can tell us not just for potential options trading strategies but also for giving us a look at what the market's expecting for short and medium term outlook for S P and, and the entire broader market. So today, you know, I'll jump right into it. So it's, unfortunately it's pretty boring for option sellers right now. We're looking at, you know, high prices, smooth sailing for markets. You know everyone, the news continues to talk about chaos but if you look at what the markets are telling us, they're telling us that you know, things are absolutely fine because seem to be completely discounting the trade war at this point in time. And they are, you know, more or less, you know, just everything is calm. You know, Treasuries are holding steady again. The kind of story about the bond vigilantes attacking the 10 year treasury yield seems to have subsided. And so again things are, things are smooth sailing right now. So how do we respond to that as options traders?

[00:02:15.21] - Speaker 1
You know here's my favorite chart to start with the, at the money term structure for the s and P500 and you can see that volume is just very low. I mean for, for some tenors we're looking at you know, 11% implied volatility. So you know, as I said like maybe it was six weeks ago, you know, for my friends who, with option selling strategies I would be very cautious right now. You know, I would, I would save my bullets, I would keep powder dry. What expression you like to use, you know, you want to be reducing risk from an option selling strategy. It is worth noting that I think the market's still concerned. It looks like some of the cheaper, some of the very short dated stuff is still getting decent pricing. So you know, you'll have to leave that to your own. You know, if you're, if you're a specialist, if you play in the kind of zero and just a couple day X freeze, you know, you'll want to, you want to use your own expertise there but it looks like there might still be opportunities there. But as soon as we get, you know, a week or more out, the implied volatility is really cheap.

[00:03:25.03] - Speaker 1
So you know, if anything I would want to be along implied volatility here. I would, would try any way that I can to avoid having any serious short exposure. So if you do sell options, you know, I'd suggest at the very least looking to say sell option spreads that'll give us some coverage that'll reduce your outright vega and it'll, you know, which again is a reminder Vegas are exposure to a move in the underlying market in the implied. Sorry in the implied volatility market. So if implied volatility goes up by 1%, do you make or lose money as opposed to delta which is our exposure to the underlying price moving. So you know, I would want all my strategies at the moment to be, you know, long volatility or at least volatility neutral here. So here we'll quickly walk through now again, there's, there's not a lot of changes from when we talked two weeks ago. It's just a little bit more extreme than it was. You know, we'll look at the queues real fast and you'll see the same story. It's a little higher than it was yesterday but, but very little, you know, very little implied volatility.

[00:04:38.13] - Speaker 1
Q is you're getting a little bit better long term volume. So if you were going to look to do, you know, sell options, I'd be looking a little further out on the curve. If you're a longer dated option seller, once you get out to 60 days, it's not quite as low, but you know, still awfully low. Sub 20 for a more volatile index. So then we'll look at the smile next and that kind of. So, you know, first we always like to start with the term structure. That helps us, you know, figure out, you know, kind of what the market's telling us short and long term about implied volatility. As I said here, they're just telling us volatility is slow. You know. One quick caveat, so one way that you could read this is that, you know, the market expects things to get more volatile in the future. Like current volatility is very low and then it gets higher and higher. But I don't think that's quite right, you know, sir, for everybody who's not familiar with trading things that have a quote unquote curve when we talk about term structure or a curve whether that's the implied volatility term structure or the term structure of, you know, of interest rates or, you know, particularly commodities, like if we look at crude oil or gold or corn, one of the things that we typically see is the Longer dated stuff, you know, the further out you go tends to be a little more stable, whereas the shorter dated stuff is, is more sensitive to prevailing market sentiment and what's going on.

[00:06:12.25] - Speaker 1
So I wouldn't necessarily read this as the market projecting that implied volatility is going to go up. Although it, you know, it could be, it could be that they're saying, hey, look, you know, I think it's going to be very quiet heading into summer. But I think what's more likely here is that we tend to see the front of the curve tends to be more extreme. So interest rate curves, volatility curves, they tend to kind of pivot with the back being the pivot point. And so it's very common that if you see a big rally in volatility, like we did back in several months ago, you start to see the curve going to what we call backwardation or an inversion. So you start to see implied volatility really pick up in the front and vice versa in the back. And that's, and that's really just telling us that there's mean reversion in markets. You know, there's, there's a few other things in the commodities markets that, that tells us, that actually helps us to, you know, ration demand. So for, so there's, it has a few added features. So for example, in the commodities market, if you see gold, can we get term structure on futures yet in the dashboard?

[00:07:21.19] - Speaker 2
Get the futures curve, not yet the top structure. So you can see the curve. Yeah, just refresh that maybe. And you might want to get, if you're looking at code, you might want to get the gc.

[00:07:45.08] - Speaker 1
And I was trying to pull up crude.

[00:07:52.14] - Speaker 2
Just use the future const. If you type clq or clu 2025.

[00:08:01.04] - Speaker 1
There we go. There we go. Yeah, so let's look at crude. So crude's a great example. And so, you know, I know a lot of people like to diversify their portfolios by looking at commodities. And right now is a great time, by the way. So if, for example, you know, you're not seeing a lot of interesting opportunities in the S and P, you're nervous because you feel like, hey, you know, the trade war is not priced in. I think it could drop. You know, prices could still fall and volatility could go up. But I don't, you know, I'm not quite there with buying options. You know, maybe take a look at commodities. Crude, crude and agriculture can offer some really interesting opportunities. Gold tends to be less volatile. The options market has a little less going on. But you know, crude market's pretty interesting right now because it just turned into a decent backwardation. So this backwardation. So let's talk about what that's doing. So this is the opposite of what we see in the implied volatility term structure for the S&P 500 right now. You see that things start very high and then slope down again.

[00:09:08.29] - Speaker 1
This is crude oil futures prices. So this has the added impact of rationing demand. And so what's really cool about evacuation in the commodities market is it actually sends a lot of signals. This is sort of economics 101 at work. So what this tells us is if you don't need crude oil right now, if you can wait, if you're willing to wait, you know, a year for your crude, you can save considerably. You know, you can save almost 10% on your crude oil purchases if you're, if you're able to defer, if you're able to defer your demand and so, and vice versa, vice versa, supply. So if you have available supply, if you have a ship that's ready to unload and you're able to get it into port and unload, you'll get a nice premium. Whereas if you're kind of taking your time delivering steadily from your well, you're not going to capture that same premium, you're going to get a discount. So why would the curve do that? Well, it doesn't want to incentivize too much overproduction long term. Because if the entire curve were to go to say $68, then a lot of marginal oil producers might say to themselves, well, okay, maybe drilling this new well wasn't worth it at 64 bucks, but at 68 bucks, I think it's worth it.

[00:10:32.28] - Speaker 1
Maybe it's worth it for OPEC nations to start to dial up some of their production if we pushed another four bucks higher long term. But those take capital investments, those kind of things. And so you want to see long term price appreciation. You don't want to do that. Just. And plus it'll take time before that increased oil flow starts. And so you wouldn't do that just to capture this short term backwardation. So what this is kind of telling us is, hey, we're not saying yet that we need permanent increase in oil supply. What we are saying though is that there's not enough oil in the market today at the delivery points where we need it. So if you have some on hand, you need to get it. We're paying a premium if you can get it. And if you can defer your demand, please push it off into the future. And you'll save time, you'll save money pretty considerably. And so, you know, that's the added thing. So, you know, just keep an eye out on this. When you're looking at, you know, curve structures for interest rates and especially commodities, really commodities, the biggest one, that there's some supply and demand things.

[00:11:39.23] - Speaker 1
So general rule of thumb, bullish market equals backwardation, which means, you know, the front is higher than the back. Bearish market means contango. So the. Or a carry market where the front is lower than the back. And in a contango market that tells us the exact opposite. Here we can bring in gold, right? G. So gold typically trades in contango. And the reason for that is just there's a huge supply of gold just sitting there for investor demand. And so, you know, in my career, I haven't ever seen a gold curve go backward. Basically everyone's just. So this tells us the opposite thing. So right now you get paid to store gold. And what I mean by that is they're telling you that, you know, hey, gold's not worth as much right now, but it'll be worth a lot more in the future. So if you store it and you sell futures and it continues to just roll down this curve, you'll earn what we call the carry. It's the carry trade, cash and carry. So you know, you'll earn something to cover your storage. Or said another way, you know, if you defer your sales out, you know, a year or two, you'll get a nice little pickup.

[00:13:02.12] - Speaker 1
Although it's worth noting that that pickup's not huge on gold just because gold has a lot of value per ounce and so storage is just not that expensive in the scheme of things. Things. But this is a contango market. And so I just wanted to show you that again. So as you're looking, as you're looking for potential opportunities, you can kind of understand what you're looking for. This isn't necessarily bearish gold because the gold market's always in contango. But so it's really just relatively how much contango it's in. But when you look at, you know, crude oil, like we, like we just were. I mean that's actually telling you that things have gotten at least short term, have gotten tight in crude oil. So. And again, a reminder, it's always the back of the curve is always that kind of mean reversion. Things are going to stabilize. So then let's take that Back to the S&P 500. And now we kind of see a similar, you know, story. It's basically telling us hey, like nothing stays this non volatile forever. It's going to surely mean revert. And the other thing here is that people give, people require a risk premium both ways.

[00:14:28.15] - Speaker 1
And so, you know, if volatility is really high for a very long time, people will just start to sell that and sell that and sell that and vice versa because they're like, hey, you know, markets just can't stay 30% volatility forever and vice versa. You know, nobody wants to sell for like we're already talking on this call about how it's not a great time to be selling volatility. So people certainly aren't interested in selling 12 volatility going very far out on the curve. And so they're going to at least require a little bit of risk premium because maybe things are calm now, but who knows what could happen happen in the next 60 days. So that's we're going to see a bit of a risk premium in there. So again, just, just things to look out for in these kind of quiet times is that, you know, the term structure is going to do a lot of work, meaning that the difference between short term and long term. And so, you know, if you're looking for more average things, you want to look out longer term. Whereas if you're trying to play off the extremes, you want to play shorter term.

[00:15:31.20] - Speaker 1
So you know, like if you were bullish commodity that's in a contango or like this or an upward sloping, you'd want to buy the front hoping that the curve actually inverts and then you would end up making more bang for your buck than if you bought a longer dated one. Same for volatility. If you think volatility is wrong, if you think it's wrong and you want to get your biggest, you know you're going to get your cheapest options if they imply, you know, short dated, fairly short dated. And so if volatility does realize, then that's where it's gonna give you the biggest pickup. Now the big caveat in options market as we talked about two weeks ago, and I'm going to continue to emphasize to people is that, you know, there's always, there's always the trade off that longer dated options give you some value because they have more vega, meaning that they benefit more from, you know, an increase in prices. The rule of thumb that I tell people I'm you know, teaching, you know, when I'm training kind of junior traders is, you know, the way to think of it is Vega is you're trading what people are going to be willing to pay for options in the future.

[00:16:41.24] - Speaker 1
Whereas short dated options gamma and theta, you're betting on how much the market's going to move in the very near future. And so that's kind of how I break those, those Greeks up. You know, Vega is a bet on long term on what people are going to be willing to pay. So if you buy that option, you're not worried about, hey, do I think the market's going to get there? How in the money it's going to be? You're just saying, how much more will somebody be willing to pay for this option in a month? Whereas Gamma, you're thinking about, okay, how much can we actually move here? You know, if I'm paying, you know, if I'm, you know, trading an option and at the money option on spy, it's trading 600 and you know, I trade a six, a 600 call. If it's 10 bucks, do I think we can get to 610? You know, if I do. If, if yes, then that seems like a good deal. And you know, if no, I think we're going to be bound, then it's a less good deal. All right, so now we'll jump over to smile.

[00:17:42.08] - Speaker 1
There's not a lot going on in the volatility smile right now. You know, we continue to see like same as we talked about two weeks ago, continue to see really weak call skew. And that seems to be pretty consistent, you know, same thing for the queues, Pretty weak call skew. So what do we do with this? You know, so as, as we do every volatility corner we like to think about, you know, now that we've kind of got an overview, now that we've got a summary of the market, how do we go use some of these really cool screening tools that Menthor Q has developed to try to kind of take the next level, try to figure out how we would convert that into a trade. So when volatility is cheap, you know, the first thing I'm going to be looking for is okay, great, well, which single names have particularly cheap volatility? So you know, I'd go over here to the volatility screeners and I look for, you know, lowest implied volatility or lowest IV rank. So here I'm just looking for, you know, single names that have the, the lowest implied volume that they've had in a while.

[00:19:04.13] - Speaker 1
You know, again, as A reminder, we don't give specific trade ideas on this. I don't pick single names and that's not what my fund or my specialty is. But I like to show you just how. You might start with the basic thesis of, hey, okay, implied volatility is relative, relatively cheap, particularly to the call side. So now we're going to go looking for a single name. In practice, I don't think it's ever a good idea just to trade based on technicals, based on charts or you know, what implied volatility is. You, it's really nice if you have a fundamental view and a tech and the technical view winds up. You know, we always talk about this like when you become, if you're a professional trader, there's always this conversation. Are you a technical trader? Are you a fundamental trader? You know, the fundamental traders are always trying to form a view. They're looking at, you know, in the equities world you're looking at, you know, balance sheets, financial statements and estimations of where earnings are going to go. The technical guys are looking at charts. They're saying, okay, where do we, where do we fall?

[00:20:02.01] - Speaker 1
Like versus the 40 day moving average and the Bollinger bands and all that stuff. And you know, they're all, they're all great. In my experience though, before you can really get comfortable about something, you really want to see both of those line up. You want to have a fundamental view and then you want to see that, you know, the implied volatility and the technicals sort of support it. So, you know, again, so I'm believing the fundamental picture out of these, these talks completely. But you need to bring that in before you really connect on a good trade idea. But what I'd be looking for here is, you know, is a stock that has really low implied volume, at least, you know, compared to where it has been. But we think is either realizing, is going to start realizing well or is realizing well. So I mean, this one's an interesting one. Vly Valley National Bancorp. And again, you know, I'm kind of, I picked these a little bit out of a hat, so you should look for your own. And if you have single names that you follow, you just want to adjust this analysis.

[00:21:09.11] - Speaker 1
You know, this is a similar deal, although the call skew is not quite as, as weak as some of the other ones. So here it looks like more at the money volatility is going to be cheaper for Vly. Here's a great view of the surface there. You can really. This one really, this is the One of the great new charts that they've rolled out in the last, in the last few weeks. Highly recommend taking a look at this one, you can get a sense for the term structure. So you can see the very short dated options moving out on time and then for different strikes where the option, where the, where the implied volatility is cheap and where it gets really expensive. So that's a great one to look at as well, you know. So for this one, if I was looking to buy options, you know, this is, this is something that would stand out to me. We've been realizing, you know, here, let me go back to the screener. Yeah, so we've been, you know, we've been realizing over 27 daily volatility over the last 30 days. But options are only pricing in at 26%, you know, so currently trading at 9 bucks, you know, you got call resistance at 9, put support at 8.

[00:22:39.18] - Speaker 1
So one great trade that we're going to play around with a little bit today is the idea of, as I mentioned earlier, this idea of if you sell options, let's at least do it as a spread, right? Maybe sell a call spread, sell a put spread as opposed to just selling that call or selling that put. And that makes you less exposed to implied volatility. And we're going to walk through a couple examples of that. But another one you can look at next level is to do the one by two call spread or the one by two put spread. And if you're not familiar with that, the idea is you would typically buy or sell the closer option and then take the opposite side two times, two times the volume on the further away option. So just as an example, if we were looking at vly trading at 8.95, you know, we might say, all right, well I see call resistance is at nine bucks. So I'm going to go ahead and sell the nine dollar call. You know, fine, because we're probably, we're probably gonna fail there. But I'm gonna turn around and buy two of out of the money calls because I think implied volatility is too cheap.

[00:23:51.22] - Speaker 1
And so the payoff profile of that trade is going to be here. Let's see if we. So, So everybody probably remember we've talked about this a lot, like the payoff profile, the hockey sticks for a call spread. So if you buy a call spread, it's going to go up. It's going to go up and then it's going to be capped. And then if we do the bear call spread, it's going to be the opposite way. So as the, so as the underlying price increases, we're going to start losing money, our profits are going to go down, we're going to start losing premium and it's going to go negative, but our losses are capped. So that's the benefit of selling the call spread. And then the bear put spread is going to look the exact opposite. So when I'm telling you, you know, at least, at least consider selling options as a spread. Let's see if. Yeah. Oh, that's so that's if you're long the put. So if you sell the put spread. So if you sell the one closest and buy it, you know you're going to start losing money. But again your losses are capped.

[00:25:10.19] - Speaker 1
So the key there is that these things are capped. The key is that you're capping your losses in all these scenarios. So again, I can't mention that enough. You always want to manage your bankroll. We've talked about kind of playing poker before and how you just want to make sure that you live to fight another day. So even though it seems like less return, especially in a market like this where that out of the money call or put is so much cheaper in implied volatility terms, it's almost always going to be worth it to limit your risk in the long run. And you can always trade more of it. You can always sell if it reduces the premium you collect on selling a put. Doing the put spread, if it reduces it by half, you can only sell two of them. But the key there is that loss is still gonna, is gonna be capped. Whereas if you just sell the put, your losses are, who knows. And particularly with calls, your losses are potentially infinite. So real quick, now let's look at like how the one by two call spread works. So the one by two is interesting.

[00:26:19.21] - Speaker 1
Let's see if we can pull that chart up. My Internet doesn't want to load it. There we go. So that's the one by two call spread. So the one by two call spread like we saw before, it starts going up, but instead of being capped, it actually flips and starts moving the other way. So we actually go from, you know, if we're long this thing, we go from making money to starting to give back our profits. At some point we'll actually give back all our profits. And then, so this would just be, if we do the bear call spread, it's going to be the exact opposite. So we would collect some premium. I'm sorry, yeah. If we do the bear call spread, we would collect Some premium, we'd start losing money and then we would start making money, you know, beyond that. And so the idea, there's so your risk if we reverse this, here's the volatility spread, the one by two rate. So we would start losing money. And then the idea is this is a 100, like 105, one by two call spread that we're short so we collect some premium, we'd start losing money and then it start rallying and we'd start making.

[00:27:40.18] - Speaker 1
So if we get to 110, we make back everything we lost on this call and now we have unlimited upside. And the cool thing is that we didn't even actually pay premium for this trade. So note that we actually collected a small amount of premium and yet we gained unlimited upside if volatility gets high. So that's the trade that I, I think that everyone should be at least looking at and, and being aware of when volatility is low like it is right now, because these out of the money options get way cheaper. Because, you know, volatility, you know, if we, if we think about options delta. So options delta tells us, you know, how likely an option, I mean the kind of quick rule of thumb is to think that it's basically like how likely we are to get there. It's not quite the mathematical definition, but, you know, it's a good rule of thumb for, you know, beginners and options math is delta kind of tells us. Well, what's interesting is when volatility is lower further away, strike options have a lower delta and meaning that they're effectively further away and that makes them just a lot cheaper.

[00:28:46.23] - Speaker 1
And so implied volatility is basically saying, oh, you know, there's, there's no chance of getting there. So it becomes what we call a teeny or a lottery ticket. So just one example that I just wanted to bring up here, my trusty Excel options pricer. You can ignore a lot of the messiness here, but so here I'm looking at two options here, let me just blank those out. All right, so here I'm looking at two options. We've taken, we're taking spy. Let me scroll in here. So zoom in so people can see that better. So we're looking at spy. Let's say it's trading 603. Interest rates are four and a quarter, dividends a little under 2. Let's say that we took an option that's expiring in August. I forget which the exact option expiry is. It's like 15, 16, 18 something like that. And we look at two different options. So we look at the 600 call which has implied volatility, call it around 15%. And then let's say we have, and we have negative call skew. So the, you know, so the by negative call skew, I mean the calls are cheaper than the, at the money in the puts, which is exactly what we saw here.

[00:30:20.11] - Speaker 1
So this is negative call skew. Let's go back. So the negative call skew shows up right here. Right. So what that means is the higher strike options have lower implied volatility than these. So in our option pricer, you know, again I'm using some approximate numbers but you know, I'm saying, all right, you know, if at the money the 600 is, is 15% volatility, but the out of the money call at 6:15 is only 12% volatility or maybe it's 13%. So what this would get us in price terms. And you can check your latest prices in your preferred, you know, trade, you know, brokerage, you know, this would actually allow us. So if you check this one out, we would be able to buy, sorry, we would collect 18 bucks of premium for selling the 600 call and we would pay 8 bucks for the 615 call. And if we did, so if we did that two times, you know, we're gonna net collect just a little under $2 in premium to buy two of the 615 call. So for that to work we would need to get to at least 630 by 816. If you're just gonna buy the option and just wear it.

[00:31:47.29] - Speaker 1
You know, traders we talk about when you just warehouse something, we just call it wearing the risk. We're just going to buy it and put it in our closet and forget about it kind of thing. Usually that's not a good idea with buying options. Usually it's better to kind of trade around them selectively. But every now and then they get cheap enough that you do just want to buy them and sock them away and hope that you get a lottery ticket hit. So when you. So if we were to buy this one and just wear it, we would need the market to go to 6:30. And the reason for that is that, you know, we'd be losing from 600 up to 615, but we'd be making twice as much starting at 615 because we bought two of these calls. So once we got to 630 we would make all of our, you know, make all of our premium back. So, so that's you know, that's the basic idea of this trade. And again, the cool thing to remember is that, you know, if you think the S P could jump, which, you know, in, in most years, you know, the S and P.

[00:33:00.21] - Speaker 1
I did this study and I don't have the numbers up today, but I actually did this study. A lot of people tend to think, oh, the S and P tends to march higher barring a crisis, you know, it tends to go higher, 7, 8, 9, 10. But that's not actually the case. When you actually look at it, it averages 8, 9, 10% a year. But the actual distribution of annual returns tends to fall much more broadly. So you see a lot of 15 and 20% up years. Well, that's only a 10%. I mean, you know, if we were to rally 10% from here, I mean that's 660. So you'd be way in the money there. It's 660, you'd be making 30 bucks without paying any premium to do it. So that's, you know, maybe this is too short of expiration. Maybe we need to go out a little bit further. But if you think that we have a chance of getting a big pop, like, hey, you know, if the courts finally come in and say that, you know, the trade war is over, that the president doesn't have that power, you know, yeah, we're back near the highs, but we're kind of back to where we started before the sell off.

[00:34:01.23] - Speaker 1
But we, you know, if the market's going to go up 10 or 15% this year, then this kind of trade could work quite a bit. But the other thing I wanted to show you is even if nothing, even if you don't get the big rally, if implied volatility just rallies significantly, let's just say that volatility goes up, you know, let's say the market doesn't move at all. You know, we just start chopping around but people get scared. You know, there's a big announcement, you know, there's another threat of trade war and we just start chopping. If volatility goes up another five vols, you know, suddenly this thing is going to be worth 20. So we remember we bought two of these, so that's going to be worth $26. So you put, you basically outlayed no premium. And the reason for that is again, you've got two options here. And so this is now worth 13 bucks. So you've got two of those, so you've now got 26 bucks. So whereas before you collected a dollar and 50 of premium. Well, now you could turn around and just unwind this trade. You could just turn around and sell it without a thought and you would just lock in a $3 profit there if we were to jump 5v.

[00:35:21.18] - Speaker 1
So you really don't need, there's a lot of ways you can win on this trade and if you Delta hedge now. So we kind of talked about, you know, the most basic beginner options trade would be, hey, I'm just going to sell a call spread. I like to collect premiums. And if you did that, you know, not a one by two, but just in the current environment, you might expect something like making 10 bucks. You know, you sell the, the 18, you sell the 600 call, you buy the 615, you collect 10 bucks of premium. But the good news is your downside is capped. So at the very least, if you're taking my advice and you like to sell options, you're saying, well, you know, it's, you know, it's. No, it's, you know, I'm going to sell my options because that's kind of my strategy that I like. I'm not, you know, inclined to be an option buyer. But at least you've capped your, your upside. You can't lose more than 15 bucks on this strategy, which, you know, you could kind of justify here because if you're collecting 10 bucks in premium and risking 15, you know, maybe you think that's actually a pretty good risk reward.

[00:36:33.11] - Speaker 1
You think that that makes sense from a probability standpoint. But if you go to the next level, the next more advanced level, we say, okay, now I'm going to buy two. Well, now you're collecting significantly less premium. You're only collecting two bucks of premium because now this is going to be 16 here. But, but you now collect a small amount of premium and have a significant amount of upside. You know, you still stand to lose up to 15 bucks if we settle right at 615. But you've got significant upside, you still collect premium and you've gained the way we just talked about that if there's the ball bump you, you can make six bucks, right? You turn your $80 or whatever of profit into, or sorry into three bucks. So you don't quite double your money. I want to fall goes even higher. I mean that could happen, right? Like ball was at 60 just a few, just a few months ago. And so if this thing, if all were to go to, and all I'm doing here is taking us to 23, like if we were to rally 10 balls. Suddenly you got this is going to be worth 36, you're going to make 8.

[00:37:48.10] - Speaker 1
8 bucks. So again you can see how the more volatility goes up here, the, you know, just the more money you make. And the reason for that is that you're long vega. So what do I mean by long vega? So this kind of shows us here the idea is that. So this is the vega of the option. So if you sell this option, you'd be short 100 bucks a Vega, meaning that for every, you know, for every increase in implied volatility, for every contract you sold, you'd lose a hundred dollars. But if you bought this one, and this is why I was saying the call spread makes sense because you can see they have almost the same vega. So if implied volatility goes up, the value of the call spread is not going to change that much. Remember we talked about you'd collect about 10 bucks if you did the call spread 18 and 8. If volume goes up 10 vols, it's worth about the same, about 10 bucks. So you don't have a lot of Vega exposure there. So at the very least if you don't want to buy optionality, if you do the call spread rather than just selling the call, you've now protected yourself from, from the.

[00:38:59.07] - Speaker 1
Because what if you sell the call? Sorry, what if you just sell the outright call? Right? So imagine you don't do this, this leg at all. You just sell the, at the money call thinking, you know, hey, 18 bucks free money. I don't think we're going up. But then let's say we don't go up. Let's say you're right, let's say we fall a little bit, but Vol goes up, that option you sold is now worth 28 bucks. And so yes, if you can hold on until, until you know, expiry, you'll end up making that all back and it'll expire worthless. But that's a lot of risk you're holding because that's going to be way in your face for a while. Whereas if you do the call spread as we saw, it's still worth 10 bucks. So your mark to market your kind of loss on the way over the life of the trade is going to be very limited. And again the reason for that is because they have roughly the same and offsetting vega meaning that so you're buying something and you're selling something close together so they're both almost equally exposed. The further away option has just a little bit less Vega.

[00:40:06.27] - Speaker 1
So that's why you're protected from this Volvo. But when you do two calls here, when you buy two of these 615s, then suddenly you're net long Vega, you're going to be long, you know, equals it's going to be a little less than 100 times two minus this. So you're gonna be long $95 a Vega. So every implied volatility point that we get, you're gonna make $95 for each share that you trade. So that's the basic idea of the one by two call spread. And you can take all this and just reverse it for puts. It's going to be the same thing. So if you find a single stock that has really cheap put skew, you could look at doing this exact same trade here. You know, you want to sell an at the money put and buy two puts. If you think that it could tank, we can go back and look at through the screeners a little bit more and see if we find anything like that. But I really wanted to take some time today drilling into the one by two. The one by two is a really nice way to, you know, offset your Vega position or at the very least the call spread.

[00:41:15.26] - Speaker 1
The call spread and the put spread have very little vega. The one by two allows you to express a Vega view, meaning an implied volatility view, without necessarily paying a lot of premium. You can basically do these trades premium neutral and get exposure without, you know, without outline premium. So if you want to bet on implied volatility going up, you do the one by two. You might be thinking though, oh, well, what if I, I want to do this trade, but I do think I do want to get long volatility, but I'm afraid the market's going to grind higher and I don't want to risk losing 15 bucks if we go to 615. Well then the last level, the last level here is the delta hedging. So this is the. Now if you want to know how a professional options trader market maker would handle this, is we would actually turn around and hedge the delta. So if we did the one by two, so we'd be short 57 Delta, which means that on 100 shares we would want to buy 57 lots, 57 shares to protect against this call that we sold. And then on the 615 call it's going to be two times that delta.

[00:42:30.02] - Speaker 1
So it's going to be equals this times two. So we have, so we're going to get, we're going to be long this two times and short this One time. So we're going to have a Delta of long 20. So we're going to have a delta of long 20% if we do the one by two call spread. So if you really wanted to, you could, you know, if you're a professional, you would do this trade and then you would actually sell like 20 shares of the underlying and that would protect you. So if the market falls a little bit, you know, you would be protected. And more importantly, and what I mean by protected is you wouldn't miss out on the volatility bump. It would still help you because obviously if we go further out of the money, then the two options that you bought are going to shrink in value. So this is delta hedging those to protect those. I got a question here. I should have said this at the beginning, but again, please, always, you know, we love comments here. We love to shape this around your questions. Great question. Would you please explain how we can use IV to our edge in futures?

[00:43:52.05] - Speaker 1
Absolutely. So everything that we're talking about, in fact, my background is in futures and I actually prefer futures to single stock and you know, cash equity options. There's a few benefits to, it's easier to price options in the futures market because we don't have to worry about interest rates or dividends. We just use the futures, right? The forward market, the futures price as the, as the spot price. So it's way easier to price. So usually I trade XSP or you know, SPX and then we don't have to worry about, you know, black Scholes price. You're putting in an interest rate and a dividend. But the important thing is literally everything that I'm talking about applies the same. You price them a little bit differently. And every market's got its own kind of unique fundamentals. But, but everything that I'm talking about you can use the exact same in futures. So you know, you know, I literally did this trade, this one by two call spread in xsp, say the mini S and P futures. But we do these trades all the time in corn, crude oil, precious metals. There's absolutely nothing different for it. In fact, I would suggest that sometimes they're even better to do in the futures market because in the futures market we have a lot of carry.

[00:45:16.19] - Speaker 1
And so it makes it a little bit clearer what you're, what you're looking at if you have, you know, and by carry what I mean is like I was showing you kind of the, like if we go back and look at the crude oil market, So here we have a positive Carry on the inversion. But you know, for example, you could look to buy a call here and it's going to be way cheaper to buy a forward call on crude futures than it would have been on, you know, S P because the S P doesn't have a curve right, like the S P's. If you're doing spy, it's just is what it is, it's 68. And so even if the market thinks that we're gonna fall, there's no way to really see that. Whereas here you can say, all right, well I think crude oil is going to go up in the future. We can move out and take advantage of the fact that forward crude oil is much cheaper. So you can buy a call that's actually below the current spot price. And as long as the back end of the curve ends up moving up to the current spot price, if you think the market dynamics are going to continue, you'll take advantage of it and it'll be cheaper.

[00:46:40.03] - Speaker 1
I mean the other thing is if you're an option seller, these futures markets tend to have quite high volatility, maybe not as high as single stocks, but much higher typically than, you know, than, you know, indexes. So we'll typically see volatility in commodities markets that ranges anywhere from high teens to 30s. Whereas you know, S and P can get really high when there's a panic like 50, 60%. But much more often realized volatility is around like, you know, 10%. So you know, again, everything. And if you have more specific questions about how to apply this to futures, I'd be happy to answer them. But absolutely everything that I'm saying about options applies to futures just as, just as well as to cash markets, I. E. You know, stocks, single stocks. So real quick, before we close up, I'll go back to, you know, the volatility screeners and point out a couple others that jumped out to my eye. Maybe we'll even find one that has a negative put skew where you could do the reverse, the one by two put spread. You know, here's no Barrick again. We looked at Baric I think two weeks ago.

[00:47:52.21] - Speaker 1
You know, again it's got an interesting relatively cheap volatility, 31% though it's been realizing 37%. See where, where is Barrett trading? Barrick Trading 2024. We're right at call resistance. So maybe you think we've got a ways to fall for. Put support down to 17. So then if we go look at, So let's see. So I've put supports down at 17, currently trading 20, 20, 24. So maybe there's a put trade here. The put skew gets high if we fall a lot. Oh, but actually, look, that put skew is pretty cheap down to 17. So it's possible that, you know, we could say, hey, we got a lot of room to go here before we hit put support. So I'm going to. Again, this would be a fairly advanced options trade, but you could say sell and at the money put here at 20, which would make sense because you'd be short volatility at call resistance and you could buy two down at 17. I probably want to delta hedge that trade. I'd sell a little bit of the stock or, sorry, I buy a little bit of the stock since I'm long two puts. And so, you know, that trade right there could work, you know, very nicely for you.

[00:49:40.13] - Speaker 1
You know, if we buy a few shares of Barrick, if we just explode higher, the, you know, those shares will just take off and you make some money. If we go lower, you'll lose a little bit. You'll be delta hedging on the way down. But then if we get down to 17, down to put support, you'll have at the money options and you know, those at the money options should be worth quite a lot. And if volatility picks up like you're hoping, you'll be able to make a lot of money on that spread. So there's another. You see, you could do it with calls, you could do it with puts. Yeah. Okay, so another good question from andy here. So Vix is at 17.26%. How can it be used for expected move, you know, for figuring out an expected range. So expected range is. Is real, is real fun. And one of the specialties of. In Thor Q and I'm. And I'm still figuring it out. You know, I'll be the first to admit, but I love looking at the various. So they have a variety of ways to look. Let me go back to spx and.

[00:50:51.10] - Speaker 2
If you need, I can add on that as well. Ryan?

[00:50:54.29] - Speaker 1
Yeah, please. But so there's a variety of different ways here. So, you know, we've got call resistance, put support. So that can give us one idea of the range. And then we've also got is it under screener? Where do we see the expected daily range?

[00:51:09.15] - Speaker 2
So you have basically the levels on trading view, which is one, one of the options where you see the one day max, one demand. You also have the matrix. So I can show, if you want, I can show my screen One second.

[00:51:26.26] - Speaker 1
Yeah, you go ahead and take over and show that. But before we do, I want to mention. So even without, you know, these great. I mean, I like them in their Q charts because they add a lot of richness to it. There's a lot of ways to think about it because obviously there's no magic formula. But, but the very simple math is that you can always take implied volatility. So annual implied volatility is quoted in annualized terms. And so if you want to figure out the daily range, then you just. Well, you can, you can actually adjust that to whatever period you're curious about, if you're curious about daily, Weekly, Monthly. So 17.26% implied volatility. What that means is that with a, you know, the kind of one standard deviation move expectation of one year is 17.2, 5.26% of the underlying. So if we're looking at SPX of 6, you know, just call it roughly 6,000, then a 17% volume would be saying that we would expect to move about 1,000 points. So we'll end up somewhere 10, 20. So we'd end up somewhere between 5,000 and 7,000 if I did my math right. Yeah, that's right.

[00:52:44.27] - Speaker 1
So we'll end up somewhere between a little below 5,000, a little above 7,000. And you might think like, wow, that sounds like obvious. That's a huge range. And it is because that's talking about over a whole year year. So that's how you know. But you can break that down into a daily expected range. And to do that you have to do a little math because it's non linear, but you just divided by the square root of the number of trading days. So if you want to know, business days. So you take the square root of 250, which works out to about 15.8. So 250 squared. Yeah, 15.8. And then you would divide that. So if you take 0.1726 divided by 15.8, it's about one per. It's a little over 1% daily. So you can multiply that by, you know, 6,000 and that tells you that the market should move about 65 bucks a day on, on SPX or that's what the options market is pricing in is about 65 bucks or about 6 bucks on spy, if you look, if you prefer with the, with the lower denominator. Yeah. So please. So that's, that's the pure way from implied volatility.

[00:54:03.13] - Speaker 1
But they have this much richer one that Fabio is going to talk about.

[00:54:06.13] - Speaker 2
Now yeah, so we have our levels that are our one day max one the main. So we calculated a bit different. We use different methodology here. So to calculate where the price should be within the next day. So you can do it through there, but you can also come to the matrix here. And similar to what Ryan was doing, you can calculate the expected move for the expiration. So if you are trading 7 DTES, then you can see that the move should be below and above 135 points within the next seven days. So you can use this as kind of a way or you can also use our swing levels. So this would be using again a more complex calculation that will show you where the price should be over the next five days. So you have this 5908 and 6136. And then basically if you go on SPX, you can actually plot these levels on your chart as well. So here what we see is swing levels for the next. So that the last five days of levels, this would be our current level, the one that we just saw. And this would be our lower level here.

[00:55:33.28] - Speaker 2
So this would be the expected range for the next five days based on the string model. Basically. Then here very important, you can look at the backtest so you can see the success rate of the model. So if you were to follow the model, the model over the last 117 days at a success rate of 75% that means that the price closed above this lower level for an on 75% of the days over 117 days. Yeah, I think we are about time, Ryan. This was awesome. And again guys, if you want to see anything specific, these sessions are for you. So they are educational session tailored to answer all of the questions that we get in our community. But if you guys want to want us to cover more stuff, more advanced things, strategies, just send us an email, use the subject volatility corner and then I'll pass this along to Ryan and we'll be sure to address that into the next call. We're going to be back in a couple of weeks, so stay tuned. And thank you Ryan for doing this was awesome as always.

[00:56:52.20] - Speaker 1
Thank you all. Have a good one. Happy trading.

[00:56:56.08] - Speaker 2
Bye guys.