Short Dated Options and Term Structure

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

[00:00:38.27] - Speaker 2
Welcome back, Tim. For our third session today, very excited to be here again with Ryan. It's been a couple of weeks, Ryan, since the last session and the feedback was great. So today we're going to go over some more advanced tools that you can use to look at volatility. But before we go ahead, welcome Ryan and I'll let you quickly introduce yourself and then we can go into the session.

[00:01:03.23] - Speaker 1
Thanks as usual, Fabio. Welcome back everybody to Volatility Corner. As a reminder, I'm Ryan Darnell. I've been an options market maker and run options derivative desks now for, oh, 17, 18 years. So I've spent many years looking at all the details so you don't have to, about the Greeks and, and how to value options and all that. And, and this is a session where we talk about a few different things. You know, how options work, how different strategies work, how to read volatility in the markets and, and how to, from that determine options trades, but also just to understand what the market's telling us about, about underlying market moves, what we can hope to expect, or at least what expectations are built into the market. Thanks to people who sent in some questions over the past couple weeks. I'm excited that we're gonna be able to do our first session where we talk through some trade ideas that, you know, that were requested in advance by, by some of our audience. So that's going to be exciting. Of course, we've had a lot in the news today, so, so this should be an interesting one.

[00:02:21.26] - Speaker 1
And again, I just want to emphasize we do not make, give individual advice or recommendations. So please know if you do submit questions. You know, we're more than happy to walk through trade ideas and talk about the different kind of risk parameters and profile of those trades. But we're never recommending a particular trade. We always try to talk big picture about how market makers and traders think or about the market and then how you can apply that to fit with your own thesis, with your own market research. So as we do every Volatility corner, let's start by jumping in to the, you know, basic overview of what's happening in volatility markets. So the first place at the money term structure for spx. So, you know, this one's pretty interesting. You know, I think a couple, two weeks ago I was warning people, be really careful if you're a, if you're the sort of person who likes to sell short dated options. 0dtes Back when we were seeing, you know, implied volatility for short dated options trading, you know, 15, 16, 17%. You know, I was kind of warning that that was a lot lower than the front of the curve had been recently.

[00:03:34.23] - Speaker 1
And so I would be, you know, if I don't stop my strategy, I'd certainly be cutting back. Well, hopefully you listen to that and I think the news is if you're, you know, if you are in that game of selling short dated options, the game's probably back on at least relative to the rest of the options market. Short dated options look really, really rich in that kind of zero to five day window for implied volatility. And by rich I mean, you know, you're getting a lot more bang for the buck for those versus anything further out. Options seem to get, you know, remarkably cheap as we go out 15 to 20 days looking, you know, here, you know, it gets as low as 15% before we start to steadily build back in a premium. But you know, it's worth noting that this chart doesn't have what was going on a couple months ago. And so, you know, the scale has really tightened back down. We're no longer looking at the past when, when things ran up as high as, you know, 40 and 50% on the Vix. And so while it looks like ball's a little more elevated long term than it was five days ago, we're still awfully low compared with where we have been.

[00:04:55.22] - Speaker 1
So you know, again, if I was, you know, if I'm trying to figure out, you know, where the value is right now, I think I'd be leading more option buyer. We said, we said two, two weeks ago that, you know, it was kind of in that middle zone, getting into the middle zone. Well, now we're getting into the low end. And I would say, you know, once you get to get down around 14% doesn't mean that implied volatility will, you know, that realized volatility will realize at those levels. But you know, your risk reward starts to get really favorable for being long options as a general, you know, as a general kind of rule of thumb. And so again, you know, that doesn't mean you should rush out and buy options certainly. But you know, if I was an option seller, I'd look to reduce some of my exposure a little bit or look to see if I could hedge by buying back some stuff elsewhere that might maybe protect me, which, which is going to lead us into one of the strategies we talk about shortly. The other strategy that we talked about was potentially selling short dated options to finance long dated options.

[00:06:03.29] - Speaker 1
And now I think that's really in play again. So if you wanted to sell kind of like one week options and use those to justify purchasing like a 20 or 30 day option, I think that could, you could get some bang for the buck there. My particularly now that would also by the way we talked about this and I'm going to show this a little bit more when we go into more detail today. You know that this will also really look nice selling short dated options, buying long dated if volatility picks up because you'll, you would be long vega I. E. If you're long long dated options and implied volatility were to say jump back up here into the 2022, you'd pick up 4456 vols on your options which can be pretty material. And I'll show you an example of that. Well actually you know let's just jump right into that one. Let's, let's, let's kind of show people quickly what I mean by vega. And so if you were to buy you know last week we talked a little bit about or two weeks ago we talked about theta and we had a few questions.

[00:07:13.21] - Speaker 1
Can you go into more detail about theta? I'll go into more after we get through our market roundup. But you know this is a quick chart of options values over time. Like I said we're going to go into more detail so hold your questions but we'll go through this a lot more. So this, for this example I picked a 580 put on the on spy versus an underlying price of 590. And just to make things simple, I used a 20% implied volatility. So you can see how the value of those puts declines as we have less time to expiry. Hold on, the x axis here is wrong but this is time to expiry here. So let me. There we go. So you can see based on the expiry of that option that if we go out towards November, December that this option is going to be worth as much as 30 bucks a share. Whereas as we get you know, closer and closer it's as little as five bucks. And we'll talk about that a little bit more. But I just wanted to comment on the Vega. The Vega really tells you how much exposure we have to implied volatility going up.

[00:08:40.25] - Speaker 1
And I'll show you that two ways. So first off, vega is the number that market makers like to use. Let me zoom in here so you can see a little better. So you can see these are the really short dated options expiring in May 30 June. So we're just going a week at a time here. So what you see here is that you have basically no Vega. And Vega again as a reminder, that's how much the price will go up or down for a 1% increase in implied volatility. So what this is saying is, you know, let's get example here. So for this example, the 580 put should go up by about 43 cents if we increase implied volatility. So right now it's at 5:30. So we'd expect it to go if we take volume up to 21%, it should go up to about roughly like 573. Yeah, there you go. 572, 42. So that's what Vega is showing us. And what you can see is look how much bigger the Vega gets. Exponentially larger as we get these options that are a couple months out. As soon as we get a couple months out, you know, there's just dramatically more vega.

[00:09:55.29] - Speaker 1
And then I'm going to show you that another way. If that's not intuitive to you, I want you to watch how much this curve jumps if I increase the, you know, just the absolute price jumps if I increase implied volatility everywhere. So right here we can see that this option is ranging from 0 up to 30. What happens if implied volume were to jump 6 volumes like we just talked about? There you go. So boom. So, so suddenly this thing's going as high as 40 bucks. So if we were to buy. So let's just pick as an example, if we were to buy the going back to 20% volume, if we were to buy an 830x free 480 put, we'd be looking to a 29x free. We'd be looking to pay with 20% volume about 18 to 19 bucks. 1876. So you might be thinking, hey, that's awfully expensive. You know, I don't think it's going to actually fall, you know, $20 below to hit my break even like I don't think we're going to 560. That's too much to pay for a long dated option. But look what happens if fall jumps up to 26.

[00:11:20.29] - Speaker 1
You know, jumps up six balls here. So we said that was at 18 and now that same option is 25 bucks. So you just made seven bucks. In fact, even if you held it for a month, you could hold that all the way. You could hold that option basically for a month. And even if the market never moved, if volatility were to jump over that month, you'd still come out ahead, you'd still be able to get out of that thing at $19. Not sure if you can see that, but yeah. So basically, so that's the idea of Vega is these long dated options are very sensitive to what people are pricing in the options market. So if you were to sell some short dated options here and buy you know, a 30 or even 60 day option and then we get a volatility jump from 16%, this is at the money, that's the difference. I was using 20% for the put. You'll see later why. But if we were to get this jump from 20 back, from 16 back to say 22, even if a lot of time passed, if we went from 60 days to 30 days, you know, you would, you would, you'd more than make up your investment in the option.

[00:12:40.11] - Speaker 1
So that's an important thing. And reminder again, as always, please feel free to ask questions, make comments throughout the, throughout the session. I love it when this is interactive. The more we can make it a discussion, the better. So yeah, feel free to come in with your questions and anything that's more complicated, email it to us and we'll try to use it for our next, next session. So that's the rundown for spx. So you know, quick summary again is simple takeaway is short dated options are still paying a healthy premium. The rest of the curve has gotten awfully cheap. We're getting towards about as low as, as the VIX tends to go as SPX at the money volatility goes. So now let's look at the smile real quick. I'll show you. Same story for the Q's. So this has been pretty consistent theme, right? We could go a little lower on cues, but not really. It's got a few more kinks which I'm guessing are around earnings announcements coming up, but the same story, short dated volatility, very high. You get this kind of immediate fall off and then we get a little bit of pickup thereafter.

[00:13:52.09] - Speaker 1
So the same story again, you know, and so I think if we look at some single stocks, certainly the big tech stocks, you're going to see this is a pretty consistent theme here, you know, expensive, short dated fall. So the market's telling us that we've got some, some things that could really come in, you know, right now, but if they don't materialize then things are going to get awfully quiet. Very likely that's related somewhat to kind of the, the trade war as always. All right, so you know, let's look at the volatility smile. Now let's go back to spx. So looking at our volatility smile. So this is why I was using 20% volatility to price up the 580 put. You, you can see that implied volatility of 16% makes sense when we're up around 590 or 600 as we start to drop, we get up to, you know, we get up to 20% implied fall. And so yeah, as we've talked about before, this is the skew. This kind of just gives us a sense of how, you know, how we pay more in implied volatility terms for you know, different option strengths. And as a reminder for, you know, for the stock market, we almost always see that puts are at a big premium to calls and implied volatility terms.

[00:15:14.29] - Speaker 1
And that's because people are looking for insurance, if you will, or protection against big sell off. So, you know, nothing really to see here. Nothing really exciting. You know, I can, you know, I can kind of, this is pretty much what we were saying before two weeks ago. The same story remains. The puts you're continuing to get a really healthy premium on looks like it going down to five, you know, 500 on spy. You know, you're getting a nice pickup involved there and the calls have gotten awfully cheap. So you know, one thing that you know, I would think about if I was really bullish is maybe selling short dated puts to finance long dated calls. You know, I think one reason that that's, you know, it's not the most tax efficient strategy, it's worth flagging and that's probably one reason that, that you do get paid a premium to do that. But right now there seems to be a particularly strong benefit. So if you're looking for short dated trades that weren't going to be tax efficient anyways, you know, that could be one potential way to take advantage of that is you know, we said, so where are we on the surface?

[00:16:26.13] - Speaker 1
Where is it expensive? So we say kind of short dated is, is richer and long dated is cheaper. So I got reaction by short dated, sorry, Sell short dated options, buy long dated options. Then, then when we look at, you know, the smile puts still expensive calls, really, really cheap. So there you go. You know, it's, it's not rocket science to come up with the basic conclusion of okay, so let's, you know, let's, let's look at selling some short dated puts to finance long dated calls. And you know, we can probably look at a couple of those strategies if we have time at the end. But basically, you know, that's the quick rundown again, you'll see the same thing on queues, You know, same story here. You know, the puts are relatively well bid, the calls are awfully cheap, at least compared to the last month. You know, one thing we're working on is talking about how to incorporate more history so we can frame this up a little bit better, give it a little bit more perspective. You know, as a professional trader, I want to emphasize it's great to keep your own notes because, you know, I, I'll typically look at these things going back at least a few years, often 10 or even 20 years in fact, for my fund, you know, we use kind of machine learning techniques and statistical methodology to try to estimate what volatility would have been going back to the early 1900s and kind of like the Great Depression and everything.

[00:17:57.29] - Speaker 1
So, you know, more history is always better, at least for, I'd say the more quantitative and technical the trader, the more history, the more data, the better. So that's always. Keep that in mind, you know, when on these calls, you know, I'm trying to keep this quick and brief. And we're using all these great charts that Mentor Q's made available for us and they're fantastic and, and getting better every week. You know, I quickly wanted to flag and plug for you guys the fact that we've added these new volatility surfaces. I'm still just playing with these, you know, but these look great. So, you know, kind of this analysis that we're doing on two different charts we can start to do across the curve. And so the way we would read this one is, you know, here's the expiration and here's the strike and we're looking at implied volatility with this heat map. So looking for where it gets really high. And as we talked about, you know, these, you know, these short dated puts, really high. Whereas we started to get out, you know, we're looking at 135 volatility. Let's go a little further out in expiration, you know, but even if we look at say like a 10 day option, you know, we're getting, we can seven to 10 day options.

[00:19:10.15] - Speaker 1
Looks like we can get 54% volatility if we take a, you know, a step out on the puts or even 39, 32, but if we want to buy some calls, you know, we step out kind of 30 days and go up a little bit and we're looking at only 17 volatility. So, you know, that's not a huge strength strike difference going from you know, 457 up to 550. I guess that's pretty, you know, that's pretty material, but you've got a lot of time for that to work. So over that strike difference you're seeing more than double volatility. So if we think that those are a little bit too extreme of bands, we could always tighten this up. We could say let's go you know, 478 up to where we're getting 32 volume versus say the 532, you know, 30. Let's get the 50 day 21% there so we can get you know, almost two months of options with 21% Vol. And versus you know, seven to 10 days getting us 32%. So again you'll see a very asymmetric premium profile. Great. Okay, so that's the kind of quick rundown of this. So yeah, I definitely recommend playing around with these.

[00:20:31.04] - Speaker 1
We're working on the scaling here to make sure that this is a little bit easier to read. But this is the same story as the 2D. The idea here is, you know, this is, this is what I look at as a professional trader is this, this 3D surface. We're looking for kinks or dips in the surface, right? We want to be buying generally where the volatility looks really low and where you see these kind of peaks in implied volatility. But with the one caveat that we want to compare that to historical. We can't just say oh, all the puts are cheap so. Or sorry, expensive. So let's sell put implied volatility because puts are always expensive in stock market. So the question is, you know, relatively. Okay, so that's, you know, that's that, you know, I've been starting to use more of the net net checks which is pretty great too. So I think when we think about telling this story. So let's again I love to think through now if you wanted to apply some of these high level summaries for, you know, for the overall market, how would I apply them to building a trade for myself?

[00:21:37.28] - Speaker 1
So I've got this general idea that short dated puts are pretty rich and long dated calls that pretty expensive. So maybe we want to look at. Or sorry, long dated calls are pretty cheap and short dated puts are pretty expensive. So you know, we could, you know, say look at, now we can start to look at some, some individual stocks here. But this one's kind of interesting. I mean this is just looking directly at the queues so you know, if you, well, so if we're at call resistance, you know, that's, you know, that's a little tricky, right, because I'm guessing if we're at call resistance, we probably don't love buying calls and selling short dated puts. So I'd probably want to look for something that was, you know, a lot closer. Unless you're thinking we're going to break out. You know, maybe you don't want to sell a put here, but you might be thinking, well, I think if we break through call resistance, you know, if you're a technical trader and then you look at some technical values, you also maybe see like we're near, near some other technical levels and you think if we break them, I think we're breaking out.

[00:22:49.08] - Speaker 1
Well, there you go. Maybe it's time to look at buying calls just above that where you can get that cheap volatility. If I was going to sell puts, I'd love to see that we were closer to put support. So I'd probably go looking for, you know, using some of these excellent screeners, I'd probably go looking for, you know, something that's a little nearer. It's. So let's, you know, try volatility. So let's look at the IV rank. So this is a great place where I like to go to look for stuff with very high implied volatility if we're going to sell, if we're looking to find sales and low IV if we're looking for places to buy. Given that we're talking about particular, potentially doing both, you know, let's, you know, we'll look at both today. So I would start by looking at implied volume versus realized. I mean that's always the key to me just having a high implied. And this is nice because this shows us implied volume for a single name versus where we would normally expect it to be for that name or the range of historical values. So I'll go pick something a little bit here we can look at.

[00:24:06.24] - Speaker 1
See. So, so implied volume very high for hp, You know, despite only 29. So we got about a 27 ball difference there in implied versus realized. Those are usually the sorts of things that I'd want to look at as an opportunity. So yeah, let's try hp. Let's give a look. And again, as a reminder, I don't research these single stocks, you know, in a lot of detail. This is just ideas of how I might apply it to a single stock. So for hp we see the same, same trend. Although, you know, I'M guessing maybe we get some sort of earnings or some sort of news coming out here in the 30 days. See when their earnings announcement is, Oh no, they're coming out here, they came out yesterday. So not sure what analysts are looking for that's causing some volatility there. But, but in general I'd say this is pretty healthy. If we're, if this persists and we're post earnings, maybe that's an anomaly. Maybe this is because we're using end of day data. But you know, again, just, just using these charts as an example, I think I'd start by looking at something like HPQ and saying, okay, great, you know, if I'm looking for a place to sell calls, we've got very high implied vault.

[00:25:48.01] - Speaker 1
A lot of things are lining up here. We got very high implied volatility. In the short term we can sell, you know, 70%. We can even go out here and sell 55% volume going 20 days out, 30 days out, we can sell that 55% volatility. But when we look at what it's realized, it's only been realizing something in the realm of 20%. Let's go ahead and look at its net checks and see, you know, that's we're not at call resistance, but you know, we're not too close. We're also pretty near put support. So you know, if we wanted to, or so, you know, if we wanted to sell puts, I mean, there you go again. I haven't looked at the, at the pro, at the, you know, fundamentals or anything for HPQ yet. But you know, this is the kind of story that I, I would start to get behind, you know, you know, if I saw put support here at 25 or you know, not too far away, 50% implied volume, substantially higher than what we've been realizing. And we know that generally short dated puts are the most expensive part of the curve.

[00:26:56.18] - Speaker 1
You know, that's the kind of thing that would start to add up to a story. And I'd say to myself, all right, you know, we gotta go, let's go take a look here at, you know, forming a view on HPQ and seeing if there's a trade there. So that's one I would like to do more research on. So that's really interesting. And then likewise, if we wanted to go back and look at, if we wanted to look for cheap stuff to buy, you know, I look at the low IV rank. So here we want to find, you know, something that's pretty cheap compared to what's Realized. There's a few to pick from here. I'll pick one quickly for the sake of. These all tend to be smaller names that I'm not, not as familiar with. But here I don't know. Let's try Barrick Mining Corporation. So look at this. They've been realizing 37% volatility over the last 30 days and yet implied volatility is only 31. So you know, it's 6 volts lower than what's been realizing, which is always encouraging if we're buying options. I mean that's ultimately what we're hoping it's going to realize, more volatility.

[00:28:19.25] - Speaker 1
So we can take a look and see, you know, again, term structures. Interesting. Here we get a big spike 30 days out. See when they're announcing earnings. August 11th. So we have some time. So not sure. Maybe they're planning some sort of call or announcement then we need to do a lot more research certainly. But you know, this 20 day option or the 40 day option looks awfully, you know, relatively cheap. So it looks like we could buy a 40 day option on Baric that's in Volterms, you know, 40% of the volatility that we'd be paying for short dated options or even these kind of 25 and 30 day options. So there you go. I mean that looks, looks like relatively good value volatility out there as you get closer to 40 days out, as we discussed before. That's nice from a Vegas standpoint going 40, 50, 60 days out, the options look more expensive but it'll hold on to its value. You got a good chance, you got a good chance, you know, to, to recoup that. And then you know, we look at the skew again. Has a pretty extreme skew, but looks like it doesn't get too high until you get kind of north of, of, you know, 22, $23.

[00:29:54.11] - Speaker 1
So it's like you can still get some value here if you go up like 10% higher on, on Barrick. So if you wanted to make a play on, on a, with their gold miner, right. You know, if you wanted to make a play on gold here and get some upside exposure to a gold miner making some profits here, you know, maybe looking at a 40 day out, 10% up call, you could get some real juice. They may have high earnings with high gold prices of late. Again, you know, I can't emphasize enough. You got to do more research on these. You know, I want to check where we are here. You know, they're at their call resistance level but that's, you know, a 22 call would make sense here because if resistance is 20 and you're thinking, well, if we break out we're going to go a lot higher. So Maybe, you know, 22 is exactly where we want to gain exposure. It's a little cheaper and it requires a technical breakout. We'll take a quick pause here. I'm going to look through the. We got a few interesting questions. I'm going to switch over to talking a little bit more about past trade idea.

[00:31:05.21] - Speaker 1
But if there are any questions. So Joel, all that Fabio address this one. I don't think there's a way to change the calendar right now for term structure. Not sure.

[00:31:22.09] - Speaker 2
The only thing you can do is to go back in time. We can change the, the chart there.

[00:31:31.08] - Speaker 1
Okay. Maybe he's saying you can change the calendar to 30 days. Yeah. For to see those deals. Oh, I see. I think he's helping us out here. Thanks Joel. Lynn. And so we can go back in time a little bit. Yeah. So excellent. So yeah, you've got that functionality. As you can see, I'm still, you know, learning all the different tools that are available on the platform as well. Oops. Yeah. So we can roll back here 30 days. So looks like we could go to. So if we want to check like you know, how barracks moved over time over that last month.

[00:32:15.21] - Speaker 2
Yeah. I think it's due to the. They changed ticker recently, so.

[00:32:20.29] - Speaker 1
Oh, okay.

[00:32:22.05] - Speaker 2
Yeah, they were gold and now they are b. So that could be the reason why you don't see the data there.

[00:32:27.02] - Speaker 1
Oh, gotcha. We can at least get last weeks. Not a lot of change it looks like in the net checks. So. Yeah, so I mean I think again that's, you know, we walked through a good example here today of how we would, you know, know, find this, you know, maybe start to look for where there are some cheap calls or some expensive puts and you know, at a portfolio level you can even look to do that across different names. You know, selling some short dated puts on. On names for your bullish, you know, buying some long day calls, you know, based on where you think there's different technical values. Those are both obviously bullish strategies. If we're, you know, if you're, if your view is, is pretty bearish right now, you probably need to reevaluate. But you know, those, again, those are just examples of how we'd approach this. Real quick, I want to address some questions about delta hedging. I'll give these a quick skim and if we can answer it quickly. I will. Otherwise we'll go back. So Delta hedging with stock covered calls and buying, selling more shares when in the money.

[00:33:54.23] - Speaker 1
So I mean, so first, I guess let's talk a little bit about Delta hedging. You know, I, I would say, you know, Delta hedging is kind of an interesting topic and I'll be the first to say I'm mostly a futures trader. So, so, and most of the derivatives I trade are on futures and derivatives. So we don't have interest rates. So I'm not an expert on, you know, RO and the impacts of interest rates on options. So I will do some more research and get back to you about that one. In terms of Delta hedging, what I would say is, you know, it depends a lot on your costs, I would say. And, and you really want to take a view in the market, you know, for a market maker who has very low execution costs and can borrow, particularly borrowing, right. So, you know, I. Nowadays with mostly free trading, you can, you can Delta hedge pretty cheaply. From a commission standpoint, you do have to worry about bid, ask, spread. Those are usually pretty tight for small size, which most retail traders are. So I think you could give Delta hedging a go.

[00:34:57.17] - Speaker 1
I think the real challenge in the equities markets is getting short, right? So in the futures markets, where I'm typically Delta hedging, you don't have to pay a borrow cost to be short S and P futures or gold futures or oil futures or corn futures. So that's one reason that interest rates don't come into play. We don't have to worry about stocks going special or borrow rates spiking. Because you certainly wouldn't want to get into a scenario, right, where you're long a call and you're trying to Delta hedge it by shorting the underlying and then, you know, and then the shorts end up, you know, borrow cost ends up going to 20 or 30% annually and you give back a lot of your premium. So I think, you know, in terms of Delta hedging, you really want to pick your spots. You know, professional traders tend to have, you know, for us, when we manage our Delta book, we would typically Delta hedge, you know, daily, like kind of once around the close. But that's usually because we're trading stuff with a bid ask. And you know, I said we're earning this bid ask spread.

[00:36:03.03] - Speaker 1
And, and the view is let's just kind of lock it in. Like we're not really trying to take risk. If you're Putting on trades where you think you can make money though, you know, I'd want my Delta hedging to reflect my, my view about the underlying. So for example, like if you think things can run a little bit, you know, I would try to reduce my frequency of Delta hedging, you know, so, you know, I haven't done things, for example, like Delta hedging with a covered call. We would generally stay away from Delta hedging with options. But the, and the general reason for that is just as a market maker, we tend to decompose our complex portfolios into Greeks. So we'd look at our Delta first and then say, okay, do we have a view on Delta? Great, that's the most volatile. So let's hedge that. And reminder for everybody who's not familiar Delta is the exposure to the underlying price. So, you know, if I'm, you know, long 50 Delta call on spy and spy rallies a bunch on news like it has recently, you know, maybe that, you know, and I was, you know, and I was Delta hedged before.

[00:37:08.11] - Speaker 1
So I bought 100 shares of worth of calls and I was, and I was short 50 shares worth of SPY. Now it's up, now it's a 75 Delta call on the rally. You know, I might want to sell another 25 shares. So that's how I would look at.

[00:37:24.11] - Speaker 2
It.

[00:37:26.24] - Speaker 1
You know, so but I think your view, your view, the view that we'd want to take is, well, you know, is this market trending? Is it kind of mean reverting day to day? And based on that, you know, I make my decision or if I thought that I was nearing a technical level, you know, I, I would really try to form a view because again, you want to get your, the most bang for your buck with your Delta hedges. Particularly as a retail trader, I wouldn't be Delta hedging constantly. So hopefully that someone answered your question there last thing. So if you're selling short dated calls and they become in the money, what would you look for in regards to when you should roll? No, that's a good question. You know how to roll. You know, I think, you know, there's a few ways. I mean, one, you can just let it expire, you know, so, so my biggest thing for roles is I think I said this two weeks ago and I'll repeat this anytime I get asked these questions. I don't like to be short teenies. Teenies are basically options with very low Delta, very low probability.

[00:38:34.29] - Speaker 1
You know, they have a very low dollar value. And so, you know, Obviously, that depends a little bit, but as a frame of reference, like on Spy, you know, let's say that I've sold a call and it goes in the money, and now it's not going to be a teeny. And let's say it goes way in the money. Like you sold 540 calls, and now we're up at 590 and we're down, getting close to expiry here. So that's going to be a teeny. Now you might say, Ryan, why is that a teeny that's going to have a value of like $50 a share, give or take? You know, it's gonna be a little bit more. It's gonna be like if. If we're at 590 and you sold a 540 call, it's gonna. It's gonna be roughly, you know, 51 or 50 inch, you know, probably 50.2 or 50.1. And the reason is because every option has intrinsic and extrinsic value. The intrinsic set, if you exercised it, the extrinsic is, you know, is. Is its true option value. And so I would call that a teeny option. And the reason is because if you look at the put, if you look at the 540 put, it'll have the same value as the extrinsic of the call.

[00:39:52.05] - Speaker 1
So it's going to be like 20 points or 10 points, it's going to be pretty near worthless. And so you're not really gaining anything by being short the call at that point, you know? You know, at that point, you're not short optionality, you're not getting paid a premium. You're just short the stock. You're just short spy. And so I keep an eye on the extrinsic value or I. E. If it's an in the money option, you can look at the out of the money equivalent option. So if you're short a call, you can look at the put put. And if that gets to be a very low value, that tells you the market's not paying you anymore for being short the option. You're just short the underlying or long the underlying. If you were short of put, that's in the money. And so that's when I would look to roll, because you want to. You know, obviously you're going to win some, you're going to lose some when you sell options. But the key is that you want. You want to. If your goal is to sell options, then you're trying to earn premium for being short volatility.

[00:40:52.04] - Speaker 1
But if you're short an option that doesn't have any extrinsic value. You're not really short volatility. You're just betting on the underlying. And so in this case, you know, that. That would be my general rule of thumb. At the very least, you want to roll if the things that you're short get, you know, get to be teenies in terms of extrinsic value or their delta gets very close to zero or one said another way, mathematically, you know, so that's. That's how I would. I would look to manage my roles. You could set some arbitrary limit. Like, you know, for spy, we usually look at, like 50 points, I. E. You know, so if we're selling options that range from 3 to $25 a share, if that gets down to 50 cents or less, we'll say, all right, that's a teeny. We're gonna roll it. And again, reminder, that could be 50 cents on the. On the counterpart. So if you sold a call and it's in the money and the put is 50 cents a share or less, you know, I'd look to roll. Hopefully that answered your question about rolling options. So we got about 15 minutes here.

[00:41:57.04] - Speaker 1
If we don't finish this, we can pick it up next week. But again, I wanted to, you know, talk through this theta idea real quickly, and then we'll move on to an interesting trade idea that we were asked about recently. So again, this theta, I want to make sure that this is clear to everybody. So theta is the concept that options lose their value over time. So each day or week that passes, that call that you purchased is going to lose value. It's going to go down this curve. So if we were to buy. Let's use an example that we just talked about, I think. So if we were to buy the 22 call. On Barrett. And Barrett was trading, I'm going to ignore dividends for the time being. Implied volatility was. I think we said we could get it for like 30%, 25%. Let's just use 30, 25 per. So that call option, that 22 call verse 19, maybe we go a little lower. If we're willing to spend a little bit more in premium, maybe we're willing to buy a 21 call. And we think that's where the breakout would happen if we break call resistance.

[00:43:53.01] - Speaker 1
So what we can see from this option here is that if it's gonna start to bend down and then go to zero, this one's declining pretty quickly. That's because it's out of the money. If we buy a little closer to the money, we'll see this more clearly. Yeah, so let's look at the, at the money call and you can see that a little bit more clearly. So if we were to buy the at the money call right now on Barrick with 25 implied volatility, we'd be looking at paying. If we, if we go out and get say 60 day option X free. Yeah, we're looking at paying about 79 cents a share, give or take. You know, again, I'm leaving out some interest rates and other things. So it's gonna, it's gonna vary a little bit, but call it between 50 cents and a buck a share. If we wait and a month goes by and nothing happens, then that option is going to fall from, it's going to lose about 25, you know, it's going to lose a third of its value. It goes from about 75 cents a share down to about 53 cents a share, which sounds like a lot.

[00:45:16.26] - Speaker 1
But when you think about it though, I mean we got a decent amount of time but in, if we wait another month it's going to go from 53 cents a share to zero. So that's the exponential part that I want people to think about, that I really want to emphasize to folks is, you know, you know, look at that. We only lose 25 cents a share over the first month of owning this two month option. We lose 50 cents a share twice as much over the last month of owning this option. So again, I can't emphasize this enough. I said this two weeks ago and I'll repeat it a lot. A lot of retail buyers make the mistake of hey, I don't want to buy long dated options. Because I'm thinking that, you know, yeah, I don't want to buy long dated options. It's too much premium. I don't think it's going to move that much. I don't want to pay A$20 or I don't want to pay 75 cents a share. But the way that a pro would approach this, 79 cents a share, the way that a pro would approach this is not to, you know, think that they're gonna buy it to own it.

[00:46:21.19] - Speaker 1
It doesn't mean we buy it, we just hold it until it expires. You know, we're buying this and we're gonna trade it. Maybe we're gonna delta hedge it a little bit over its lifetime, you know, but we're certainly going to look to manage this position. So I buy this at 79 cents. Obviously if we go in the money, if we rally and break out like we're hoping, then you know, we could just pay for it full stop. And then I'd either Delta hedge or, or sell another call to recoup my, my premium. But another thing that could happen is the market might not move at all. Let's say a month goes by and you're thinking, well then I'm going to lose 25 cents, I'll lose 25% of my investment. But not necessarily. We saw Berkval could spike as high as 50%. So what would happen if it just jumped up to 35%? That one month option would suddenly be worth 75 cents. So we basically got a free month of optionality because we paid about 78 cents and now it's worth 75 cents. And so for a nickel a share we got a month to basically sit there and see if our option goes in the money or things change.

[00:47:33.03] - Speaker 1
If, and of course that's if implied volatility goes up. But if your view is that implied volatility is very cheap, well then you know, you got a lot of chances. So you know, pretty, pretty sweet perk of, of owning implied options that are longer dated is you have this benefit that implied volatility can basically offset anything you lose in theta. Okay, last thing I wanted to jump into. We had a question over email about trading some structures two weeks ago I talked about selling the belly. Buying the belly or sorry, selling the belly and buying the wings. We had a few questions. How would you do that in practice? How would you buy the belly and sell the wings? So this is a somewhat complicated structure but you know, I think a lot of people have heard of it for no other reason because it's got a famous great sounding name, the Iron Condor. What is the Iron Condor? So the Iron Condor is basically you buy a call spread and a put spread. So you're buying a strangle and selling a further out strangle or vice versa. You can buy or sell. So this is a little bit complicated Excel spreadsheet.

[00:48:47.15] - Speaker 1
But I'm going to show you quickly the payoff of the Iron Condor. So first let's look at underlying structure price. So here's an example payoff of an Iron Condor. Just to. You don't have to see everything that's going on in this chart or in this Excel sheet. But I'll tell you real quick, what we're looking at here is an Iron Condor. That's where we buy the 610630 call spread. So the 6, 10, 6, 3, 0, call spread. And we buy the. Let's see here. And we buy the 5, 7, 5, 50, put spread. So the idea is a roughly symmetrical call spread and put spread around 590 when spy is trading 590. So here you go. So spy is trading 590 very close to expiry. Here is your payoff profile. We pay a premium. I just threw in five bucks of premium just to give you an example. And so the way this structure works is if we stay in between. So in this one, you're betting on volatility, right? You want volatility to be high. If we stay between 566 and 614 roughly, then you're not gonna make back your premium. If we get outside of that, you start to make back that premium.

[00:50:27.11] - Speaker 1
But it's capped. For those who are familiar with straddles and strangles, it's capped because we sold a wider strangle. You know, we sold the outside, we sold the wings. So we bought the, in this case, we bought the belly and sold the wings. So, and what I mean by that, and I'll show you, is because we're making money making money, making money, and then we stop making money. And if you really wanted to sell the wings and buy the belly and reduce your premium, you know, you might do something like instead of just selling one of these, you might sell two of the outside strangle. And now you can see. So we make money. We make money. We make money. Oh, and then we start. And then we start losing again. Start losing again quickly. So this would be cheaper, obviously. This one might even be premium neutral. Or you might get paid. I didn't change the premium. Let's assume we could do that at zero cost. So this would be an example of buying the belly and selling the wings. If we could do this at no cost, we're basically saying, hey, I think the market's gonna fall somewhere in this 530 to 570 range or 610 to 646 range.

[00:51:54.05] - Speaker 1
In practice, we probably have to pay a little something for that. This. But the idea here is that, you know, we can make money on medium sized moves and we lose money on big outsized moves like very big tail events, or at least we give back our profits depending on how you do this. But if you do it one by one, then, you know, you can't lose money. You're just, you're capping your gains. All you can lose is the premium and your gains are Going to be capped at the width of your call spread or your put spread. So that's the value at expiry. But what I wanted to talk about a little bit was, you know, someone was kind of asking, you know, how, how would I extend, you know, like, what's, what's my exposure here? Like, how exposed am I to, to implied volatility? So that's, you know, and why do we call this buying the belly, selling the wings? Hopefully this kind of shows it. But even if we just do a singleton, even if we just sell one each, you might think, I'm not really short anything. It's just a qu.

[00:53:07.08] - Speaker 1
I'm just long call spreads and put spreads. So what do I have to worry about here? Well, remember we talked about vega, basically how much we have to worry about implied volatility moving. So let me show you the vega of this position. Because one thing we've got to remember is when we trade options are a lot of times we do these options and we look at hockey sticks, or this is almost a hockey stick because I've, I've given it one day till expiry. We look at the hockey sticks and we think, okay, you know, so that's, you know, like if I buy the Five90 call on spy and we go up to 595 and make five bucks. But that's not how it works because, you know, that's going to be a much smoother payoff profile. So let me show you just what I mean by that. Look at how. So right now this looks like a pretty clear, you know, like call spread and put spread. But watch what happens if we give it an extra month or two to expiry. Look how different that profile looks. And the reason for that is that these options basically, you know, as you get further and further from X free, they just kind of naturally smooth out.

[00:54:28.02] - Speaker 1
And so rather than going up more steeply and then capping out. And I think we can even see this here. Let me see if this isn't too hard to chart. Yeah, let's try to chart this so you can see the difference. Yeah, so look at that. So look at how different that one looks. I think we're missing premium in one of these. This one's missing five bucks at premium. We gotta smooth that out. It. Took the wrong one. Oh, I need to add five bucks in. Sorry about that. One moment. There we go. So we, what we can see here is that, you know, this thing. I might have made a few details, but I want to focus on this curve Right here. So what's interesting here is as you get to Xprey, you know, if you're at 550 and you have a 570, 550 call spread, I mean, that's basically it. You know, you're gonna make your 50, you know, nearly 15 bucks, whatever you less your premium. So if you paid five bucks a premium, you're going to make 20 bucks on your. I said call spread. On the put spread, the 57550 put spread, you're going to make 20 bucks here.

[00:57:03.02] - Speaker 1
If we expire at 550 or 15 bucks after your premium. But if we get there early, you're going to get a fraction of the profit. If you try to unwind that position early, you're gonna get more like 10 bucks. And the reason for that is because you're short volatility up the wings. Look at what happens when we look at volatility instead of the price of the option or Vega instead of the volatility, the option. So we take those away and look at Vega. Now what we can really see is we're long the belly and short the wings. And what I mean by that is if we do this Iron Condor and the implied volatility goes up a lot, we're going to make money. We will. We will make money even if the market doesn't move at all. Like if, if we buy this thing, let's say you listed in my call today, you were like, okay, I think implied volatility is cheap. I'm gonna go buy some. I'm gonna do it with an iron Condor. So it's not too expensive from a premium standpoint. Well, if implied volatility goes up, you're going to make money.

[00:58:10.26] - Speaker 1
If it were to jump up tomorrow by three or four balls. But if we sell off a lot and implied volatility goes up, you will lose. You will not make nearly as much as you expect because the option that you, that you are short will become way more expensive to buy back. And so if you are delta hedging, this is actually no bueno. If you're a delta hedger. What we would prefer to reverse this. Typically, I was talking last week about selling the belly and buying the wings. So if I wanted, if I was delta hedging, I would actually go one of the. And I thought that, you know, the tails were cheap, I. E. Tail events or low probability events, big moves up or down, then I would buy out of the money. I would do the reverse. I would sell the straddle or the, you know, Close to the money options and buy the further from the money options and delta hedge it. And then if we end up in a tail event, I would have a long vega position. It would be the inverse of this. So if I flip this sign on these.

[00:59:17.23] - Speaker 1
So if I sell the 610 call and buy the 630 call and I sell the 570 put and buy the 550 put, now I reverse it. So now what's great about this is if I wanted to bet on implied volatility and I'm short implied volatility at the money, but if we end up going down to 530 or up to 630 or 640, 40 and then implied volatility goes up 5 or 10 vols, then suddenly I'm going to be making money. In fact, with a Vega of 25 cents a share, I'd make a dollar a share if we went out that far. So that was a little technical, but hopefully that gives people a little bit of a sense of how the Iron Condor works. It's a way of, a cheaper way of trying to straddle or a strangle to get exposure to the underlying market. Or if you're selling it, then it's a way you'll collect less premium but you'll limit your losses. I can show you that real quickly before we close for today. So if you look at the structure price here, let's look at this one day till expiry. So you can lose.

[01:00:59.10] - Speaker 1
So if you did the opposite, so if you sold the belly and bought the wings, then if the market were to rally, you'd lose money. But look, your losses are limited so you would, you know, the most you could lose is 20 bucks in this example. This is just the inverse of what we saw before. So the Iron Condor would be a way to, if you're selling volatility to cap your losses and if you're buying volatility the other way, you cap your gains, but it makes it a lot cheaper to buy that volatility. But then remember that if you're trying to bet on implied volatility that these have kind of interesting volatility characteristics. So on this one you would be long volatility in the tails and the other one you'd be short in the tails. So, you know, as usual, please ask questions, please send emails. Hopefully that was helpful and hopefully people were able to follow that. And if you have a question about a potential structure or strategy that you hear about, I'm always happy to diagram one. And we can talk about an example of it.

[01:02:08.18] - Speaker 2
Yeah. Awesome. And thank you so much, Ryan. And we're going to see each other back in a couple of weeks and thank you guys for watching and have a great day. And again, see you guys soon.

[01:02:20.25] - Speaker 1
Thanks, all.