Using Q-Scores With VRP

In this guide we will show how to combine two powerful MenthorQ Models: The Volatility Risk Premium and the Q-Score.

VRP: The First Filter

The Volatility Risk Premium compares Implied Volatility (IV) to Historical Volatility (HV). When IV exceeds HV, options are expensive — favoring selling volatility. When HV exceeds IV, options are cheap — favoring buying volatility.

This makes VRP your first filter:

• High VRP (IV > HV) → Look for premium selling setups
• Low/Negative VRP (HV > IV) → Look for premium buying setups

However, not every high-VRP name is a good sell candidate. You need further confirmation. That’s where the Q-Scores enter the picture.

Learn more about VRP here [ Fabio qui metti link al primo articolo Understanding Volatility Risk Premium]

Q-Scores: Four Key Metrics

Each end-of-day scan should include four Q-Score components:

Options Q-Score

• Look for: Top decile or large 1-day changes.
• Why it matters: Reflects unusual flow, skew, and OI shifts, often signaling directional bias.

Momentum Q-Score

• Look for: Strongest performers and sharp uptrends.
• Why it matters: Price confirmation. Reinforces Options Score bias or flags divergence.

Seasonality Q-Score

• Look for: +2 or above for bullish setups, −2 or below for bearish ones.
• Why it matters: Gives historical context, useful for time-based trend alignment or fading.

Volatility Q-Score

• Look for:
  
  • ≥ 4 → Overpriced vol → sell premium
  • ≤ 2 → Underpriced vol → buy premium
    
• Why it matters: Guides trade structure — whether to lean toward credit or debit strategies.

Together, these scores form the decision stack. The rule of thumb is simple: look for alignment in at least three out of four categories.

Check out our Tutorial Video on Q-Score.

Example Setups

Let’s look at two sample trades based on VRP and Q-Scores.

SPX Setup

• VRP: High
• IV > HV
• Options Score: 2
• Momentum Score: 2
• Volatility Score: 4

This setup indicates expensive implied volatility and moderate directional bias. With no strong momentum or seasonal edge, the trade leans toward neutral premium selling.

Trade idea:

• Structure: Iron Condor or Call Credit Spread
• Rationale: Take advantage of high IV without leaning heavily on direction.

TLT Setup

• VRP: Low
• HV > IV
• Options Score: 3
• Momentum Score: 3
• Seasonality Score: +2
• Volatility Score: 2

Here, you’re looking at cheap IV with strong momentum and seasonal alignment.

Trade idea:

• Structure: Debit call spread or long straddle
• Rationale: Cheap premium with bullish tilt and potential for IV expansion.

These examples show how the VRP signal helps define your volatility posture, while Q-Scores define directional conviction.

Step-by-Step Daily Workflow

Every day after the close, follow this 5-step model:

Step 1: Check VRP Chart

• Segment tickers into “Buy” vs “Sell” premium categories using VRP.
• Use IV vs HV spreads or scatterplots for context.

Step 2: Review Q-Scores

• Look for assets with 3+ Q-Scores aligned.
  
  • For premium sell setups: High Options/Momentum + High Vol Score
  • For premium buy setups: Strong Momentum/Seasonality + Low Vol Score

Step 3: Confirm on HV vs IV Chart

• Spot extreme dislocations in IV vs HV.
• Validate that your VRP candidate is actually trading at a statistical vol premium/discount.

Step 4: Choose Trade Structure

• Let Volatility Score guide structure:
  
  • Vol ≥ 4: Favor credit spreads, strangles, or condors
  • Vol ≤ 2: Favor debit spreads, long straddles, or calendars

Step 5: Strike and Sizing

• Use Q-Levels or Expected Move to anchor strike selection.
• Size trades based on confidence in signal alignment and volatility context.

Execution Rules and Cautions

Q-Scores Update Only Once Daily

• Q-Scores are calculated end-of-day only.
• Use intraday action for entry/exit execution only, not to re-score ideas.

Do Not Chase Divergent Scores

• Avoid trades with conflicting signals (e.g., bullish Options Score but bearish Momentum).
• Mixed signals often lead to poor RR setups.

Strike Selection Matters

• Use implied volatility percentile, historical move range, or Q-Levels for defining realistic profit zones.
• Avoid selecting strikes based purely on delta — factor in expected movement.

Why This Model Works

By combining VRP and Q-Scores, you move from a single-factor filter to a robust multi-dimensional model:

• VRP gives context on whether to sell or buy options.
• Options and Momentum Q-Scores define directional conviction and structural edge.
• Volatility Score guides strategy type.
• Expected Moves and Q-Levels optimize strike selection.

This creates a repeatable system for trade selection across market regimes.

Conclusion

Traders who rely on the VRP model alone often misfire, especially during regime shifts or low-volatility environments. But when paired with the Q-Score framework, VRP becomes a powerful signal in a broader decision matrix. This article outlined how to screen, filter, confirm, and execute with a process that reduces noise and boosts edge.

By focusing on signal alignment, volatility posture, and structured execution, you’ll take fewer trades, but with higher clarity and greater statistical foundation.

Use this model daily, stay disciplined, and trust the system. Over time, it’s this kind of repeatable decision-making that separates strategy from speculation.

Access more free educational material at our Youtube Channel.