Expensive Doesn't Last Long

Fifty Ways to Trade an Option

Most of the time the market isn’t doing anything. Alternatively, there’s always something cheap or expensive on the board. 

Depending on your perspective as an investor, opportunities in the market are either rare or pervasive. Particularly with options strategies, it’s hard to be a mid-frequency trader. Either you have active positions that are bending and exploding with gamma as they expire this week, or you’re using hedged equity structures that only need a quarterly check in. 

In both cases, you’re taking advantage of the way derivatives behave to mold a custom exposure. 

Volatility is the main driver of all options prices, but it’s best priced when it has space to realize. Over longer durations we can not only make better predictions about what the sample looks like, our experience has a better chance of lining up with the theory. 

Longer term strategies like the GULL lean on that “fair” pricing to find an appropriate risk trade off. We convert upside potential into downside risk protection at relatively stable values in indices and liquid equities. 

The implication here is that if it’s more stable in the long term, it must be less stable in the short term. Less accurate and more likely to be mispriced is another way of saying opportunity. 

Short term options have a little bit of extra cushion on them because of the potential for movement. Not just slightly higher IVs (Tuesday is 15% and Wednesday is 13% in SPX, while Friday onward is ~11%), but in terms of dollars per minute, you get the most bang for your buck. 

Opportunistic options traders will be looking for the short terms spots where they can find expensive or cheap volatility, and use these expensive (and powerful) greeks to craft short term positions. 

Today in Fifty Ways to Trade an Option, we’ll explore how to find options that are most likely to be mispriced in the short term.