Premium Melting Away

Using EPOP For Risk and Position Management

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Setting the Table:

• This week we looked at overlay screens based on our liquidity metrics. While far from the only component necessary to evaluate a trade, liquidity is the lifeblood of markets and will determine your execution experience. Both absolute levels and changes in liquidity are interesting. 

  • We use the LIQ index to identify names that are developing more robust liquidity for investment strategies, like AAPL and XSP. Tighter markets, more strikes, and generally more activity improves pricing for fundamentals based investing. 

  • The time value of options makes them great for a trade too, and the LIQ index sees spikes when volume pops indicating price movement. Both AFRM and CELH are seeing volume pickups and have several potentially interesting trade setups. 

• Both of these have a common theme, in that liquidity allows for more granular strike selection. Systematic options strategies will commonly define their objectives by either percentages or deltas; e.g. sell the 30 delta or 5% out of the money call. This is particularly true of the GULL trade, that not only requires 3 strikes, but the put spread legs often bleed into the less trafficked series. 

  • We’ve made a few upgrades to the Strike Finder tool, which you can now find totally free, without any login required, at DemoTheTape.com. You’ll also get exclusive delayed data previews of all the reports in our Analyst package. 

    

    www.demothetape.com/strike_finder

  • Lex and I also chatted about this on the Traders Workshop. It’s a complicated balance, but if there’s liquidity to support it, more strike listings open the doors for more strategies and opportunities. 

• Strike selection matters because it defines the bounds of your strategy. Yes you’re long vega when you buy the AAPL 220 call expiring in a month, but plain and simple you make money when stock goes further past the strike than the amount you pay. For all the greeks out there, it comes down to dollars and cents.

• Today we’re going to look at another metric that has nothing to do with the calculus, but is all about the cash. Expiration Premium Over Parity (EPOP) is a simple calculation, but it’s both a risk and position management tool.