In this video, we show you an example of the remarkable way that options income strategies respond to huge spikes in market volatility, affording options traders unusually good trading opportunities in volatile markets.
View Video Transcriptone of the reasons that options income
traders love volatile markets like the
one we’re in right now in this is stark
pandemic is that options income trades
if designed correctly can create a
winning trade over a gigantic range of
prices compared to normal markets
I’m the head trader of SMB capitals
options trading desk here in Manhattan
and we’re seeing opportunities like this
all day these days in this video we’re
going to show you a vivid example just
how dramatically advantageous this
change in the market can be four options
income traders if you understand how to
structure trades to take advantage of
these opportunities so if you’re
interested in a trade that can win over
a gigantic range of prices and in either
direction from the current market price
then stick around because I think you’re
going to be surprised by just how wide
of a range the market will give you for
winning trade in today’s market
[Music]
hi I’m Seth Freudberg and I’m the
head trader of SMB capitals options
trading desk SMB capital is a
proprietary trading firm located in
midtown Manhattan and we provide capital
for options and equity traders from all
over the world trading both remotely and
in our offices here in New York City now
I’d like to suggest that you click on
our subscribe button right now so that
you don’t miss any of our free trading
videos that we produce for traders and
investors all over the world they’re
really very valuable ok
so as a result of the Cova 19 pandemic
unless you’re living under a rock
somewhere you’re aware more than aware
that the market crashed in March now
when a market crashes what happens is
that the options market begins to adjust
to the realities of that crash and in
this video we’ll be showing you an
example of that now Before we jump into
that though we’ve got to make sure that
everyone listening understands the
basics of index options and for those of
you who already understand options
basics
hang in there there’s going to be really
quick and then we’ll jump into the key
principles of this lesson okay so now
almost all of you are probably familiar
with equity options where a call buys
you the right to buy 100 shares of a
stock at the strike price of the option
anytime before the option expires and a
put option entitles you to sell 100
shares at the strike price of the put
before that option expires but there are
also index options which work similarly
to equity options except there’s no such
thing as 100 shares of an index like the
S&P 500 you can’t really buy or sell 100
shares of an index but what you can do
is get paid in cash $100 per point if
the index expires above the strike price
of an index call that you buy or
alternatively you’d be paid $100 per
point for each point the index drops
below the strike price of your index put
so for example if an index is trading at
1,400 and you buy the 14 10 call if the
index goes to 1415 you’d receive $500 in
your account if the index closes at 1410
or lower your call expires worthless on
the other side of the ledger if you buy
a 1385 put and the market sells off to
1375 you’d make $1,000 but if the market
just sold off to
1385 or higher the put would expire
worthless so those are the basics of
index options and remember you can buy
options but your broker will allow you
to sell options as well and your broker
will allow you to put together
combinations of options in other words
option strategies that involve both
short and long options purchased in a
way that is advantageous to you as a
trader
okay so now that we’ve established the
basics of how index options work let’s
take a look at a pretty surprising
example of just how dramatically options
adapt to market conditions and how
helpful that can be to you as an options
income trader so let’s take a look back
at December 30th 2019 about four months
ago before the pandemic had really
emerged as a finance or markets issue
now most of you have heard of the VIX
index and what it represents but for
those of you who’ve not to put it in
very very simple terms the VIX measures
how expensive options are getting which
in turn is a reflection of how much fear
there is in the market and so as you can
see the VIX was trading near its
two-year lows back at the very end of
2019 now at that time the market was
very bullish particularly tech stocks
and so let’s focus on a particular index
known as the ndx index also known as the
Nasdaq 100 which is a very commonly
traded index for options traders the nd
the MDX index includes Microsoft Apple
Netflix alphabet and lots of other tech
giants most of which were in a very
bullish mode at the end of last year
which are the very times that the VIX
tends to be very low as it was at the
end of last year now there’s an option
strategy known as the iron Condor that
some of you may have heard of and the
way that it works is that you create a
wide range around the current price of
whatever you’re trading within which
you’ll make a profit if the market
remains anywhere in that wide range so
let’s explain you how this works and
should come clear to you so let’s say
that on December 30th of last year you
wanted to make a 39 day iron Condor
trade on the ndx Index well on that day
the ndx Index was trading at 87 21 and
so what we did was we sold the nd xcall
9200 about 500 points above the current
market
and we bought the 9300 call for
protection should the market go crazy to
the upside at the same time we sold the
eight thousand foot which was seven
hundred points below the market and then
the 100 points below that we buy the 79
hundred foot now let’s understand how
this creates a large range around the
current market so to do that let’s first
look at the cash flow implications of
what we’ve done here with this trade so
you can see that when we bought the
ninety three hundred call we paid eight
dollars and eighty five cents but
because this put pays off $100 per point
if ndx gets above ninety three hundred
then that eight dollar and eighty five
cents is multiplied by one hundred to
arrive at total cash paid into our
account of eight hundred eighty five
dollars when we sold the ninety two
hundred call we received a market price
of $17.50 so that becomes a cash inflow
into our account of seventeen hundred
fifteen dollars now moving down to the
put side we sold the eight thousand foot
for thirty nine dollars and seventy
cents which brought in three thousand
nine hundred seventy dollars and at the
same time we bought the protective 79
hundred foot for $32.25
so those are the cash implications now
the way that this trade works at any
price below ninety two hundred and above
eight thousand you get to keep all of
the cash that you received in other
words your profit would be the entire
initial cash flow why well let’s examine
what happens if the market expires
between any of those any of those two
points well both the ninety three
hundred and the ninety two hundred calls
both expire on expiration day february
seventh completely worthless because for
either and trigger an obligation to the
buyer of that option the market would
have had to be above the strike price of
the call option as we explained earlier
and the same logic applies to the eight
thousand and seventy nine hundred put
options unless the market expires below
eight thousand then obviously there are
no obligations to the put buyer of
either the eight thousand for the set
900 puts and so those expire worthless
also so those options just die and go to
options heaven and you get to keep the
original cash flow that you received as
the trade is over in other words your
initial initial cash flow becomes your
profit on the trade now before we get
into how this all changes when the
market gets extremely volatile like it
is in the last two months I wanted to
let you know that there really are sound
viable long-term techniques for trading
options for income and in fact we’re
currently running a to our free
intensive workshop at the moment we’re
will be teaching you three of those
strategies that real professional
options traders use including a really
simple but incredibly effective
technique that some of the greatest
investors in the world like Warren
Buffett use all the time plus an options
trading strategy that has a statistical
80 percent probability of profit month
in and month out plus an option strategy
that you can employ with the stock that
you like where you’ll make your target
profit whether the stock goes up goes
nowhere or even goes down a small
percentage so if those strategies would
be of interest to you then you should
check out the free options class that
we’re currently running just go ahead
and click the link that should be
appearing now at the top right corner of
your screen that will open the free
registration page in a new window so
don’t worry you won’t lose this video or
you can just head on over to options
class com to register for this free
intensive workshop it’s a rare
opportunity for retail traders and
investors to learn directly from Wall
Street traders but that’s exactly what
you’ll be getting through this free
online workshop so click the link to
sign up now and don’t miss it okay so
now we’re gonna fast-forward through
today and as you can see the VIX which
had been trading in the 12 to 20 range
for the vast majority of 2018 and 2019
suddenly spiked massively on February
24th and has remained elevated above 35
ever since spiking as high as 85 at one
point as the market grapples with how
badly the Cova Denine teen pandemic will
damage the valuation of the equity
markets in general so as a result
options pricing has spiked right along
with the VIX
which as we said before was explained
simply as a measure of how expensive
options are getting and so now let’s
take a look at how this plays out in
reality so let’s move now to march 9th
which was in the middle of this huge
spike in the VIX and we’re going to look
at an apples for apples situation we’re
taking the ndx index options 39 days
from March 9th so that’s the April 17th
expiration and we’re going to set up an
iron Condor and you’ll remember that
before we went 500 points above the
market to sell the call but in this case
we’re going to move up a thousand points
from where the index was trading on that
day which is slightly above 8,000 so
moving up 1,000 points to the 9,000 call
strike price and selling that one as we
did then moving up another 100 points
from there to 90 100 we’re going to go
ahead and buy the protective call and on
the put side you’ll remember earlier we
dropped down 700 points to sell the put
on the put side of the trade well in
this case we’re gonna drop 2,200 points
below the current market price and sell
the 5800 call and below that we’d buy
the 5700 put so while before we were
1200 points wide on this iron Condor we
are now 3,200 points wide so not only
are we almost three times wider than we
were before
in the low volatility environment but
I’d like you to take a look at the cash
flow on this iron Condor now we won’t go
through each strike in details we did
before but as you can see that when you
net down each of the strikes of the iron
Condor adding up the cash we received
for the short options and the amount we
paid for the long options we end up with
over 26 hundred dollars in cash flow on
a trade that is 2,000 points wider than
the earlier iron Condor we demonstrated
with where we collected just about
$1,500 or so in other words we were
collecting 75% more cash on an iron
Condor that is 2,000 points wider it’s
incredible so moving forward expiration
day will see that the ndx closed at 8000
8:32 and for the same reasoning that we
just discussed earlier we see
Polly Pocket the 2672 dollars in options
premium that we originally received and
the witting trade has ended this should
not come as a big surprise given the
fact that we nearly tripled the width of
the iron Condor and so for the markets
that stay within that giant range
shouldn’t be that shocking now the
purpose of this video was to drive home
a very important point and that is that
these kinds of market neutral range
trades like the iron Condor are very
tradable in super volatile markets
because the options market automatically
adjusts to the giant moves in the equity
market that are taking place and adjusts
the pricing accordingly so that the
options sellers are compensated properly
for the risks of they’re taking the
options markets basically saying look if
you want me to sell you this iron Condor
for anywhere near the price you paid
before in the low volatility times then
you need to give me a much much wider
zone of safety than the normal zone
because the markets too erratic making
big up moves and big mountain down moves
virtually every day so for me to be able
to make a profit of my iron Condor I
have to make it pretty unlikely that
I’ll have to pay off and that can only
be accomplished if you put my short call
strikes way above the market and my
short put strikes way way below the
market as we did in this example
creating this giant 3,200 point wide
iron Condor and actually getting paid
more for it then the 1200 point wide
Condor expiring in the previous month in
the lower volatility times these are the
kinds of opportunities that professional
options traders look for all the time
and once you become experienced you’ll
be able to spot these same kinds of
opportunities whether you’re trading
professionally or with your own capital
now just to remind you as I said earlier
if you enjoyed this video and learned
something valuable from it would like to
learn the details of three real-world
option strategies that professional
options traders use all the time then
you should check out the free options
class that we’re currently running just
go ahead and click the link that should
be appearing now at the top right corner
of your screen that will open the free
registration page in a new window so you
won’t
this video don’t worry or you can just
head on over to options class comm to
register for this free intensive
workshop it really is a rare opportunity
for retail traders and investors to
learn directly from Wall Street traders
but that’s exactly what you’ll be
getting through this free online
workshop so click the link to sign up
now and don’t miss it and please don’t
forget to click on the subscribe button
right now so you won’t miss free trading
videos that were posting constantly on
our channel to help you to improve your
game as an options trader
* no relevant positions
