Hey trader,
If I offered you 40% off your next trade, would you take it?
Funny enough, that’s what the market is offering you right now…if you know where to look.
It shows up in how the options are priced.
You see, a volatility gap between two strikes is quietly marking down the structure I trade most, the vertical spread.
In fact, the same SPY vertical that quoted north of 60 cents yesterday quotes 36 cents today.
Yet, almost none of that markdown traces to the chart.
It comes from the skew between the strikes.
At first, I didn’t believe it myself. I had to double-check the quote when it popped up.
But it’s real. It’s an edge.
And now, it’s time for you to learn how to find and exploit it too.
The Coupon Hiding In The Chain
Three things set an option’s price.
- How far price sits from the strike
- How much time is left before expiration
- How much volatility is priced in.
Distance to the strike is just how close the bet already is to paying off. Time to expiration is the runway the option has to get there.
Both of those move slowly and predictably. Volatility is the wild card.
Volatility is the market’s guess at how much the stock will move. It swings around far faster than time or distance ever will.
When volatility jumps, every option gets more expensive.
Most of us know this.
But let’s take it a step further…and look at the volatility of one strike against another.
If you’ve ever looked at an options chain with implied volatility listed, you’ll see it change from one strike to the next.
When that spread gets out of whack, we find opportunity.
The Practical Application
Inside a vertical spread I am not buying one option. I am buying one strike and selling another against it.
Each of those two strikes carries its own volatility. When the gap between them widens, the strike I sell richens faster than the strike I buy.
I pocket that richer premium on the sale. It pays down the strike I am buying, and the whole spread gets marked down.
That gap between the two volatilities is the skew. A wide skew is the coupon.
Here is the math on today’s SPY vertical.
- Yesterday this same 744/742 structure priced north of 60 cents.
- Today it prices at 36 cents.
- One strike carries about 16% volatility. The other carries about 19%.
- The chart barely moved between the two days. The skew did the discounting.
Corey on the desk called it a 40% off coupon. That is exactly what it is.
If nothing else happens other than the volatility spread between the two strikes returns to normal, I make money.
THAT is a pure edge no market maker can ever use. Just us.
Now, this might sound complicated or nerdy. I promise you it’s not.
I look at stuff like this EVERY day with my members. And this is just ONE of the many statistical edges we can exploit.
I’m not going to list them all here for you. But if you want to put yourself ahead in a trade before you ever enter, then it’s time to join Block Hunters.
Not only do you get access to my proprietary unusual options activity console, but I’ll show you how to develop trading plans built from options chains and activity – the real money that moves the markets.
Click Here to Access an exclusive offer to get started.
Brandon Chapman, CMT
Creator of Ghost Prints
