QuantitativeExhaustion

Option Arbitrage and Contrarian Investing

INDEX:VXD   DJIA VIX
1228 29 32
We have had several opportunities this past few months to make significant plays using what I call a hidden option arbitrage strategy. Here is a simple strategy I employ when trading options. I often scan the Volatility Indexes to find rock bottom prices. When the index gives you low readings on a historical chart scale you can purchase options at a discount. You can also employ a contrarian trade if you see candles with long tweezers that are inverse to the performance of the underlying. Remember though, options are extremely risky. You can also use a strangle option trade to make sure your not on the wrong side. For every long candle shadow the next day or days have been extremely volatile. A strangle helps you profit from uncertain directions, but an expectation of market volatility . Strangle option strategy is using out-of-the money option strikes that are above and below the underlying price.
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Here is a look at both gold and gold volatility index. Notice the numerous long shadows. Now with the recent rise in Gold volatility options are much more expensive and more difficult for option traders to make money on calls or puts.
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QuantitativeExhaustion QuantitativeExhaustion
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Market sometimes lags and is forgetful, but when it lags, double down and expect a big return. We had a few day lag on the chart above as well, before the market roll over.
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Dear JR, Ah, finally. Well, there goes my weekend with these charts to study. So happy you did this work for all of us here at TradingView. Sincerely, Beauty
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no problem. I'll add the other volatility symbols soon.
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Here is a chart comparison of oil volatility vs oil. Only one really good trade here recently. We could see one shape up soon with lower volatility thus lower option prices.
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Here is a look at Apple's volatility vs Apple Shares. Apple has had high volatility for many years and volatility vs the underlying is almost always converging. I only see two really good opportunities with really cheap options here. However, we are seeing a fast downtick in volatility and could get back in the low twenty's.
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Pigs in a Pen

Near Term Option Volatility vs SPX
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QuantitativeExhaustion QuantitativeExhaustion
Bulls make money, bears make money, pigs get slaughtered is an old Wall Street saying that counsels against excessive greed and impatience. As you can see greed kills, it can kill an investor's returns by making them act in haste. The best investor is the one who is intellectually flexible and dispassionate in analysis when it comes to investing. As Warren Buffet has said the critical determinant in an investor's success is not intelligence or skill but temperament

In a normal market cycle we have long bull cycles followed by short term bear cycles. Here is a strategy using a simple method of probability and what is known about market cycles.

Reference Chart Above: Each - pen - has a group of volatility lows that consistently has a grouping of lower -pigs - than the previous lower pen. Three or more - pigs - in the pen and volatility is likely to run up as you can see in the chart above.

Market timing with more little piggies in your pen an odds are your short or long put trade will be a winning trade. However, if they hold too long corrections often quickly reverse, and they too turn into greedy pigs slaughtered with the longs.
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See any pigs JR ?
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littleriver you're missing the point here.

What I'm describing in the charts here are rare opportunities using options when you see unusual activity in the underlying's volatility index. The idea is to find contrarian signals by charting *BOTH the underlying volatility index of the underlying and the underlying.

What to watch for is the long shadow/tweezer's (using candlesticks) on the underlying volatility chart when there is little to no price movement with the underlying. Very often than not, this is a indicator of future volatility. The best way to make money with future volatility is to buy near dated options using a strangle option strategy, which I described above, or taking a small deep OTM Long Call, or deep OTM Long Put.

There is a higher probability that with a lag (days or few weeks of a long tweezer candle with little price volatility on the underlying) a big move will happen and your strangle will make large gains. If you are correct with your deep OTM option play, you'll make a large % gain.
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littleriver QuantitativeExhaustion
Thank you for the explanation. I may yet get the point with your help. Thank you!!
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Maybe the three little pig analogy is confusing
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.... aswome :)..........post
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Thanks Nashwan.

.. Now we need intra-day charts with indexes on TradingView so we can take advantage of not only daily/weekly/monthly large move, but intraday option moves. I hope we see this soon.
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>>>>> nice work :D
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Thanks nmike. Gave away my secret
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Here were two examples using the Euro Volatility Index and Euro Futures chart.
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I'm still need to learn the option game and have not given up. ;) Can you explain the difference and what it means out-of-the-money & in-the-money. Have never really understood it. Thx! in advance BM
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Best way to explain OTM's and ITM's options is to simply look at a option calendar. Here is a calendar for SPY July options.

>> http://finance.yahoo.com/q/op?s=SPY+Options <<

In-the-money options are highlighted yellow for the calls and puts. Out-of-the-Money OTM options are in white.

SPY Current Price is 160.42

Calls above 160.50 are out-of-the-money OTM
Calls below 160.00 are in-the-money ITM

Puts below 160.00 are out-of-the-money OTM
Puts above 160.50 are in-the-money ITM
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Soybeans is developing many long shadow candle tweezers. There is very good chance that soybean prices will drop significantly before the end of the year. Previously support at 18 has held for the soy volatility index. Now we are seeing shadows testing the area.
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Very interesting info. Thx for share your knowledge JR.
I think options market is very useful to make operation's coverage and structurated products, truly very interesting. You can make your own no risk investment product with assets over the world. Very intersting alternative to people who wants to invest in assets with high volatility but that they have fear to risk. Thx another time.
But i dont like that the option's price is very murky. The emisors put the price that they wish. It's dark, very dark. They say the they have a clear formule but is reallly a very complicated formule with volatility, volume, price, prime....
I like clear datagrams, clear data series with min and max quoted in a organized market tick by tick. I know they are also manipulated but it's less and you can profit it.
Anyway your published info is very interesting, Thx JR.
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Big tweezers long shadow candles. Wouldn't put in a strangle here. Probably better to actually sell options and collect on the premiums. I'd expect some sort of consolidation before next volatile move. If this were to be the case, straddle into the fall.
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Looking at DJIA bid volatility
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Google volatility compared to Google stock price
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QuantitativeExhaustion QuantitativeExhaustion
Support broke at the 910 level, as which was discussed by fibonacci queen a few days ago. Nice clue for those that bought puts 45 mins before the close yesterday.

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