New Range Established, Tread Carefully and Wait for Clues

There are three types of volatility: Implied, realized, and future. Realized is a measure of how much movement there has been during some time period in the past. Implied volatility is the price of options now, which is in some sense a forecast of what future volatility will be.

As a full time options trader, I spend a lot of my time dedicated to searching for patterns that give me hints of what future volatility will be. Looking at the charts and order flow among other things, I use the price of options and my expectation of potential moves to allow me to enter into a trade.

Take a look at the chart above. This is the 9 month daily chart of gold. In January gold made a high of 1307. It sold off rather quickly to 1142 (165 lower, or about 12%) in the course of about 50 calendar days. Take a look at where gold options are priced.

Gold implied volatility is currently trading around 16.5% for options expiring in 60 calendar days (November exp). If memory serves, volatility was priced similarly to where it currently is when gold was trading 1300. As I write, the 40 dollar lower put in gold expiring in 60 days (the November 1095 put) costs about 15 dollars. If it were to be compared to the equivalent put when we were trading 1300 in January, this would be approximately the 1260 put. That move (1300 down to 1140) took place in 50 calendar days.


Here is the trade in retrospect:

15 dollars of premium spent; if the put goes in the money and you cover at expiration, each put you bought will be worth the strike price minus where gold is trading. So, in our example case, where gold moved from ~1300 to ~1140 in 50-60 days, we buy the 1260 put for 15 dollars. On expiration, we are trading around 1142. (1260-1142=118). You spent 15 dollars for a trade worth 118, so you make (118-15) 103.

As a high schooler and college student I played poker as a means of affording some basics. I would rarely play games where I won or lost more than $1000, but it was my young version of trading. Poker taught me one incredibly important thing that I use in my job to bring me back to reality. If you know the implied risk reward of a situation, and understand some basic math, you can become a winning player. Whatever noise markets are blasting in our ears, we must ask ourselves if the risk reward makes sense. If we are not convinced that it does, or that a trade makes sense but comes with a caveat, it is not worth doing.

In our above example, you would have made a return of approximately 103 dollars on a bet that cost you 15 dollars. You could not lose more than the $15 you put up because you were the buyer. So, you made 103. To calculate the risk reward, we should ask what the number of outcomes like this we would need given this price for the option to break even.

Put more simply: we bet 15 dollars; we made 103. (103/ 15 = 6.8) So if you had an outcome this favorable one out of every 6.8x, this bet would be fairly priced. (6.8x you pay 15 dollars, so you spend 103 on making the bet, if you win once in those 6.8x you will have won what you paid to enter making it “fairly priced”)… there are more outcomes than this, but if it is a move hard or sit scenario, this kind of math is more applicable than would be in a whippier market like crude.

I will not say what makes gold options fairly priced; but as an options buyer you can wait until situations are favorable from a risk reward perspective given your understanding of historical pricing. You are in no rush to make bets. If you are, step back, that kind of mentality is what allows the options sellers to hold onto their profits despite selling vol many times in the last year below where vol was realized.

All of the charts I show are in an effort to show and determine what I see as patterns of buying and selling. If we can find lines, however random, that indicate to us the potential for consolidation, it makes the prospect of owning options all the more dangerous. If you paid similar prices for the option we just discussed from any time between late March and June you probably lost all of your premium. To make on that trade, your timing would’ve had to have been perfect.

Creating a fair price for gold options over a 4 month period can be very tricky. The market can sit still for months and then move quickly all at once. Most of the time it is actually overpriced, but the times it is underpriced, it is drastically underpriced. If you look at the chart, and assumed you could not time things, but rather made the same bet time and time again, you probably made a little bit over time. You would not  have made enough to justify seeking out trades like that. It is the most difficult discipline we need to keep when trading gold. Even if we are right that gold is going to collapse or rally 100s of dollars, owning options gets expensive if we are right a little bit too early.

The longer term (not seen here) chart seems to indicate that gold remains in a downtrend. I last wrote about how I expected gold to continue to trade higher if the S&P sold off. The relationship was short lived, once again bringing gold’s safe haven status into question. Funny enough, gold’s safe haven bid failed in the 1150-1170 range, which is where it failed when there was the brief and almost forgotten Greece default scare. While this has been a major short covering rally, the gold bulls must have been disappointed when gold stalled in the 1160s as the stock market continued its sell off. Below is the 9 day look at gold.

Notice how when gold topped out around 1165 the stock market had yet to put in its low (the purple line is the S&P) and gold progressively worked its way lower. While the bulls had a good run there was serious volume at the 1170 level (sellers defending against a move higher). For now, in the 1120-1135 range, gold sits right in the near the middle of its recent range (1070-1170) over the course of the last 2 months. It is why I think options buyers need to be patient here. As an options buyer you have the control. Being profitable requires the discipline to wait for situations where implied vols get relatively cheap, and you have a strong opinion that movement is imminent..

Why is gold volatility where it is right now? Overtime gold option implied volatility tends to get lower when it trades in the middle of a range. Why was 1 month volatility trading as high as 18% 2 days ago, when equivalent volatility was close to 12% before the drop to 1080? The chart definitely implied a greater chance for a significant move down and quickly at 1142 before 1080 than it does here. While the chances for going lower are still viable and in my slightly biased opinion probable, betting on having it happen quickly is challenging. If you are buying 1 month options and you are right just a month too early, you lose all of your premium. So what to do?



That in fact should be the answer most of the time. Nothing. There is nothing to do, but prepare for the next trade and wait for the opportunity that might arise. Gold’s volatility spike was almost certainly due to the volatility in the stock market. Even while gold stopped negatively correlating with the S&P gold volatility went out. In fact, gold volatility got bid as it moved BACK INTO an area (1110-1120) where it has consolidated before this last leg of the rally. One fairly trustable rule is that volatility will not get bid if the futures are reversing back into a range. That is exactly what happened.  Vol got bid as we came back into the range. When the Vix is trading in the 30s, it is not unreasonable that people who need to own options across markets (for whatever reason) might reach for some gold volatility. Gold volatility has been trading at historically cheap levels, and in a time of panic in stocks, it is not unreasonable for funds with short volatility exposure to buy some gold vol as a hedge. Gold at 16% as it currently, as opposed to the usual 12-13% we have grown used to when heading back toward the middle of a range, is not expensive relative to other asset classes’ volatility. So we are left with a strange situation in which we notice the inter-connectedness of all assets classes, and that gold’s implied volatility is relatively cheap compared to others. But should the stock market, and consequently other markets’ volatility settle down a bit (stock up, asset class implied volatility down) gold volatility should come in as well. If gold can move quickly in either direction from here, its volatility may justifiably hold up. But we can only operate on the information we have in front of us. As option buyers, we must realize that the price action of late does not show us a clear reason to believe realized volatility will increase. Implied volatility is also toward the middle-higher end of where it has been on a daily basis for the last year. Higher implied volatility combined with an unclear signal from the price action means we should stay away. With lower volatility and gold closer to either end of the range, options might become very attractive, I actually think that is likely. So while there are a lot of reasons to see the potential for gold to move hard in either direction, exercise patience. While I am sympathetic to the idea that options have been underpriced for a long time in the gold market, I also know how difficult it can be to manage a position when nobody cares to buy options. Death by 1000 paper cuts is still death. So be careful.

I want to reiterate that there are times when options can become very attractive, but that we need to be very diligent if we want to employ buying options as a strategy. Timing, which is a big part of successful option trading, is far harder to nail down than people who do not trade full time might think. Even if you are right over the long term, the smallest difference in timing can be the difference between a loser and a home run. I have seen too often the wrong reaction to this reality of markets. The answer is not that you need to level into positions time and time again. You don’t need to chase the market. You have to be willing to miss what look like incredible opportunities. This market has proven that options can get cheap before big moves. Here, is not the place to put on bets for just that reason. The medium term implied vol is too high right now relative to its mean, and the chart gives us no strong reason to feel strongly one way or the other about direction in the short term. Far too many of the profits I have made on the big moves have been eaten into by my haste to enter trades that are medium term smart, but short term stupid. I don’t want others to make the same mistake.

My hope in writing this article was less to discuss gold than to discuss some of the classic mistakes people make trading options. I make them all of the time, even when I am trading well. As traders we cannot control the speed of the market. As such we must always defend against our urge to put aggressive minded positions without strong cues that it makes sense to do so. Making money is no longer a daily expectation in this patient but prudent trading strategy. It would even be OK to suggest option trading to mom and pop if they understood one simple rule


Never Be Short Options.

If you are a long option/ long spread player you cannot lose more than the amount of money you put in. “Trading” which involves getting short options, is a totally different ball game. That is hard enough as a full time trader, and should not even be considered by a less active player. But for less active players, I would suggest studying some of the historical implied volatilities and weigh them against your expectations for imminent movement. If you can find yourself in a place where the implied volatility is low vs historical implied vol, and you have conviction of a move, then options can be a profitable way to play the game. But you have to be selective. Death by 1000 paper cuts is still death. If you choose to track the market closely, than you will be able to see situations where the risk/reward to play the game is very favorable. If you are not willing to pay close attention, you will slowly bleed buying options in this market.

Be patient, and make sure that if you have a strong directional opinion that the implied volatility is relatively low compared to where it has been. If you see that the implied volatility is extremely low relative to its historical mean, get involved ONLY if you have a real conviction that it might move.

Markets have been a bit finicky lately, and it is easy to get caught up in the hype and feel like you need to participate. This can be a big trap and a more costly one than immediately meets the eye. There are ways to make money in these markets, but the prudent ones will realize that staying flat the majority of the time is the smart move now. Opportunities will arise but we cannot control when they come. If we keep a close eye, we will find opportunities while others are throwing their hands in surrender having painfully paid for options right before things calmed down. Things may go crazy again, but in gold at least, nothing has really changed from a longer term perspective.

My suggestion? Enjoy the last week or so of summer. Don’t sit in front of the screen waiting on the next big thing. Stay flat for the next week and watch how things play out before taking any strong stances. Historically gold sees more activity after Labor Day than in late August. I think there will be some interesting stuff forthcoming in this market, and I will write more if I see anything take place that creates a potential for a good trade. For those updates, please check in at

Gold Update by Ben Ryan

August 9, 2015

I just wanted to update what has happened since last post, and why I think copper is worth a close look.

Above is the 20 day of copper with gold in purple tracking it. Since gold dropped below copper 3 Sundays ago, you will see gold has traded below copper on this scale for almost the entire time. Now, you are seeing gold hovering above copper.

There are a few ways one could interpret this action, but my main takeaway is that if this correlation is staying in tact,we will probably expect gold to sell off small or for copper to rally.

On tonight’s open Copper gapped down about 1.5 cents.

Copper filled the gap, and now sits right near where it opened. China had a few below expectation economic releases this weekend.


I was curious to see if it might lead to any liquidation in the metals. Copper got knocked down but as mentioned has held up. The question is, is this just a short term rally with a greater trend of selling behind, or was it just one small order at an illiquid time? To be fair, this is not an enormous move (it’d be the equivalent of gold opening down 6-7 dollars on the open). Nonetheless, I want to stress the importance of anyone trading this market on a short term basis to at least keep an eye on copper.

Gold’s ability to withstand multiple tests of the 1080 area has created some short term support. As such, there may be some short term traders playing this market from the long side. While I do not have a strong 2-3 day view on gold, I could understand why some short term traders might look to get long between 82-90 area. I would just caution, if you see copper begin to sell off, take note. It might be the signal that allows you to save a lot of money by flattening out should copper lead the way. If copper struggles to stay above tonight’s open over the course of the next few days, I would become more cautious as a gold long.

As for the trade I mentioned last time; I had said gold could be sold around 1095 with a target of 1000. I think the trade is the most reasonable out there right now given what I believe to be a very comfortable stop at 1148 lets call it. So, 95 dollar target to the downside with a stopout 53 higher. It’s not the greatest risk reward ever, but I think resistance is so strongly defined near 1140 that a breach of this level would clearly mean being short no longer made sense. For someone who has a short bias, I think that is the smart way to play it for now.

If you are more selective in looking for good spots (and that is a good idea, making directional bets in the middle of our newly defined 1080-1104 range is not ideal) then I would look to see if gold can rally first and then sell into it. If for instance you were able to sell some gold around 1105, that trade gets you 105 profit potential vs 43 downside potential. A little bit of patience for a trade that is designed to last a few weeks could do a lot for its risk return profile. While I’d like to see gold whipping around, the price action of late makes it tough to get too strong with opinions in this spot. If gold manages to go below 1080 and sit for a few days between 1070-1180; I think there will be an  an even better risk reward trade from the short side (sell 1075, stop out 1100, target 1000).

As far as trading gold goes, I find that it is better to be a little bit more patient and deal with missing a trade than to worry that you are going to miss the next big move. While I try my best to write about what I see as the determinants of good risk/reward situations, the price action can be very choppy in gold. While there is a longer term downtrend in tact, finding short term trends that allow for definitive entry and exit points has been and continues to be challenging. If you want to be short this market, keep a longer term time frame. Even in bear markets gold makes it hard for shorts with short term outlooks. You are better off scaling in on rallies, or waiting until there is a definitive break of 1080 to pile on. If you are looking from the long side, keep an eye on copper and the dollar. There has been a lot of correlation of late. If either the dollar moves aggressively to the upside or copper moves aggressively to the downside flatten out and wait for a better spot.

Have a great week,


Debate On Crude-Oil Price Direction Continues

Debate On Crude-Oil Price Direction Continues

Debate regarding whether or not crude-oil prices have bottomed continues in the market, but the one thing is certain, prices are volatile.
Oil prices sharp slide through the end of 2014 continued into 2015, touching a low of just under $44 a barrel for Nymex West Texas Intermediate in January. Since then prices have bounced around $50 as of mid-February, with some oil industry analysts, like Price Futures Group’s Phil Flynn, calling a bottom.
But his view is certainly not universal. Some firms, like Citi, are still calling for WTI prices to fall to the $20 range.

Nervous Equity Investors Show Fear Through VIX®

Nervous Equity Investors Show Fear Through VIX®

Investors were popping champagne bottles at the end of 2014 as the S&P 500 chalked up another year of above average returns, amid fairly low levels of market volatility. But, equity market action in early 2015 suggests a whole new ball game is starting now. Equity market volatility has increased amid heightened uncertainty among investors on the outlook for stocks ahead.

Several times in recent months, the CBOE Volatility Index or VIX® has pushed above the 20 percent level, which signals fear or uncertainty among investors.

What is the VIX? “The spot VIX is a measure of S&P 500 volatility over the next month— the higher the percentage the greater the fluctuations we can expect in the near-term. It is typically higher during times of a market pullback or correction and lower when prices are going up, said Mitchell Warren, founder of

Potential ‘Storm Clouds’ Headed For Markets, But Volatility Could Rise In 2015

Potential ‘Storm Clouds’ Headed For Markets, But Volatility Could Rise In 2015

With China’s economy still looking soft and Europe’s economy shaky, there are some potential storm clouds ahead for the markets in 2015.

“Compared to even last year, the sky looks a lot cloudier than it did before, and we’re not talking about those pretty fluffy things where you can see Abraham Lincoln. They look like storm clouds over a number of markets, but that’s not to say we can’t have a good year,” said Patrick Young, executive director of advisory firm DV Advisors and publisher of the Exchange Invest newsletter.

China is expected to see its gross domestic product growth slow to closer to the 7% area, while Europe teeters on the brink of recession. Japan fell back into recession in late 2014. Only the U.S. economy is still growing. While Young said he sees no reason for the U.S. economy to not grow, he said given that it has strung together many months of expansion, just based on statistical averages the U.S. economy could falter.

Doritos Locos Tacos or New Coke: 7 Steps to Reinvent Your Flagship Product

Doritos Locos Tacos or New Coke: 7 Steps to Reinvent Your Flagship Product

The Doritos Locos Taco has been hailed as a genius reinvention of the taco – it combined two things that many of the company’s core customers wanted, before they even knew it. In the quarter after the company launched Doritos Locos, Taco Bell’s same-store sales increased 13 percent. Such is the case with successful product reinventions.

At the other end of the product reinvention spectrum sits New Coke – a reformulation of the classic Coca-Cola introduced in 1985. Just 79 days after its launch, public outcry forced the company to reintroduce its original product as Coca-Cola Classic, though it kept New Coke on the shelves through the early 1990s.

While Coke survived, few companies have the cushion to fail as spectacularly as it did. To get reinvention right – to be more like Taco Bell than Coca-Cola – it helps to take the following steps:

1. Have a Change-Ready, Competitive Culture.

There is comfort in having an established customer base that loves your product. Development is comfortable updating the product; the sales team is comfortable selling its features; and management is comfortable with the revenues it generates. But comfort should inherently be uncomfortable.

As a tech startup, we are not afraid (at an executive team level or a developer level) of taking calculated risks in order to push our products forward. It also helps that we are voracious competitors – once our developers see how an innovative idea to change one of our products can strengthen our leadership position, they become single-mindedly focused on making that idea a reality.

Read the full article here

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Options Industry May See Second-Highest Volume Year

Options Industry May See Second-Highest Volume Year

2014 may go down in the books as the second-highest volume year on record, as a high volatility at the beginning and end of the year boosted volume.

Traded volume through November stood at 3,910,760,808 option contracts, up 3.16 percent compared to the 3,791,066,303 contracts traded in the same period last year, said the Options Industry Council in early December.

There are still a few weeks to go before calling this year done, but “2014 looks to be on track to be the second-highest volume year on record,” they said.

The OIC measures the number of puts and calls traded at American exchanges.

Gain Market Insights With Unusual Options Activity

Gain Market Insights With Unusual Options Activity

“Unusual options activity” has quite a buzz lately —especially as it spills over from the institutional arena into the retail options trading arena. What exactly is unusual options activity and how can it be used to help drive trading decisions? OptionsCity sat down with a Chicago-area options trader to get some answers. John Voorheis is chief operations officer at and co-founder of

OptionsCity: Why are options markets so important for traders and investors to watch?

Voorheis: Options markets don’t have the deep, dark pools that are seen in equity markets. Apple trades 58 million shares in a day, but the real number might be closer to 70 or 80 if you factor in off-exchange liquidity. Because options markets are more transparent, they can offer unique insights —one of the most prominent of which is unusual options activity.

Options Volume Growth Could Be Low Single Digits Next Year

Options Volume Growth Could Be Low Single Digits Next Year

Options trading volume growth could be in the low single digits next year, but what type of growth the industry sees will depends on what’s going on outside the options market.

A panel of options exchange executives at the 30th annual Futures & Options Expo in Chicago said they have expectations for modest growth next year.

“Our baseline expectation is for a modest amount of growth,” said Steven Crutchfield, executive vice president, head of options, ETPs and bonds at NYSE. “A key driver of it is the underlying equity markets, and stock ownership is at an all time low. To the extent that we build up confidence in the equities market, we build up options.”

Crutchfield said he expects 2015 growth below 5%.

Buy vs. build? It’s the task, not the size that matters

Buy vs. build? It’s the task, not the size that matters

The “buy versus build” question continues to percolate in the trading community, but in recent conversations with software developers it appears to be reaching a tentative conclusion.

“This has been a constant debate for the last 30 years,” said Scott Morris, a quantitative modeler and president of Chicago-based Morris Consulting. “What’s different now is the quality of buyers and options has gotten better.”

The choice comes down to size and cost, the developers suggest, and size is not always the deciding factor.