Gamma Optimizer Glossary - Market Analysis for Mar 1st, 2018

When joining the service new users can feel overwhelmed by the particular lingo that is spoken in all of our posts. Though the terms might sound strange or too advanced most of the time the concepts are very simple to understand. In order to help everyone new to the service here is a list of very common terms used in the room and also YouTube links to where I explain them at length.

Glossary

Gamma: This is probably one of the most frequent words you’ll see in the room, it will be accompanied by a qualifier most of the time: long gamma or short gamma. Gamma is a mathematical parameter that describes the amount of non-linearity of an option. For a more in-depth presentation on this please check my YouTube video: https://youtu.be/mk-diJbRfMk

GT level: This is a very new term, and it means the long gamma/short gamma threshold. In essence when the market is above that level option dealers are net long gamma which means hedging activity will tend to oppose the market, in other words if the market goes up, they hedge by selling. If the market comes down they hedge by buying. The net effect is that hedging activity tends to slow down the market moves which causes low realized volatility. In the other hand when the market is below the GT level option dealers are net short gamma and hedging is in the same direction than the market. This means that if the market falls they hedge by selling even more, and if the market goes up they hedge by buying. The effect is that market moves will tend to be amplified by hedging activity causing higher realized volatility.

G.O or GO: This is a reference to our Long Gamma Optimizer tool, which is a tool we use to compute the best options to play a particular thesis. For a tutorial of the tool please check: https://youtu.be/qOg40JiXgvI

VRP: Another term that appears very frequently is VRP or Variance Risk Premium. In its most basic form the VRP is an added premium between Implied Volatility and realized volatility. In general Implied Volatility trades above realized volatility (it trades at a premium called the VRP). For more information please check: https://youtu.be/X3JkoYNFi8c

Variance: This is an statistical term and it it corresponds to the classic variance of population distributions. It is a very important concept for options and it is explained in more detail in the Volatility videos (see Volatility).

Standard Deviation: This is another statistical term that is very important to options, it is defined as the square root of the variance (so if you know variance you know standard deviation). Again this is explained in more detail in the volatility videos (See Volatility)

Volatility: This is a very frequent word in the GO room and it is a key concept for option trading, in finance volatility is basically the standard deviation of log returns, scaled to an annual value and also printed as a percentage (10%, 20% etc). It comes in several flavors most notably Realized Volatility and Implied Volatility. For a more in depth understanding of those concepts please check: https://youtu.be/1DPC1BdkWbo

Vertical spreads, Butterflies, Calendars, Risk Reversals: Those are a set of trades that can be done with options and are called in general Complex Trades. The reason is that the trade requires the simultaneous execution of multiple “legs” where we are buying and selling options with different strikes and or/expirations at the same time. For more information about this topic please check this video: https://youtu.be/bpcigFODyxI

DLA and NDLA: This is a deep learning algorithm trained with SPX historical data that seeks to predict 1% upside moves in SPX within a 5 trading session period. The DLA was the original implementation and in 2018 we replaced it with the “New” DLA or NDLA.

Binary Options: In the room I talk frequently about binary options, in particular the 1% upside binary call. A binary option always pays 100 if it finishes in the money, or 0 otherwise. Because of this it is a very simple way to play certain scenarios because it allows to compute in advance both expected profit and losses. For a more detailed discussion please check: https://youtu.be/ADSHUp2SqzU

Volatility or Momentum Center: This is a helper application with multiple charts updating real time most of them designed to track momentum in any underlying. For more information please check: https://youtu.be/bphaGeKHx3w

Kurtosis: In the momentum chart we have the control chart that displays a value called Kurtosis. This is a basic statistical number that tells us a lot about the nature of the distribution of intraday log returns. When kurtosis is 3.0 the distribution is normal (also called Gaussian) and means that most of the action is perfectly random fluctuations of price.

Log Returns: In finance returns are usually measured as log returns. This is a simple concept and it is defined as:

Log Return = log (close/ prev close)  where log() is the natural logarithm function.

SPX Term Structure: This is a chart that I publish frequently in the room and represents the Implied Volatility of options across different expiration dates. It gives you an idea of how expensive options are based on how close to expire they are. The X axis of the chart is time in days, and the Y axis is implied volatility in percentage. For a more detailed explanation of this concept please check the Gamma Central tutorial: https://youtu.be/0ddedBG5H6g

Ambiguity: I also post a chart about a statistical quantity called Ambiguity which is a close cousin of VIX (it was created by one of the co-inventors of VIX). It measures the Knightian uncertainty in the market. The concept is pretty advanced but the way I use the chart is simple we look for low ambiguity to start a leg up, and for very high ambiguity when expecting downside action. 

VIX : Another term that you will see a lot in the room is VIX. This is an index created by the CBOE that measures the 30 day implied variance in the market using only SPX option prices. It is a very useful measure and although it can be traded directly there are lots of products connected to it, like VIX futures, or volatility ETP’s like VXX and SVWY. For more information about VIX check the CBOE website and also this video: https://youtu.be/Y-qxfP3Y7Os