About Leo Valencia

Leo Valencia

"Leov," as he is known in the Trading Room, hosts the Gamma Optimizer service at EWT, where he provides options education and trade set-ups, as well as access to his proprietary Gamma Optimizer tool. The tool helps traders pick the option strike and expiration that maximize returns for a particular move in the underlying.

Leov has also developed what he calls the Deep Learning Algorithm, which, trained with historical SPX data, seeks to predict 1% upside moves in the SPX within a 5-session period. This algorithm is among the tools Leov provides in guiding members of Gamma Optimizer with options trading strategies and set-ups for minimizing risk and maximizing returns.

With a PhD in physics from Stanford University, Leov is an electrical engineer with more than 20 years of experience in research and development projects. He was a member of the technical staff at Bell Labs Lucent Technologies in the RF and Analog Simulation department, and also a senior member of Consulting Staff at Cadence Design systems for more than 15 years working on analog and digital simulation software projects.

Leo also has developed an options education video series exclusive to members of his Gamma Optimizer service, plus a premium set of online Options Courses for all levels of options trading.

Education Articles

Understanding the GT level 2020-12-07

Reposting of this article about the GT level for new members (it was posted a long time ago) Understanding the GT level Or the not so invisible hand of the market. You see me posting the GT level from time to time in the main room, and every day in the GammaOptimizer service, and it is also displayed real-time in the full Variance Center app. But what does it mean? And why is it important? To better answer those questions I need to start by explaining the acronym. GT is an abbreviation for the Gamma Threshold

The Ultimate Source of Truth 2020-04-14

We are seeing very encouraging signs of an end to this crash environment.

Convolutional nets Live Video 2019-11-11

Folks, I plan to do a live video for the convolutional nets at 3:15 PM today EST (UTC-5), it will be recorded and that will be the official tutorial going forward. Here is the YouTube link for it: https://www.youtube.com/watch?v=3NP6YSEXy78 Remember that you can ask live questions on the YouTube chat. For those not familiar, please test out our Gamma Optimizer tool for selecting the optimal option strike and exp date.

Gamma Optimizer Glossary - Market Analysis for Mar 1st, 2018 2018-03-01

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

NDLA Performance II - Market Analysis for Feb 27th, 2018 2018-02-27

Now for the month of February we still have several more sessions to go even though the month ends tomorrow we need to wait more than 1 week to finish evaluating how did it go for it (so we can see if the predictions this week work next week or not). However running things so far it looks terrible for the NDLA (the market corrected 10% so it is no surprise) also because of the incredible expensive implied volatility we didn't officially play all the signals because they were outside the recommended trade

A Tale of Two Volatilities 2018-02-20

Because I know it can be confusing it is good from time to time to explain the differences between realized volatility and implied volatility. In essence volatility is a measure of dispersion (how far the returns are spread from a mean) so there should be only one volatility, however in financial markets we have a bunch of them. But for all practical purposes we have the following two: 1. Realized Volatility: Is the actual volatility of the market on any given time frame. It can be computed right away from just

New VIX Levels - Market Analysis for Feb 13th, 2018 2018-02-13

After a healthy correction of 10% from the top the question in everyone’s mind is the following: At what level will VIX reset ? In other words, after years of low VIX values what would be the new normal level? 12 ? 15? 20 ? Of course it is hard to come up with an estimate right now but looking at certain immediate statistical measurements can provide us with good clues.  We all know that VIX trades at a small and consistent premium over realized volatility during peaceful times, however after a volatility

Liquidity is not Volume 2018-02-07

 For the past several sessions I have been harping consistently about liquidity in the markets. More exactly about the lack of liquidity we are experiencing right now so I want to use this opportunity to dispel some misconceptions about what liquidity really is. The most important takeaway from this post is that liquidity is not volume. I know that some of you might be puzzled by my assertion that we haven’t had any meaningful liquidity the past couple of sessions when in fact trading volume has been 3X or 4X

Reading VIX and VXST 2018-02-05

By now you folks must know that I post a detailed view of the term structure of SPX options during the day, also you can get the a realtime curve by using the GammaCentral tool. However sometimes we don't need anything that fancy to draw some conclusions here. For instance pay attention to VXST and VIX right now. Remember that VXST is implied variance for the next 9 calendar days, while VIX is implied variance for the next 30 days. The current readings are: VXST = 20.18 and VIX = 18.08 What that means is

ES futures and SPX 2018-02-05

Those of you with good eyes have noticed that ES futures trade sometimes at a discount to SPX and other times they seem to trade at a premium. Right now they look discounted (cheaper than SPX) but last week they were a tad higher, why is that ? The explanation resides in the fact that ES futures trade closely the SPX forward value expected at settlement day. And if you remember a Forward is computed like this: Forward = SPX * exp((r-q)*t) Where r is the risk free rate, and q is the dividend yield and t is

Long Gamma/Short gamma hedging effects. 2018-02-05

I can't find any material about this subject even though I'm sure I have posted about this before :) the gist of the long gamma/short gamma threshold that I publish is this: 1. Below the threshold, SPX option dealers are short gamma in the aggregate. 2. Above the threshold SPX option dealers are long gamma in the aggregate. That is important because: 1. Long gamma hedging always happens against the market. In other words if the market moves up, dealers have to short to become neutral, if the market

The non-scientific 1997 Hypothesis 2018-02-02

For those of you curious about the 1997 thing, back in Jan30 I posted this: https://www.elliottwavetrader.net/members/atchat/?threadId=4548643 explaining that 2788 "could" be the bottom for this move if 2018 were in fact following that year (based on another earlier post about 97% correlation for the January action).

NDLA analysis - Market Analysis for Feb 1st, 2018 2018-02-01

Ubah has done a very interesting analysis for the NDLA that he shared on this thread: https://www.elliottwavetrader.net/members/atchat/?threadId=4548681 in case some of you are interested on looking at the numbers.

NDLA performance since 2017 2018-01-31

This has been requested so I'm putting it here for those of you that want to play with the performance of the new DLA algo with data since 2017 until Jan 24 2018. Here is the link for the .csv file: https://storage.googleapis.com/gamma-trader-positions/amb/infer_ndla_2017.csv You can run your own statistical analysis with it. The high level take away from that data is this: Precision: 71.19% (This is the amount of signals >=0.5 that actually worked divided by the signals generated)  Recal

Why is VIX so high right now 2018-01-23

During the early days of 2018 we have seen a consistent and huge move upwards in price in the SPX index, it has been a relentless move that is pushing the index to all time highs on a daily basis for almost all of the sessions in January so far. At the same we have seen a consistent increase in implied volatility, in particular VIX has been trending up at the same time the market is up and this is confusing a lot of market participants, however there is a valid explanation on why implied volatility can be higher with

Market Analysis for Jan 18th, 2018 2018-01-18

I know some folks here are interesting on coding their own Ambiguity and Probability of Negative returns heuristics (which is an step towards coding their own DLA's :). As you can imagine my implementation of those concepts is secret sauce and won't see the light of the day anytime ever (trade secrets). However the ideas behind them are public and available to any of you that want to pursue them. The Ambiguity heuristic in particular is the brainchild of Menachem Brenner, which is one of the fathers of VIX

Gaussian Weights - Market Analysis for Jan 18th, 2018 2018-01-18

This post is for Pegasus, he has requested information about how to compute weights based on assumptions of a normally distributed factor.  The process is very simple, first take the factor that you want to use and analyze the distribution for example this one: 1,4,4.5,5,5.5,5.5,4.5,5,10 That distribution is mostly centered around 5 with a couple a big outliers so the weights should reflect that. 1. Compute the mean and standard deviation: mean = 5, sd = 2.318405 2. Rank each value based on the

Web apps links - Market Analysis for Jan 17th, 2018 2018-01-17

Remember folks you can access some webapps that can be useful to you. Positions app: https://gamma-trader.shinyapps.io/positions/ Momentum center: https://gamma-trader.shinyapps.io/center/ Gamma Central: https://gamma-trader.shinyapps.io/gamma/?token=6e66d3982189c6b3dcbc55bd20342959 (the link changes frequently so better to use the official link from the Gamma Optimizer tool).

Binary Risk Reversal - Market Analysis for Jan 17th, 2018 2018-01-17

Implied volatility in SPX is finally coming down a lot and option prices are starting to become decent again. However the next time we are in a similar situation of high IV and expensive options and we want to play upside we can use a binary risk reversal. Remember that a normal risk reversal is: RR = short put + long call  The idea is to finance the expensive call with an even more expensive put that we are selling. This is actually a fantastic trade in any market with strong trend to the upside, however

The false myth of Income Strategies 2018-01-15

Making use of the holiday this is a good time to re-post my thoughts about option "strategies" in particular those that seek to generate "income" in a regular basic, like weekly time frames. This is what I wrote in the past about this subject: https://www.elliottwavetrader.net/members/atchat/?threadId=4542766 Those strategies don't exist, they are just bogus claims from dishonest or inexperienced (or both) traders. If it were possible to extract money from the market, systematically, with little risk or

Webinar recording - Market Analysis for Jan 12th, 2018 2018-01-12

Folks Tom has kindly provided me with the link to my latest Gamma webinar (the one on Wednesday) so for those of you that were not able to attend here is the link: https://www.elliottwavetrader.net/videos/Optimizing-Your-Options-Trades-201805104816.html

The True Edge of the DLA 2018-01-12

With the close today the DLA is batting 3 trade jackpots in a row (max gain trades) with gain per trade north of 700%. With those numbers is easy to get lost in the hype and the adrenaline and forget that even though the DLA has been very accurate over the whole of 2017 and start of 2018 (64% precision), the true edge of those trades doesn't come from the DLA signals themselves. Instead the edge comes from an structural mispricing of binary calls in SPX. The mispricing is very simple to figure out. Just compute

Positions app - Market Analysis for Jan 12th, 2018 2018-01-12

For those of you new to the site we have a mini-Web app that tracks our current open positions: https://gamma-trader.shinyapps.io/positions/ Right now we only have two positions on. The list is updated real time every 10 seconds and also as I add and close new positions.

DLA writtings - Market Analysis for Jan 11th, 2018 2018-01-11

I don't have a single source of information for the DLA as it is just a deep neural net that I trained last year and I have been sharing periodically with you folks. So here is a collection of links to whatever I have written about it: https://www.elliottwavetrader.net/members/atchat/?threadId=4545945 https://www.elliottwavetrader.net/members/atchat/?threadId=4546964 And this is the origin of the Naive strategy that gave birth to the DLA: https://www.elliottwavetrader.net/members/atchat/?threadId=4535606

How to read Kurtosis 2018-01-11

The control chart from the momentum center: https://gamma-trader.shinyapps.io/center/ displays a lot of useful statistical information. Things like Skew, Kurtosis, Mean, Standard Deviation, Realized Volatility. I pay attention to all of them and each provides useful information, but the one that I'm always looking at other than realized volatility is Kurtosis. Those of you with a STEM background might already know what Kurtosis is and what it measures but I want to expand on the way I interpret the value in

Comments about the DLA and Probabilities 2018-01-11

Given that the DLA seems to be the hot item "du jour" I'm getting many questions about the correct ways to interpret the probabilities displayed on the table. So to clarify misconceptions once and for all I want to post a basic premier about probabilities in general first and then more specifics about the DLA itself. Let's start with a quick review of the following question: Is the market going to move 1% up in 5 trading sessions ? (That is the basic question that the DLA wants to answer). The answer can be a

Deep Learning Algo and Ambiguity 2017-12-17

I got a very good question over the weekend about the Ambiguity indicator and the Deep Learning Algorithm (henceforth known as DLA) and I think it deserves to be answered in a wider space as it could be helpful to a lot of you folks to understand the differences between the two of them and how I use them. Ambiguity and Probability of Negative Returns I publish daily after the close an updated chart with those two values, but what do they mean? In first place Ambiguity is not an algorithm or heuristic or trading

Binary trades as pure Gamma trades 2017-12-08

The power of long gamma expressed with binary options :) Remember that a tight vertical spread is basically a binary option, and also remember that a binary option is basically a pure gamma bet (not delta). So in this case our SPX uber-lotto: https://www.elliottwavetrader.net/members/atchat/?threadId=4544946 which I paid 0.8 for it initially and then added at 0.7, I also took some off at 2.6 ;) last week, is a perfect example of this. It is delivering more than 5X gains (400%) in a little more than

Hedging Video - Market Analysis for Nov 21st, 2017 2017-11-21

Here is the link for the Hedging video in YouTube: https://youtu.be/WKxNHaKGVbI, we can use this thread for Q&A

Hedging Class - Market Analysis for Nov 21st, 2017 2017-11-21

I just completed the material for the Hedging Class and it certainly looks like it will be a very long video, so I wonder if you folks want me to just go ahead and record it or if you want a live class format where you can also asks questions (as usual the recording will be in YouTube after that). Please let me know. If you like the class format we can shoot for this afternoon.



Simple Practices for Maximizing Gains in Vertical Spreads - Jan 29, 2020
Leo covers why the Gamma Optimizer service makes extensive use of spreads instead of single options. He shares the most common mistakes that options traders make when trading spreads and how to eliminate them and maximize gains through a set of simple best practices.

Optimizing Your Options Trades - May 10, 2018

Playing Market Volatility With SPX Options - Sep 15, 2020
Leo discusses the best way to use SPX index options to take advantage of the expected seasonal volatility and added dynamic of the presidential election.

Options Courses

Leo has developed an options education video series in his Gamma Optimizer service. The 6-part series, ranging from an introduction to options to advanced options trading strategies, is currently only available to GO members, and archived in the service's video section. The series covers:

1) Introduction to Options: Basic concepts and tips.

2) Options Pricing: Pricing options in a risk-neutral world, plus Binomial model introduction.

3) Talking Greek: Advanced options pricing, Black Scholes Merton Model, volatility and greeks.

4) The Power of Gamma: Time decay, Gamma and Vega in detail.

5) Put-Call Parity and Synthetics: Trading implications and applications related to synthetic positions.

Class 6 to follow.

Leo has also developed a premium set of online courses for all levels of options trading. Whether you're just getting started in the options world or wish to master sophisticated strategies, these courses will make a savvy and skilled options trader. Learn more and get discount code to save more than 50%.

Glossary A-Z

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 links to YouTube videos and site posts labeled "Education," to where I explain them at length.

Ambiguity: I 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.

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 this video

Complex Trades - Butterflies, Calendars, Risk Reversals, Vertical Spreads: These 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. See video for more information:

Convolutional Nets: These are neural networks trained with SPX historical data that seek to predict moves in a 5-trading session period. One of the networks, called Ultra-4, looks for 1% up-moves in the market. A second, called Zero-I, provides the most basic prediction (market up, or market down). The third, called Neg-I, predicts -0.5% market declines. Unlike Leo's original NDLA algorithm, Convolutional Nets can be used to play both positive and negative signals. See video.

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.

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

The Gamma Central tool provides a nice snapshot of the current realized and implied volatility status for any underlying. The tool provides functionality through tabs, and what follows is a brief description of what each tab does. For more in-depth information about the tool, please check the following YouTube video

Gamma Optimizer 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 this video.

GT / Gamma Threshold Level: The level at which most options dealers are neutral in the aggregate (i.e., they don't need to hedge). Above that level, dealers are long gamma, with their hedging activity tending to slow down big market moves, producing lower volatility. Conversely, when below the GT level dealers are short gamma and their hedging activity amplifies or accelerates moves, creating more market volatility.

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.

Standard Deviation: This is a 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). This is explained in more detail in the volatility videos (see "Volatility").

Variance: This is another 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).

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.

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. See video here.

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. See video.

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 see video.