Recent Articles by Leo Valencia

Understanding the GT level

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 level.

by Leo Valencia - 3 years ago

The Ultimate Source of Truth

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

by Leo Valencia - 4 years ago

Convolutional nets Live Video

Folks, I plan to do a live video for the convolutional nets at 3:15PM 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.

by Leo Valencia - 4 years ago

NDLA historical results - Market Analysis for Jul 17th, 2019

Detailed historical datasets for both NDLA and NDLA 2.0 strategies.

by Leo Valencia - 4 years ago

Understanding the GT Level

The Gamma Threshold (GT) level is computed from options in the S&P 500, all of them, which as of today number more than 11,000 in total. But why do we care about SPX options at all? The answer will be surprising to many of you that are unfamiliar with market microstructure.

by Leo Valencia - 4 years ago

NDLA Performance - Market Analysis for Apr 30th, 2019

Performance in Dollars since May 2018

by Leo Valencia - 4 years ago

What the Gamma Threshold (GT) Level Says About the SPX

For those of you that are expecting a big move down, a great starting point is if the S&P 500 manages to tag the GT level (70 points down from here) and breaks it as well.

by Leo Valencia - 5 years ago

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.

by Leo Valencia - 6 years ago

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

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 theywere outside the recommended trade parameters (i.e cost = $1.

by Leo Valencia - 6 years ago

A Tale of Two Volatilities

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 historical data. It is a reflection of what has already passed. 2.

by Leo Valencia - 6 years ago

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

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 event the opposite becomes true, VIX starts to trade at a discount over recent realized volatility. For today for instance, realized variance in the past 30 calendar days is around 25.

by Leo Valencia - 6 years ago

Liquidity is not Volume

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 higher than usual. How is that possible ? Well the answer is that volume and liquidity are two very different beasts.

by Leo Valencia - 6 years ago

Reading VIX and VXST

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.

by Leo Valencia - 6 years ago

ES futures and SPX

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 yieldand t is the time to settlement in years. Also exp() is the usual exponential function.

by Leo Valencia - 6 years ago

Long Gamma/Short gamma hedging effects.

I can't find any material about this subjecteven 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 moves down, dealers have to buy to become neutral. A long gamma regime dampens volatility because dealers are softening the moves. 2. Short gamma hedging always happens with the market.

by Leo Valencia - 6 years ago

The non-scientific 1997 Hypothesis

For those of you curious about the 1997 thing, back in Jan30I posted this:https://www.elliottwavetrader.net/members/atchat/?threadId=4548643explaining 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).

by Leo Valencia - 6 years ago

NDLA analysis - Market Analysis for Feb 1st, 2018

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

by Leo Valencia - 6 years ago

NDLA performance since 2017

This has been requested so I'm putting it here for those of you that want to play with the performanceof the new DLA algowith 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) Recall: 64.6% (This is the amount of signals =0.5 divided by the total amount of 1% moves that actually happened in the market). As you can see the NDLA improves the recall vs the old one which means it has less false negatives signals.

by Leo Valencia - 6 years ago

Why is VIX so high right now

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 the market trading higher. To understand this we need to remember what is the purpose of the VIX index.

by Leo Valencia - 6 years ago

Market Analysis for Jan 18th, 2018

I know some folks here are interesting on coding their own Ambiguity and Probability of Negative returns heuristics (which is an step towardscoding 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 ofMenachem Brenner, which is one of the fathers of VIX (the same VIX we use all the time). The reference paper that I used for my implementation is this one:https://belkcollege.uncc.edu/sites/belkcollege.uncc.

by Leo Valencia - 6 years ago

Gaussian Weights - Market Analysis for Jan 18th, 2018

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 probability density they have, here is the list of densities for each value: 0.03884446 0.15679108 0.16812061 0.17207621 0.16812061 0.16812061 0.16812061 0.17207621 0.01681642 3 Finally normalize using max density to get the weights (divided everything by the max on the previous list): 0.22573984 0.91117231 0.97701252 1.00000000 0.97701252 0.97701252 0.97701252 1.00000000 0.09772661 Those are the weights to be used.

by Leo Valencia - 6 years ago

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

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).

by Leo Valencia - 6 years ago

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

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 drawback is that the short put is naked and it is exposing us to major risk in case of big downside.

by Leo Valencia - 6 years ago

The false myth of Income Strategies

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, withlittle risk or effort all of us would be extremely wealthy already.

by Leo Valencia - 6 years ago

Webinar recording - Market Analysis for Jan 12th, 2018

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.

by Leo Valencia - 6 years ago

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