Is there a way to pick the right side of a trade before you make it?

The best market tools are the ones that give you information instantly that actually can point you in the right direction. At Aqumin I helped develop the Option Landscape from my experience as a CBOE and PCX Member for 15+ years. So, what does it do?

Essentially the Option Landscape allows you to see relative volatility patterns and relationships for every series in a name at once. It goes beyond a volatility surface because the 3D environment allows you to see 1000’s of strikes at once, in real time. How is the current market pricing implied volatility of the options versus how the stock is actually moving? Knowing this information ahead of time helps you to pick which side of the market (buying or selling options) you want to be on before you initiate a trade. Let’s see a sample below for a hot name right now, MCP.

The Option Landscape is laid out like a standard quote screen where strikes go from highest (in front) to the lowest (in back) in rows across the plate. Each column is a strike month where the nearest expiration (could be a Weekly) is on the left side of the plate and the time to expiration increases as you move across from left to right. In this view the height of each building is the Mid Point of the Implied Volatility to show the skew that exists in the options. What is most interesting for this landscape shown of MCP is color. A white option series means the current Mid Volatility for the series is trading about the same as the 30 Day Historical Volatility for the underlying, red series have the options trading cheaper than the 30 Day HV and green series have the options trading more expensive.

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Now in a glance you can see several things. Near term, the puts are trading at higher implied volatilities than the calls for the same strike. This tells you that MCP is a hard to borrow stock and a potential (or current) short squeeze candidate. You are giving some edge to the market wanting to short MCP using options because the name is difficult to borrow. You would have to sell the calls down and pay up for puts given the current 30 Day HV. If you want to pick up cheaper gamma, you would do it on the call side and not the put side of the equation in the front month. Most of the options (red ones) are trading at a discount to the last 30 days underlying movement. The market is signaling it expects a drop in volatility over the mid and later expirations. Buying naked options out there right now means you could be walking into a volatility collapse so better to use spreads. Near term, in January, the puts are very reflective of all of the recent volatility (larger near term moves are priced in) and are more richly priced which makes them the most expensive options in MCP right now.

So, by using an Option Landscape  with known market indicators arranged in a visual way (no gimmicks), the trader can put on the correct position to fit the volatility environment and at least take what opportunity the market is giving today.

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