In the last few articles, we went over the basic concept of options and introduced the Greeks. This time, we will provide you with some real-world tools in SignalPlus Toolkit and how these tools can help you to build strategies to gain proper exposure to the market. In addition, we will also show you how these strategies can be translated in terms of Greeks. We really hope after this part, you will be able to build a portfolio based on your analysis and expectation.

Volatility Labs

In SignalPlus Toolkit, you will find a series of tools to display volatility related information of the options market from different angels, under the Volatility section - you can find more details regarding those tools HERE.

As discussed in the previous chapter, implied volatility projects the likelihood of future price changes in a given asset. Among the 4 factors (moneyness, time to expiry, and interest rate, implied volatility) that affect option pricing, IV is the only subjective component that can't be observed directly. Given an option price at a specific moment, as the other 3 objective factors are known, it is fairly easy to derive IV from option price by using the Black-Scholes Model (in the bonus section of the previous chapter!).

The benefit of using IV instead of dollar price to compare different options is evident - it is a simple percentage value and can be applied across different strike prices, expiration dates, and even underlying assets.

In a word, IV is one of the most important measures for options traders to gauge the market sentiment and we want to use IV to help us find hidden opportunities or manage upcoming risks.

USD price is translated to IV for analytic purpose

Term Structure

The term structure of IV describes the pattern of options with the same delta exposure but different maturities. By comparing term structures, investors can visualize how option IV will change as time elapses. As per the chart below, longer tenor options currently have higher IV than shorter tenor options, implying that longer tenor IV will naturally drift lower as time passes.

By default, our system displays a standardized set of strikes. 25D Put represents a Put whose strike has been chosen such that the delta is -25%; 25D Call represents a Call whose strike has been chosen such that the delta is 25%. You can also choose a different delta representation for your purpose on the left side.

By observing the IV gap between different delta, investors can also gauge RR IV. RR is a portfolio of long call and short put at the same delta, which is commonly used for gauging market emotion. When call iv-put iv is lower, investors are trading put for downside protection. When call iv-put iv is higher, investors are trading call chasing up trend.

Volatility Cone

Volatility cone is a visualization of historical volatility variation ranges. It is a useful tool for predicting possible IV range.

The data is derived from a certain period (in 1 year period for the case below). The horizontal axis represents the size of the observation window in days while the vertical axis represents the annualised volatility. For a certain observation window, we can derive several different RV (realized volatility) values in 1 year period. Analyzing these RV values statistically, we can plot extremums and quantiles of RV in each observation window. Meanwhile, the dotted line represents the latest RV for each expiration period.