Moontower "Blaster" Tool
Simple “buried treasure” trading
Friends,
We talk quite a bit about how options are about volatility and looking at them with only a directional lens can lead to nasty surprises. Like buying puts, getting the stock’s collapse correct but still getting rinsed because you paid too much for vol.
Unhedged vertical spreads offer much cleaner ways to use options for directional trades.
Spreads:
involve buying one option and selling and other so you can sterilize much of the vol risk and greeks.
have defined risk and payoff allowing you to size the trade to a max loss budget. I call these trade expressions “risk-budgeting”
are distributional bets that are loaded on the probability of an outcome (as opposed to their opposite…a naked tail option which is less about probability and more about the distance the stock and travel and vol of vol). Spread bets can be thought of like sports bets. Binary or discrete scenarios while outright option trades are a 3D plot along 3 axis: time, implied volatility, and stock move.
I explain them in both theoretical and practical terms in:
a deeper understanding of vertical spreads (10 min read)
After reading that you can expect to automatically start translating the price of vertical spreads into implied probabilities.
[By comparing the cost of the call spread to the max payout based on the distance between the strikes we can compute the probability of the stock expiring above the midpoint of the spread.]
Today, I’ll show you the mockup of a tool we are shipping to moontower.ai in the next week or so. Calling it the Blaster for now. Subject to change.