Primer Conclusion: Bringing It All Together In a Recap
Implementation Unit #6
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The moontower.ai Primer is divided into 2 units: Conceptual and Implementation.
To review, the Conceptual Unit which includes:
The Implementation Unit thus far:
Bringing It All Together In a Recap
Conceptual
Markets reflect a mix of investor preferences and predictions.
By "completing the market," options allow precise bets on future states of the world.
Long-term profitability requires an edge. It requires buying or selling around fair value.
Fair value in liquid markets is consensus-driven. They set the line or price for various risk parameters.
Measuring the market to identify what’s fair is “to see the present clearly” as opposed to trying to make explicit predictions.
There is an implicit prediction that buying/selling around consensus is profitable.
Options provide the flexibility to focus on any mix of:
the final return (destination) by “risk budgeting” fixed maximum losses.
the path by betting on market movements without a strong view on the final outcome.
Professional volatility traders use a funneling process, starting from a broad view to identify mispriced options and refining to specific trades.
Directional investors invert the approach by finding the most attractive prices to express specific market views.
Implementation
moontower.ai uses the same cross-sectional tools as volatility traders use to prospect for opportunity to suit your own goals.
Top Of The Funnel: Cross-Sectional Fair Value
Tools at the top-of-the-funnel quickly provide a comprehensive look at how volatility is priced cross-sectionally. We can see consensus pricing to infer the relative:
supply/demand of volatility in near vs farther dated (Dashboard)
the cost of gamma or VRP (Real Vol)
supply/demand of skew (Skew)
changes in strike IVs (Vol Scanner)
Drilldown: A Finer Look Into Option Surfaces
Mid-funnel tools:
refine choices down to specific delta ranges within a name (Tickers)
provide head-to-head comparisons between closely related names (Pairs)
Trade Expressions & Structures
Tightly matching trade expressions to a thesis requires understanding what drives the p/l of particular trade structures.
Structures should balance the desire to isolate the drivers with suitability of the trade with regard to the investor’s own constraints.
Broad categories of trades include: distributional bets, carry/VRP, and surface re-pricing
Popular trade expressions like covered calls, cash-secured put selling, "stock replacement" call buying, and calendar spreads are explained in terms of their underlying drivers
Thoughts On Execution, Greeks, and Weights
The practical details of executing trades and managing risk extends far beyond what any introductory guide could cover.
This section addresses areas of focus that investors will become more fluent in as their approach matures, in particular:
execution
using greeks to target desired exposures, monitor risk, and weight trades
Welcome to option analytics with a “point of view”
moontower.ai applies a volatility trader’s perspective to measure the the liquid market’s consensus for risk. From this baseline, investors can find the most effective ways to express their ideas whether it's for speculation, hedging, or yield enhancement.
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