 Okay, hello and welcome and I've got with me a special guest today We get a lot of questions here at Amphi trading about trading options And I wanted to get a specialist on and I can't think of anyone better for that job than Imran. So hello Imran. How are you doing? Yeah, good good I'm excited to have you with us because I know that you have spent a career Essentially working in this space. So why don't you just introduce yourself and give the guys a bit of a backstory of how you arrived here options insight Right. Thanks Yes, and my name is Imran Laka. I've been a trader for around 20 years. I started my career In you know, the big investment banks so credit Swiss Back in 2001 a long time ago Then I went to Merrill Lynch Traded through the financial crisis over there in 2008 And then spent a bit of time at Citibank running their index grouping index desk over there I had a short stint at the buy side as well Bluecrest capital and now I run my own training firm where I teach investors asset managers Pretty much whoever wants to how to utilize options to improve their trading in this management Okay, great. I mean look very illustrious background. So it's great to have you with us and Yeah, I'm just interested to know then and I want to accommodate every one of different levels of expertise I know obviously that a lot of our US community a little bit more familiar perhaps with options Particularly in the equity space, but I think for 2020. It's obviously been a pretty exceptional year But I know having spoken to you before you were talking about how its Options has provided a unique opportunity in a certain sense Different to say outright positions or the futures market Yeah, so I mean, it's been a crazy year clearly some some very wild moves happening in all asset classes and the thing that really struck me was that Usually you get maybe One or two occurrences a year where you get to use options and they give you crazy payouts of you know More than 10 to 1 so you might spend X amount of premium on option and the payout will be 10 times what we paid But I mean the the richest thing about this year has been there's been probably 100 to 1 payouts on options and it's happened for you know Probably five times from just what I can remember and what sort of stuff I've been trading and looking at But so that's what makes this this makes this year really unique And and I I took a bit of a step back myself from trading Probably two years ago, and I was compelled to start trading again this year because Once I saw what was happening in February and the tail risk that was emerging in coronavirus I was like I said to my wife and said, you know what I think I'm gonna have to put my trading hat back on because You don't get opportunities like this every year. They were like more like once in a decade type of opportunities So that's why I did in March and I kind of put my trading hat back on Sat in front of the screen every day and just had fun actually and I know it sounds a bit weird But for options traders volatile markets are a dream and you know once you know how to utilize them It makes your trading much more interesting exciting and dynamic Well, I mean I'd love to get down into a little bit more the detail of examples, but perhaps before doing that a Little bit of just understanding about some basic option Concepts would be would be great for everyone. I think sure. Yeah, okay Well, I'll I'll share a couple of sort of slides and we'll just go through the basic options that exist so the two most basic options that exist they call vanilla options and they are called calls and puts and You can see the slide up here. So that's a call option, right? So what is a call option? It is the right but not the obligation to buy an underlying asset, you know, which is let's call it a stock Or an index or a commodity whatever it may be at a fixed price Which is called the strike price at a given maturity. It's called an maturity day So so unlike trading futures or stocks, which are just sort of linear payoffs Where you buy it if it goes up You're making money if it goes down with losing money and it's one for one in terms of, you know, how much you make or lose Look, these are non-linear payoffs, right? Because you don't have to buy it So you've got the option to buy it if for example this this thing is a hundred this stock is a hundred If you buy a call option struck at a hundred You have the option to buy that stock at a hundred But if the stock goes down and it's cheaper than a hundred at expiry date You don't have to buy it, which is why the payoff doesn't actually go below zero If you look at the blue payoff that that kind of hockey stick as it's known as that doesn't go below zero when the stock price is below a hundred And if it's above a hundred then you will the payoff will be the same as had you bought it at a hundred Now to have this amazing payoff where you can't lose any money Obviously you have to pay a premium, right? And that's that's the thing about options like they do they do cost you something to have them Otherwise, you know wouldn't make any sense like I was going to give you that asymmetric payoff for free and the premium that you pay in this case I've said the premium of that call option is five and in this case you pay five So the true P and L of that position if you were to put that trade on pay five for that option at Expiry if you kept the option all the way till expiry then depending on where spot is your P and L would be the green line So that's why you shift that payoff down by the premium And so that's that's a call option, you know, which is the option to buy the underlying But the good thing is you can also have options to sell the underlying and these are put options very very commonly used in the options world and Same story. They're just the mirror image So this time, you know, I've got an example of being able to sell the underlying at 100 You have to pay a premium again, which is why the green P and L line is shifted down These are bearish positions, right? So if I was to buy a put option that I'm bearish on the asset I think it's going down and that's where my payoffs going to come from And these are used usually as some form of insurance, right? Because the general sort of investor community is long exposure to let's say equities or wherever and They might be a bit nervous about the macro landscape They might want to protect themselves and they're willing to pay that premium for the put option as like an insurance premium And if the market then was to go down, it might be losing on their asset portfolio But their puts are actually increasing in value and providing them some protection, right? So as a very that's the most common use of options as protection to a portfolio So those are the basic kind of payoffs and what options are Okay, well that is the Yeah, so what one of the yeah, these are the benefits then that you I can see you've got out Benefits and risks I guess So the next source slide just talks about why do you use options? And so the major benefit of using option and this applies particularly for retail people is that you get you get great leverage Right, so you might not have loads of money to play with But if you you can spend that small amount of premium and if you happen to catch a move in the market Then that premium can multiply by 10 20 even a hundred if you get really lucky, right? So, you know in the in the case of You know recent times in March or February Let's say had you spotted what was going on in China and you thought, you know, this is a terrorist to the market We could really this could get out of control You know, you could have bought S&P pot options for pittance, right? And within the space of three or four weeks, you know, they had multiplied by a hundred which is crazy Right, but that's what you could do. Yeah The good thing also is that when you spend a premium and that's it You know, you can't lose more than the premium we spend So whereas, you know in trading you have to think a lot about where to place your stop losses and your risk reward and stuff like that The beauty of options is that they automatically tell you what your risk is. It's the premium that you spend, right? And you know what the expiry of the option is as well. So, you know that I spend that premium That's what I can lose The option doesn't die until a month's time or three months time, whatever you've Whichever expiring chosen and and then you don't have to worry too much about some freak move Stopping you out and then you being right in your view and not making money I mean, that's the worst feeling in the world for a futures trader And I think we've all experienced it. Yeah, we put our hair out Like how do we avoid that happening and there's there's techniques and ways to do that But options are a great way because you can say, you know, I know I know I can only lose X But you know, I've got this trade on for three months It's got plenty of time for my view to play out and it's quite a nice way of sort of managing your risk And I'll put lottery tickets there as well And then you can you can trade very very far out of the money options Which means that the strike price is so far away that the premium of the option is really next to nothing And you can consider these a lottery tickets basically. So if you were to You know get some random tail event happen, for example, silver was a good example recently when silver started breaking out you know You could have had some really like 30% out of the money call options which were priced very low And you know, you saw a 40% move in the matter of weeks in silver Yeah, was there something similar happening with tesla when tesla what about months two months ago was shooting higher and I saw some crazy calls In terms of option plays going Um at the time they were I thought ridiculous for yeah, that's right. I remember which strike were they buying is it was um I think it was like a one week two thousand strikes I don't think those options paid out in tesla the ones that you're talking about but yeah people exactly That's what people are doing but they're looking for those lottery tickets because they're thinking This is the type of stock that could be up 20% overnight and right You know, I don't have to pay a lot of money to get exposure to that. Yes. The chances are it's not going to make me money That's why it's price cheaply. But you know in the in the year that we are experiencing crazy stuff's happening And those lottery tickets are paying out a lot more It would in a normal year. I mean you've got to be careful. I mean the Paying buying options and buying lottery tickets and and these great payouts. They're very seductive and They make you want to basically buy options every day. Yeah, because what could happen? So you have got to be careful about how often you buy options because they do usually expire worthless, right? That's so the premium does decay You you spend spend x for an option and then over time that premium decays and they do lose their value So you do need to be a bit selective about when you buy options and you know, there are various Ways to figure out whether options are expensive or cheap or worth buying Um, and that's kind of that's about understanding the factors that affect the price of an option such as things like implied volatility And when implied volatility is fairly priced whether it's cheap whether it's expensive that that will deter you from buying For example silver now, right silver trades on a 60s volatility now an implied volume 60 Which you know is is kind of implying that silver is going to move 4% a day roughly And uh, but but a month or two ago silver might have been on a 30 vol which is saying it's implying It's going to move 2% a day, right? So there's a big difference between those two things So, you know, you're going to be much happier about spending premium On optionality that's pricing 2% a day move on an asset because when when the asset does go crazy The market's going to reflect that in the way it prices its options So things like implied volume answering that is there if you're a retail trader How do you get visibility of these types of you do have platforms that are now you a bit of that? So you've got interactive brokers probably the best one Uh, you've got you know, you can trade a whole host of options on there because they just trade directly on the exchanges Um, so it's not cfds. It's actually trading the options on the on their exchanges And they've got some analytics as well. We show you what the vol surface looks like what it's been doing that kind of thing Right, so, um, I think that's the best probably the best platform around to trade options that I'm aware of Okay, so if you were let's say If you were someone completely new to this This arena and you you've never traded options before what's like the general Kind of path of progression that you would recommend for someone coming at it at a retail sense like how You know, you mentioned about obviously you can calculate what are the the better opportunities to be more selective But as you say you can be seduced almost and I'm sure that's the biggest hurdle for a lot of people new to it Is I'm sure they get drawn in because they hear about the media loves to pump it obviously when When it works out well What what would be a controlled or structured way of getting to the point where you can identify with better selection So, I mean I think first of all you need a basic level of education and you need to understand What option payoffs are how option premium behaves all those things Obvious place to learn that is me. Yeah So, you know, I provide I provide training courses and you know, I've got a big syllabus in options and my focus is on Teaching people to trade options intuitively, right? So I don't use I don't use textbooks I don't I don't throw a lot of formulas at you I teach you why the premium is what it is and how it evolves through time and how it evolves through space Like I spot. Yeah, and the consideration is to think about what what options structures make sense in what volatility environment so for example Vols cheap I'm going to buy an outright call option if I'm bullish vols not so cheap I might buy a call spread So I don't spend as much premium and I don't buy as much volatility in a call spread Obviously, I won't go into details And then another option is actually vol super expensive But I'm still bullish or by a call ratio where I'll actually sell volatility But I'll have a bullish payoff profile and I'll have a various expectation of how much the asset can rally Right. So there's all sorts of funky structures. You can do within option space that allow you to take advantage of your Opinion and your view of where vol is versus what it should be and the scenarios of the asset that you're trading Right, so to get a basic level education and then also, you know Once you're an options trader, you know what's going on That doesn't mean that you can predict with precision what the market's going to do every time Right. So what I say to all my students is You know split up your implementation, right? You might be bullish on it on a trade. I'll give you an example Recently euro Threatened to break out on the upside like 19 and a half And you know, there was a half decent likelihood that it was going to go to 125 if it broke, right? So, you know, what did I do? I said, right if it breaks it's got legs to 125 potentially I don't know if it's going to manage it. I don't know if it's going to do it quickly slowly or whatever So I bought some outright spot with a stop at 118 at half Yeah, and then I bought so I decided how much I'd be willing to lose on that delta part of the trade That's a delta one expression. And then I said with the other part of the trade I'm just going to buy some call options that expire in september in a month And I'm going to spend x amount of premium on those so then I've split up my view and my expression But in two different ways one with optionality and one with just straight delta So that's the way to think about it, right? So, you know, you spread your bets in a way that your view is the same But you don't have to implement it in just one form All right, if you if you implement it in a couple of different ways Then you expose yourself to the different scenarios where you know, euro might have had a false break Come back to 118 and off and then gone to 125 over the next three weeks And I would have been grateful that I didn't just do it all in delta I did some in options. Yeah But in in that example, then you would still be I mean, obviously determining the overall origination of the idea is Looking at the global macro environment. Well, what is that? I know the line the actual Technical setup of that particular asset or products in question Yeah, and the vol was cheap, right? The vol was eight and a half Right. So, you know euro fx vol does tend to trade quite low So if you think there's a trend about to If you think there's a break about to happen Usually the implied vol hasn't priced that much for it So because the implied vol trades on the kind of daily expected move, right? Because the person who sells you that option He's going to hedge that option in it and if as long as it doesn't move more than 50 bits every day The option seller won't lose money. But when you buy it, you're not hedging that option You're just buying it spending the premium and then coming back in a month to see where we're at basically, right? So that is the situation where both the seller if it's a steady rally of 50 bits every single day But we get to 125 in two weeks The option seller doesn't care because the volatility hasn't been so great that he's lost money on his on his greek positions, right? On his risk management Whereas the option buyer is done. Okay, because he's run that trend and the option value has just increased as we keep going Yeah, right So there are times where the option expression isn't the right one So another example would be let's say we do get the rally to 125 on euro But it's too slow So the option never really gets in the money Because you might be trading out of the money option 122 strike and it never quite gets there Or doesn't get there fast enough so the premium is just decaying as you go there too slowly Whereas just buying the spot at 119 and a half Is making you money So that's the advantage of splitting your expression and giving yourself a a lot more scenarios And hopefully at least one of them some of that sometimes both of them will work But then you know, you're trying to increase the odds of at least one of them working Yeah, so let me um, I know you have Some some good examples of so far in 2020, but for the for the sake of time if you were to pick one isolated um situation which has Happened so far this year that was Particularly played out well for a setup that you That you foresaw what what what would that situation have been? Is there one that's out in your mind that that was I mean, I think it's probably Probably two there's two to pick out There's um, so once you had the sell-off the original sell-off on corona on the s&p and the broader equity market And then you had that bounce When they cut rates initially in the US So there was a clear setup for me In that and I was putting videos out about this and I was saying that You know, it was for anybody who thought about it. It was obvious that A 50-bit rate cut or whatever they did was not about to change anything, right? They had to do a whole lot more To fix what was about to go down, right? So So for me, it was like I I obviously want to own s&p puts, okay But the problem was, you know, historically owning s&p puts Has been a losing trade the ball had already repriced from let's say the teams to maybe 20 30 kind of levels, right? Because then you don't really have that original shock So I was like, what do you do? So for me, I was convinced that there was no way we were going back Through hot close to the highs on the s&p in the short term, right? Because I was like, you know, this thing has just started You know, we're going to see all the repercussions. We're going to see all the dominoes falling So the way I traded that in option space was I said, right? I'll buy the s&p puts Struck at 24 2500 and the market was trading at 3000 in a bit. Let's say and I was funding those puts by selling upside calls Which were 32 50 3300 kind of area, right? Because I was super convinced that those calls are never going to go in the money I'll collect premium from those calls and spend that premium on the puts because then if nothing happens And we just kind of chop around trying to figure out what's happening I won't lose any money If we melt down then obviously I go towards my puts and I make loads of money And the only scenario where I really take some pain is if we smash back through 3300 Which was very close to the highs in february And I didn't think that was that was I didn't think I thought that was such a low probability outcome Um to happen so soon after the crisis So I was saying like april and may april and may call options struck in that area basically as my funding leg So that was a great trade and that was a great setup and and it you know, thankfully for me that worked out well Um, and then the other the other probably most obvious one has been the the gold breakout The recent gold breakout, right? So, you know, you've been looking at a price action on gold for the last year It would have its leg up and then it would consolidate for a while Break and it would take another go right and so that price action was it just kept happening It was quite predictable and as long as you're a patient and you wait for that break to happen Then all you had to do was that for example that break of 1850 Unlike the 21st 22nd of july that was that was the break level right? You look you looked at where the where the highs were when it took out around 1820 to 1850 in gold That's your cue to just buy a load of upside calls, right? Because the vol wasn't that expensive The vol was in the high teens, I believe And yeah, you you can buy and I put video out about that actually I think it's on my youtube channel gold and silver breaking out I basically discussed with a group of students What ways could we use to play this gold breakout? And we're saying you could use outright calls You could use call spreads Look at the payoffs. Look at the risk reward Which one do you want to do and what the pros and cons were of each expression basically, but that that was probably one of the easier ones Or late, so I think I think something that people would find valuable in terms of your insight is You know given the way that macro themes tend to be Fairly channeled I guess in a way in that we know as a milestone certain events are happening We have things like a Kind of a tentative Almost early deadline for brexit to be delivered before transition at the end of the year coming october But then let's focus on the u.s. Election. We know when that is happening and we know is that the The corona virus is going to have impede the ability for the immediacy of results to be known And people are already anticipating multiple week delays and that that will probably increase uncertainty Is there anything in preparation of that then that can be done now? And or at what point in the future does that then start to channel a lot of the Options activity just more broadly speaking. Yeah, it's an interesting question I mean The the biggest thing on on the us elections is you know the vix curve has been kinked for the us election for For months now, right and I I put out a little thing on linkedin explaining to my students how You can extract the implied move on the s and p From the kink in vix curve, right? So the last time I looked at it it was kind of implying roughly And there's a crude approximation basically you're making in the assumption that The kink is completely due to one day gap on the election day And without that the curve would be smooth. Okay, so it's a it's a crude assumption But but it gives you a sense for what's being priced So so that was coming in at roughly four and a half five percent move for the election day Versus like every other day being a normal move which might be like 1.3 1.4 percent something like that that the vix was pricing Yeah, so so that's one way of looking at it and monitoring what the bold market believes about the election And the risk attached to the election, right? So you could track that implied move for the last six months and see how much that implied move is moving around People are getting nervous or complacent about the election risk And is the market complacent about the brexit risk? Yeah, I think the problem is the market's just tired of brexit, right? When brexit was first around in 2016 the market wasn't complacent. It was pricing a lot of risk And you know, you know, it was certainly pricing a lot of terror risk And then you saw that on cable moving 20 big figures on the on the day, right? But that was when it was all fresh in our minds and it was oh my god. Oh my god, what's going to happen? This is dragged on for so long now that yeah I think the market has kind of stopped paying attention to an extent and you you look at where cable is 132 It doesn't feel like the market's that nervous about it. I mean for me even even though I'm not looking at options in the same way you are I would say it still forms part of what would be of my opinion of what I think an overall outcome So thinking as like a political strategist, what do I think in that regard? What do I think about then the risk economically for the players involved like europe and the uk I think about all these different things, but That is definitely like what you said the price the help just the actual price of where we're training at 132 is reflective Of the inspector and also you get the options noise start coming out But the fact is so quiet is really quite telling But I think the easiest place to see what the option market is signaling on brexit is to look at the skew Right. So if you look at what the 25 delta risk reversal on cable looks like right where that's been relative to history That gives you a barometer of brexit risk Right. So I don't know where that is. I haven't checked it myself, but that would be the thing to look for Yeah, cool. Well, look, let's um Let's wrap it up there. Um, thank you so much for that that insight. It's just That's a really fascinating area And I'm sure there are some people that that are quite intrigued by this discussion And if so, I will put some details Yeah, you can find all my sort of links twitter youtube my website, etc on the just stick that in the In the comments or whatever it is. Yeah, no problem. No problem at all. So, uh, imran always pleasure take care And now speak soon. Thanks a lot. Anthony