Why is Option Pricing Acting Weird?

I wrote this X thread this morning and thought it was a great training for options traders. The textbooks will tell you one thing - reality from having done this for 3 decades can help you see the rest....I'm here to help so enjoy (forgive the plug).

Members have been asking about stronger options pricing in the last couple of days. "if the market is going up, why are options prices rising? Doesn't the VIX go down on market rallies?"

🚀This is super important if you trade options. So let's talk:

✅I've been saying on several shows in the past few days that I don't think downside VIX plays are super great because I think VIX actually finds a floor in here. It did, even into the weekend.

📌Yes, VIX roll-down and fairly low realized volatility (low actual up and down movement) should keep certain types of those trades winning (SVXY), albeit slowly.

✅But why the options pricing pump? When an upside move gets too strong volatility markets start to take notice: meaning VIX, or the "VIX" of the stock, firms up. You can actually see it in shorter term (30 day) options pricing in tech names over the past week, it has been going up. Exactly as suggested.

30 day option pricing moving up as the market rallies strongly

📌Think of it this way: when stocks get exuberant to the upside, especially when parabolic, volatility markets start to go “WTF” because they worry about moves getting silly and maybe even stupid.

✅Options pricing thinks of this WTF risk in two ways: 📌1) more potential upside, or even possible parabolic moves. It doesn’t know where the upside will end and must start to price in that unknown movement risk. Think of MSTR last November. "Don't know, so I have to price it that way."

📌 2) the possibility of a pullback because we've run up so hard. What goes up must come down right? Not always, but volatility doesn’t know that! WTF alarms are going off and for all it knows the harder something goes up the more likely it is to retrace significantly. It's worried about both up and down, which means it HAS to price in movement. That's what's happening to a smaller extent but that could get more pronounced if this market melts-up more.

Bonus round: ✅That exuberance can also manifest itself in upside call skew (farther out of the money calls) as people scramble to protect short stock positions or play for a further upside move or seek stock-replacement strategies via OTM calls.

📌 Those calls are often too cheap because of several things including supply-driven dynamics (ie call sellers/theta funds).

And on that note….

✅I've been saying for 500 SPX points that upside calls ARE too cheap. LEAPS and Trading Room members have been killing it on those trades. GS up 126% in 2 weeks, closed HOOD up 298%, up 25% on RDDT, SOXL up 223% and tons more - ALL documented and alerted to members... JULY 4 SUPER BUNDLE SALE on now: check profile. Or: https://www.optionswithhans.com/pricing-plans

📢But read on, the best stuff is next....

💥 Sometimes when upside is priced too low you can get a normalization of upside skew and pricing on a further move up, which means you can make money several ways:

🏆Delta win from direction (call structure)

🏆Vega from general iv explosion

🏆And skew (Vega) from a steepening of the upside.

Now THAT is how you come up with a blend of volatility edge and Greeks that work FOR you in a trade. Stack your Greeks!

These setups can be exceptionally powerful when you find them. I gave one to LEAPS members yesterday, but I think it’s still good for Monday. It is higher risk but if my thesis plays out it could be a 10x-20x type win. That is NOT our normal quality name trade but when the moment is right…. 🎉Note my SOXL call at $17 for an example of “when the moment” is right playing out perfectly. My YouTube vid and follow-ups went over all the details.

💥Bonus Round 2:

✅Now, what happens when stocks pull back in a reasonable fashion (not a crash)? The WTF effect fades because option pricing says PHEW, we found a top, a level, a spot where buyers have had enough. Volatility can then start to price in a normalization of fear and greed dynamics. A drop to SPY 615 and you could see vol actually relax. It's counterintuitive in a way but that’s how things work when markets get a little too excited.

✍🏻If you want to learn this kind of stuff and how to actually make money and stop spinning your wheels with those 90% win-rate-but-don't-make-money strategies.... get on my Mentoring Wait List.

💡I may do another Ivy League VIP Mentoring Cohort in the next couple of months. But in the meantime, the very next best thing at a fraction of the price is the July 4 SUPER Bundle. Ridiculous value for the price. GS position up 126% in 2 weeks, closed HOOD up 298%, up 25% on RDDT, SOXL up 223% and tons more - ALL documented and alerted to members. 🦾Yes, this is your turning point. Take my hand. https://www.optionswithhans.co...