Using Options to Manage Risk and Reward

Published on
August 29th, 2018
27 minutes

Using Options to Manage Risk and Reward

The Expert View ·
Featuring Nancy Davis

Published on: August 29th, 2018 • Duration: 27 minutes

Nancy Davis, managing partner and CIO of Quadratic Capital Management, joins Real Vision to provide an overview of the options market. She reviews the key Greek metrics that determine option prices, in addition to revealing a handful of trading tips for new investors. Nancy also discusses recent moves in emerging markets and how to capitalize the opportunity. Filmed on July 26, 2018 in New York.


  • DA
    DAVID A.
    20 January 2019 @ 20:10
    Its rare to find a real pro who can speak so fluently about such a complicated topic. I wish there was a 101 series on options with her taking viewers through the B&S model and perhaps add some of her own thoughts and remarks. Great stuff.
  • PC
    Peter C.
    13 January 2019 @ 23:41
    I've watch this 6x, the most of all the vids, & read the transcript. Yes, I'm slow but the point is Nancy is fantastic - I can sense the depth of knowledge (way more than Kirk on Options Alpha or the peeps on TT), her delivery is crystal clear, & she contradicts my selling of options to take advantage of the premium income. As a beginner, like she warned, I lost a lot of money when all my short puts went in the money at the same time and now I've watched all my covered calls go in the money :( Please bring Nancy on as much as possible. I also love her humility.
  • BH
    Bin H.
    12 December 2018 @ 05:11
    Really nice piece, would like to know little bit more philosophy of QSAM if possible. Thanks for the talk, Nancy!
  • CL
    Chris L.
    4 November 2018 @ 06:02
    First rule of trading markets: the market doesn't "have to" do a damn thing.
  • HS
    Hisham S.
    14 September 2018 @ 17:05
    I love these interviews with Nancy.
  • MT
    Mike T.
    2 September 2018 @ 08:55
    As an intro to Options I thought the views expressed in this video were entirely reasonable, until the bit about 'advise against selling options' aka short premium. I disagree most profoundly with this point of view. In a few words available here I will never be able to make convincing argument of the immense power of short premium strategies, but folks with curiosity should in my view aspire to achieving a level of appreciation of short premium option trading so that at a future point in time at least be able to make a more informed judgement as to the potential rather than simply believe it's all too scary and risky. For the curious of mind suggest commit to a 3 month period of study and importantly do something every day with the end prize being your eyes will be opened to the huge potential of short premium (credit) option trading. I've always thought ever since its inception conspicuous by its absence on RVTV has been any attempt to articulate the value of short premium option trading. I contemplate why might that be so? Possible answer? There's a conflict of interest. Those with competence at short premium option trading do NOT require someone to explain Global Macro narrative, do not need 'tips' or Trade ideas from others, can certainly do without Technical analysis and choosing my words very carefully do not require any of the aforementioned 'to find opportunity'.
    • ND
      Nancy D. | Contributor
      3 September 2018 @ 00:56
      Thanks for your comments. This was meant to be an options 101 educational piece as a follow up to questions that RV received from my macro trade idea on shorting Brazil from earlier this year. The goal here was to outline options from other types of derivatives and explain the Greeks.
    • ND
      Nikola D.
      3 September 2018 @ 22:44
      @Mike T. Could you please elaborate and perhaps recommend some resources? I'm exploring the ways of limiting the downside risk when selling options. Thanks!
    • MT
      Mike T.
      4 September 2018 @ 10:40
      to Nikola D, ask the folks at RV to provide you with my contact details and I will be happy to DM with you directly.
    • CT
      Christopher T.
      5 September 2018 @ 19:46
      Selling options during a structurally low vol environment is quite literally picking pennies up in front of a steam roller.
    • JO
      Johnny O.
      6 September 2018 @ 16:52
      Nikola D: is the home of investor education on short option mechanics and probabilities
    • MT
      Mike T.
      9 September 2018 @ 07:14
      In reply to picking up pennies comments below? It's certainly true a high volatility environment is always strongly preferred but even in the current 'low vol' environment there are always UL's somewhere with options having elevated premiums compared to 12 month historical (high IV Rank) providing good opportunities. Low vol is certainly NOT the time where we see an abundance of such UL's but they always out there current examples may be seen here:- Short premium strategies still work in 'low vol' times and with similar 'win rate' statistics as high vol periods i.e. but the amount of money the average P&L per position I acknowledge is LESS, but still a most worthwhile activity. Also remember in earnings season particularly, short premium traders are 'extremely active'. One example of a very common strategy used by short premium folks, takes advantage of elevated options premiums as earnings day approaches (this happens even in an overall low volatility times) then using the market place calculated 'expected move', the trader then 'sell's' a defined risk trade in the weekly option chain in which the earnings announcement is to be announced. A 'theoretical' optimum trade would be Earnings in Company X scheduled on a Thurs AMC, with expiry due next day. A new position is opened as the Thursday close approaches where the short strikes are placed beyond the expected move, how far beyond depends on the risk appetite. If company X earnings report is met with indifference and the stock next day trades within the expected range the previously rich premiums collapse (Volatility Crush) and it's happy days as the position is closed at the Open by buying back at a much lower price than it was sold for. If the earnings are deemed a blowout up or down and the stock opens significantly outside the expected range the worst case scenario is the maximum loss as known and understood at time of trade entry.
  • NF
    Nicholas F.
    6 September 2018 @ 23:43
    Great video and thanks for sharing solid options knowledge, Nancy. I'm looking to brush up on some more complex options strategies for rates and fx, any great books or blogs you would recommend? Thanks again for your time and contributions to RV!!!
  • MM
    Michael M.
    5 September 2018 @ 01:55
    Retail investors are able to express a rate view via options on the Eurodollar futures (GE). Eurodollar futures pricing is easy to understand (100 - the futures prices = the anticipated 3M forward LIBOR rate). As an example GE Dec16 '19 priced today (9/4/18) is 97.015 (implies 2.985% 3M LIBOR end of next year). IV in the options is relatively cheap, the multiplier & pricing are such that ATM (at-the-money) puts for the term previously mentioned can be a bit over $500 each if bought on a Futures price spike. The CME has a pdf on Understanding Eurodollar Futures with a great section at the end on how to use them to hedge floating rate loans. -
    • MT
      Mike T.
      5 September 2018 @ 07:21
      .... and to add one small additional point with /GE futures don't be put off by the huge notional value as most brokers only require a tiny margin to trade it so the typical brokers view of trading /GE is it's low risk for them = good instrument for even the smallest of accounts.
  • LP
    Lari P.
    4 September 2018 @ 16:20
    Would like to see more in-depth, practical video on this topic. Thanks!
  • PS
    Paul S.
    4 September 2018 @ 11:54
    "The sold put is the natural predator of the greedy investor" - Equity Options Trader, 2008
  • SD
    S D.
    30 August 2018 @ 06:13
    This was filmed July 26?
    • ND
      Nancy D. | Contributor
      3 September 2018 @ 17:27
      Yes, the filming was done in NYC on Thursday, July 26th
  • IO
    Igor O.
    31 August 2018 @ 05:57
    Make a series on options for advanced with visuals, I'll watch.
    • ND
      Nancy D. | Contributor
      3 September 2018 @ 00:56
      I’d be happy to do more of these. This was meant to be a basic overview on investing with options and explaining the Greeks.
  • MS
    Mark S.
    1 September 2018 @ 23:50
    Liked this talk. Would have liked some details on how she manages positions. When does she become concerned about Vega, theta, gamma. What does she do?
    • ND
      Nancy D. | Contributor
      3 September 2018 @ 00:54
      Thanks for your comments. This was meant to be an options 101 to explain the Greeks and basics of options. I am the CIO of Quadratic.
  • AL
    Andrew L.
    30 August 2018 @ 21:39
    I am generally not negative on anything RealVision does but who is this video for? New to options? Well theres still way to much unexplained terminology. Not new to options, then why all the basics? This is a horrible format for this kind of material you really need visualizations of payout diagrams, slides with information to digest or web pages to read and re-read. Here we have a thousand little facts about options flying by and nobody is going to internalize that. I prefer OptionAlpha, amazing free educational material and podcast.
    • AL
      Andrew L.
      30 August 2018 @ 21:43
      With that said, I would still love to see more on options trading specifically and do like Nancy Davis's delivery and he sharing specific market experience. A trade ideas or some other deep dive on options pricing and strategy with specific examples would be awesome.
    • JL
      J L.
      31 August 2018 @ 01:12
      have to agree with you, anyone can learn this stuff googling for 1h, no reason to have Nancy babysitting the audience, get her back with examples of how to actively manage an option in different scenarios (that Brazil video was impressive)
    • AP
      A P.
      2 September 2018 @ 09:18
      Andrew, I can't thank you enough for sharing the OptionAlpha material, I have already 10xed my knowledge of the topic as I started from scratch. The power of the RV community here. I hope interviewees like Nancy will just stick to more advanced applied strategies (like that video on Brazil, totally stunning), as the foundations can be found elsewhere.
  • TH
    Timo H.
    2 September 2018 @ 07:10
    I have this ominous feeling, that pension funds are trying to meet their objectives by selling options. I hope I'm wrong!
  • CN
    Charles N.
    31 August 2018 @ 06:48
    Good options refresher course, though a bit slow for people who trade options regularly (I realize this was probably intended as a 101, which is perfectly fine - gotta start somewhere!). Please get Nancy back to discuss more strategic aspects like sizing, duration, vega, gamma, and underlying selection in a bit more detail
    • ND
      Nancy D. | Contributor
      31 August 2018 @ 20:57
      Thanks, Charles! I would love to come back to do a more detailed version. This was meant to be a 101 as a follow up from questions from my trade idea pitch on short Brazil that was implemented with long puts.
  • EC
    Eric C.
    29 August 2018 @ 12:32
    Great Video! Would have liked to hear 1 sentence on IV rank, even if it’s just “IV Rank is really important but beyond the scope for introducing options”
    • AM
      A M.
      31 August 2018 @ 14:10
      If you are writing the options I agree, but she is telling the children to buy only. Knowing the IV Rank for exploiting the vol crush after earnings or another market moving event can be very profitable.
  • RD
    Ryan D.
    31 August 2018 @ 01:42
    Nice. Always like Nancy"s ideas and ability to inform. How about options on eurodollar Futures as an expression on rates?
  • DF
    Dave F. | Contributor
    30 August 2018 @ 20:03
    Enjoyed this interview.....
  • TB
    Tim B.
    30 August 2018 @ 13:40
    This was an excellent review of options, and definitely worth rewatching to let it soak in. At the same time, I also think there's room for a more beginner version. People have to start somewhere. Just a thought...
  • V!
    Volatimothy !.
    29 August 2018 @ 12:53
    I’m not totally sure but I take it that discovering option miss pricing comes from identifying paradigm shifts. The greeks are priced from recent history. On a future episode of The Exchange lets get Nancy Davis, Mike Green, and Chris Cole or Ben Melkman as the third.
    • GS
      Gordon S.
      29 August 2018 @ 18:14
      "The greeks are priced from recent history." That is not really correct. Greeks are priced from expectations of the future. I.e. for example before a company's earnings, its implied vol will be high, after the earnings, its implied vol usually goes down. Of course expectations of the future are somehow ankered by experience from the past.
    • V!
      Volatimothy !.
      30 August 2018 @ 11:24
      I’m still not sure what prices greeks. Open interest, put call spread, or price. I assumed it was just mathematical probability pricing them. Is it possible to get positive or extra negative carry on a call with no price movement because of price adjustment?
    • MK
      Michael K.
      30 August 2018 @ 11:34
      Tim - there’s just no quick way to express a deep study of options theory that takes years distilled into a pithy lesson. Read the transcript and pursue the subjects within topically. If you truly want to understand then enroll in options theory classes in a grad school program. It’s just not something you will “intuit” out. There’s being smart and then there’s the work. Option models that break out greeks exposure and dynamics are just models. So there’s knowing the models and then there’s making decisions based on them, which often strays in subtle ways from theory and she explained. This takes time, perseverance, patience, passion, and analytical skill.
  • AB
    AJ B.
    29 August 2018 @ 19:39
    For anyone new to options it is not this difficult. Have someone use plain language and not the Greeks
    • CT
      Christopher T.
      30 August 2018 @ 01:13
      like flying a plane without instruments
    • MK
      Michael K.
      30 August 2018 @ 11:30
      I think the consumerist desire for simplification or complex reality is too strong. Her conversation was about as “simple” as it gets without losing the signal. Those confused should either stay away from options or study them intensively and consider whether they have the mathematical skills and perseverance to do it.
  • PB
    Pieter B.
    30 August 2018 @ 11:20
    Thanks a lot Nancy! This was very informative and great value!
  • SU
    Shakeel U.
    29 August 2018 @ 23:43
    It would be helpful if this video was in plain English, too much jargon here.
  • PG
    Philippe G.
    29 August 2018 @ 23:29
    Very informative! Note that Home Capital is a mortgage lender, not a home builder...
  • Nv
    Nick v.
    29 August 2018 @ 10:29
    Big fan. Bring her and Mike Green back any time Independent thinking
    • ss
      sid s.
      29 August 2018 @ 22:17
      love Mike Green.
  • SP
    Steve P.
    29 August 2018 @ 22:08
    Will RTV add an on-video annotation feature soon? Similiar to thinkOrSwims ability to add a common on screen? In this case , a "bookmark" that's say limited to 250 characters?
    • SP
      Steve P.
      29 August 2018 @ 22:09
      sorry found it idk how to delete this
  • SP
    Steve P.
    29 August 2018 @ 21:30
    Advise against writing options? Sure, where there isn't a clear strategy - assignment is an issue. Still, the credits collected and if you're savvy you've already factored in the likelihood of assignment, and how any dividend and potential growth will offset the loss.
  • SK
    Stuart K.
    29 August 2018 @ 21:16
    Great video on the inception of trades with defined risk and asymmetric risk/reward. I could listen to Nancy for hours.
  • CT
    Christopher T.
    29 August 2018 @ 20:32
    She's great
  • WB
    Wes B.
    29 August 2018 @ 20:05
    Most difficult part of option trading is getting the duration right. It would have been nice to hear her talk about how she handles timing. How far out does she typically go when buying options, 3 months, 6 months, etc?
  • MT
    Margo T.
    29 August 2018 @ 20:01
    Terrific video; should be required viewing for any investor.
  • MM
    Mike M.
    29 August 2018 @ 17:49
    Excellent, enjoyed the presentation. Thank you.
  • SN
    Scott N.
    29 August 2018 @ 17:09
    Where's the download audio link?
  • RS
    Richard S.
    29 August 2018 @ 16:36
    Every time I listen to Nancy I am more impressed whether on CNBC or RealVision. She nailed to vol explosion in February by calling it before it happened as well as the Brazil meltdown. I also love her turning conventional wisdom on its ear by emphasizing that asymmetric can only be achieved through long delta option strategies. I found her comment about locking in the cost of borrow with long-dated puts to be very insightful. Please have her back as often as possible !
  • JS
    Jason S.
    29 August 2018 @ 15:36
    I'd also like to know how options trades (with vega etc) during the GFC. Reviewing history could be useful for the next financial meltdown, knowing the pitfalls etc. such as long puts on dow jones (as an example).
  • JS
    Jason S.
    29 August 2018 @ 15:35
    Awesome stuff - great to have a straight forward revision on oppies.
  • TE
    Tito E.
    29 August 2018 @ 14:30
    Crystal clarity! Thanks Nancy.
  • PM
    Patrick M.
    29 August 2018 @ 13:19
    Super Duper !!!
  • ss
    sid s.
    29 August 2018 @ 13:17
    does she have Twitter handle ?
  • DI
    David I.
    29 August 2018 @ 10:39
    Great video, very informative. EWZ was a good learning curve for me also so thank you Nancy.