The Barclays Trading Strategy that Outperforms the Market - en

last week i made a video talking about institutional investment research

institutional confirmation bias analysis talking about individual companies and

where they thought the share price would go

while i was doing research for that video i found

possibly the most incredible thing ever a different report and realized that

this this really requires its own standalone

video from barclays u.s equity derivatives strategy impact

of retail options trading this is a 30-page report from the

barclays derivatives team about the strategy they developed to capitalize on

new retail options trading volume quite literally a

specific blueprint of how to take money from the degenerates of wall street bets

at the end they offer two trading strategies that they actually use to

drastically outperform the index so i thought it would not only be funny

to read about how barclays takes money from robin hood traders but also

interesting to see if anyone could use their strategies to do the same

literally the first sentence we show that retail investors have been driving

a significant increase in option mostly short-dated

calls volumes for large cap stocks i love that

they throw that in there in the first sentence

just to clarify that we are talking about the retail crowd here

don't worry guys you didn't need to clarify i didn't even know robin had

offered options with more than a week until expiration

i think i think that's what you unlock when you get robin hood gold

so this was posted in september of 2020 not too long ago

single stock option volumes have increased three times on a

year-over-year basis the increase is in short-term calls on

large cap tech stocks before we move on reading this it's

littered with so much pretentious complicated and boring financial jargon

then i'm just going to summarize all the important parts with memes instead

if you want to read the whole thing the link is down below i mean come on

monetizing retail driven options volatility dislocation

can't you just say taking money from broke people with robin hood instead

then i wouldn't need the goddamn rosetta stone to try to decipher all of this

that's like how you describe your trading strategy to your girlfriend's

parents yeah i focus on looking for option

volatility dislocation and large cap equities

in reality that's just you fomoing into meme stocks with 500

iv then losing all of your money and not eating for a week

yeah i'm really big into minimalism brocism

how does barclays take money from you and how can you use their strategies to

take money from other people so there are a bunch of retail degenerates

getting stimulus checks and entering the market they now have access to robinhood

zero commission options and just a lot of fun ways to lose money we can

actually see in the report where most brokers enabled zero commission

options trading combine this with stimulus checks and interesting things

are bound to happen all of the new degenerates entering the

market want to take risk after all what's the point of making a

20 return on a thousand dollars there is none so what do i need to do to

leverage my money to the max short term cheap out of the money

options should do the trick these 15 out of the money tesla calls

with two weeks until expiration should provide me sufficient leverage to meet

my personal risk tolerance may as well drop my stimulus check and student loans

into this opportunity wouldn't want to miss out on a great

trade barclays claims that two interesting things happen because of

degenerates yellowing their savings they're kind of complicated but i'll try

to break them down simply but first a quick reminder that options

are priced based on the market's anticipated future volatility the higher

the implied volatility the more expensive they become

so what did those barclays analysts find the first thing that's happened

is the volatility risk premium on some stocks has decreased i think i've shown

this chart in other videos this is historic implied volatility

versus realized volatility the space in between is the volatility

risk premium why should anyone give a it shows that the market tends to

anticipate volatility to be higher than what

actually happens with the new retail options buying the spread between these

two for some stocks has actually decreased

this means that realized volatility has been bigger than what the options market

has anticipated for other stocks it's gotten bigger

implied volatility and realized volatility have moved apart from one

another if you have any options trading experience you're probably

already seeing big dollar signs all i need to do is sell these expensive

options and buy these cheap options we'll get into that a

little later they also mentioned that their collection of 100 stocks with the

highest retail option volume have outperformed the

index however it's somewhat inconclusive as they're the same stocks that have

shown themselves to be resilient in the pandemic there is one other

incredibly important way the retail degenerates influence

share prices i'm gonna try to explain this simply broke robinhood trader uses

wendy's savings to buy worthless short-term out-of-the-money options when

he places his buy order market-making man who sold the options needs to keep

his neutral market position in order to be completely neutral he

buys shares of stock now if the call he sold increases in

value the profit from his shares make the position completely neutral but by

buying those shares he also drove the underlying price

higher this triggers more wendy's employees to pile their paychecks into

deep out of the money options it literally can't go tits up this

causes the market maker to buy more shares and hedge's position against the

calls he sold which once again causes the share price to go up this hedging

share volume has increased significantly since the rise of commission free

options trading the mystical gamma squeeze it just means

that weird things can happen when a lot of people are buying out of the money

options just something to keep in mind let's

look at the actual trading strategies barclays recommends using to take money

from the robinhood traders they offer two methods the first is

monetizing elevated volatility using selective vol

score based short delta hedge straddles on single

stocks see what i mean about needing the

rosetta stone the they're basically saying that selling or going

short volatility on certain stocks is a good idea with certain options

strategies you can go long or short volatility

exactly how you might go long or short a stock

this is one of the great things about options now we don't need to gamble on

which direction a stock will go instead we can bet whether it will go in

either direction a lot or a little they're suggesting selling

straddles if you think the market is pricing future volatility too low you

might buy a straddle by buying a combination of a call and

put the position isn't affected by any directional move in the share price

instead the strategy makes money if volatility increases whether that be

from a directional move up or down this would be an example of

going long volatility using options you might also hear this

referred to as long vega barclays is selling straddles or

shorting volatility on specific stocks in doing so they've significantly

outperformed the market however what might even be more

important is how they determine which underlying stock to sell these straddles

on they say they're looking for stocks with

rich volatility risk premium a wide spread between

anticipated volatility and realized volatility

essentially they've made a ton of money selling retail degenerates over

priced options you might be able to do the same

in the report they mention that they find these opportunities using what they

call their volsscore metric unfortunately they don't go into exactly

how it works just the general idea they're looking at

the spread between the stocks implied volatility and the sector's implied

volatility as well as the implied volatility of this stock

relative to its historic realized volatility

i think it's easier to imagine this visually if we look at diagram a we can

see that they're looking for stocks that have a ton of volatility above the

sector volatility as well as stocks that have a wide margin between

implied volatility and realized volatility we can't know specifically

how they're judging the relationship between these three things

i'm guessing that they're assuming that these stocks with such overblown implied

volatility are bound to revert back to a lower volatility point in the future

more in line with sector volatility in this report they say specifically that

the volatility risk premium hasn't expanded uniformly across stocks with

high retail option volume but there are opportunities where it has in a big way

when you find those opportunities that's when you short volatility and

take money from the retail degenerates retail traders blow life savings on out

of the money options which creates spooky weird price

action sometimes this leads to expensive options that are disconnected from

reality the other strategy they describe is

buying long call spreads on stocks where implied volatility and realized

volatility have converged this would be buying a long call then

selling a deeper out of the money call on a stock where this volatility risk

premium is tighter this strategy is less volatility based

so if you're using it you want to make sure you're buying spreads on a company

you actually believe in selling straddles is purely a volatility

based options strategy but with a long call spread your volatility exposure is

not nearly as large as your directional exposure

so there you go a real barclays trading strategy that beats the market

surprisingly it doesn't seem impossibly complicated

it almost seems like an individual who put enough time into this could develop

something similar that's concerning the last thing i need

is more hope that the stock market will ever make me money