This analysis involves examining Nvidia stock options to identify short-term trading patterns by analyzing changes in "implied volatility" (IV), which reflects the market's expectations of future price movement.
In options trading, IV often serves as a signal of anticipated risk or fluctuation: when IV rises, it typically means that traders expect the stock could move significantly in the near term, even if the stock’s price remains steady.
The approach observed here focuses on a particular pattern between out-of-the-money (OTM) puts and calls. Out-of-the-money options are priced slightly above or below the current stock price, so a change in their IV can signal traders' expectations about potential stock price shifts. In this case, a sudden increase (around 10%) in the IV of OTM puts was found to often correlate with a slight rise in the prices of OTM calls within minutes. This inverse correlation suggested that rising demand for downside protection (increased IV of puts) could sometimes drive up the value of upside potential (calls), even in a flat market.
The hypothesis was that by detecting this IV increase in puts, a trader could enter call positions right before their prices rose, then sell them quickly for profit. ChatGPT’s analysis indicated that this relationship was strong enough to yield minor profits, provided the stock remained flat and the trader acted fast.
However, this strategy’s profit potential was limited. The gains per trade were small, and any deviation from the flat market or delay in execution could negate profitability. While the trader might succeed on a few trades, occasional losses would offset these gains, resulting in minimal overall profit after several trades.
Additionally, maintaining the precise conditions required throughout the day would demand significant focus and effort, which would not be sustainable or lucrative in the long term.
Ultimately, while this pattern demonstrated real predictive potential under ideal conditions, it was impractical for long-term profitability. Nonetheless, it highlighted how AI tools like ChatGPT can uncover nuanced patterns in financial data, assisting traders in exploring complex relationships, even if those patterns require further refinement to be viable trading strategies.
are you day trading stocks for the short term gain? If so, aren’t the profits ate up by taxes?