@smile it makes sense to me not to buy options when IV is extremely high if I am trying to earn on volatility change, but instead of buying I could sell them right? And then buy to close once IV goes down.
Buying vs selling options are two very different animals. With buying options my risk is limited to the price I paid for the option. There are some limited exceptions to this at expiration. In sharp contrast, with selling options my risk is far greater and undefined unless I do a spread. I am not interested in selling options because I like high reward to risk ratios. One bad options sell(short) trade can destroy a trader. There are so many variables to account for in an options trade, it is easy to make mistakes and when selling options the mistakes can be devastating. I would NOT recommend selling options until a trader fully understands the risks involved and then to start with small size and defined risk ie.(spread). If I were to sell options into spiking volatility I would it as a day trade very carefully or a spread if held overnight. I am not comfortable with these types of trades.
It's a newsy name. You can get filled somewhere near the mid, if you're willing to give up a little edge... give unto Caesar what is Caesar's...
John Carter has a strategy that he calls Bad News IV Crush. In general, for stocks with large gaps down the put options IV spikes. If the stock price finds a bottom at support and starts rallying with volume the stock panic selling is over and the puts can be sold for a day trade. The put option seller captures the IV crush and profits from the option price decline.
@smile Thanks for heads up about the risks with naked selling - it is certainly something I will not do for long time or ever, but was discussing it as a hypothetical trade. However, John Carter here is selling naked put in his strategy, right? And then buying it to close when IV drops down.
There's nothing wrong with naked selling of options. Treat it like you would buying/shorting vanilla stocks and you will never blow up (any worse than if you were trading the underlying equities).
I don't think you're going to be able to profit from low volatility alone, unless you have some ability or knowledge to predict an unexpected rise in it. For example, if we just had earnings, and vol drops to a relative low, you might predict an increase in IV for the options which expire just after next earnings. You will be 100% right, but unable to profit from buying those options on that basis alone, because theta will eat away all the vega gains and a little bit more as well. This is because as time goes by, all other things equal, the expected movement of the underlying still goes down slightly over the remaining lifetime of the option. The IV goes up because there are fewer days for the remaining expected movement to happen, but the total expected movement does not actually increase.
@newwurldmn From what I heard so far from experienced traders, selling naked options is very dangerous and should be done only by very experienced traders. In some ideal conditions, if I sold options on X, my profits be similar to as if I was short/long X - that is what you were stating? But what if for example X has a sudden drop and I sold put - I will likely suffer much more loses then if I was long on X? If not, why is everybody so afraid of selling naked?