Anyone that sells vol is making a defacto bullish bet on the market all things constant. Unless he is running a discrete dispersion strategy. If I sell front month gamma, the last thing I want is for the market to roll over hard. If I sell back month vol, the last thing I want is a hard selloff causing vols to spike. This is what I mean by vol traders being an indirect directional trader. When I sell vol, it's usually because I think the markets are going higher. If I buy vol, it's usually because I think we are going to sell off. Why would I ever buy vol with a bullish market outlook? So at the end of the day, whether you are trading direction or trading vol, you are really trading direction regardless. One cannot make the argument that simply because of the wide placement of strikes that they don't care about direction.
Mav, Thanks for all of your very good information over the years. I've learned a ton. I have a question though. I understand forecasting vol is not easy and there's nothing saying it has to go up or down based on the underlying movement, but how would you weight your forecast based on historic implied volatility figures? Here's an example. I had a bull spread on recently that was a bit short vol expecting MSFT vol to go down a bit while it rose. Fortunately, MSFT went my way on the direction, but the volatility went up a bit. Looking at the historical implied vol charts, ivol was really on the lower end of the range. So my question is, if you're about to go long or short directionally, what factors weigh in and by how much when you select your vol forecast? Maybe the MSFT is just an anomaly? Thank you.
I joined this thread a bit late,so I will assume you are talking about index options and not equity options... I get your point regarding a bullish outlook and selling vol.My point is if you are short vol,you cant afford to take directional bets,while when long vol,you can let your deltas go a bit more.. I dont necessarily agree with not buying vol at these levels if you are bullish...
"When I sell vol, it's usually because I think the markets are going higher. If I buy vol, it's usually because I think we are going to sell off. Why would I ever buy vol with a bullish market outlook?" -------------------- Mav - you have a point here. Do you believe this gives you a slight edge by sticking to these prInciples? Basically this rules out calendars, diagonals etc to the upside altogether with maybe bear call spreads more suitable or flies. OTM
Who said that brilliant statements appear only on this Board? Here is a piece of brilliance I extracted today from the other Board. "Prices may move strongly higher or lower after breaking through a moving average." This is so profound that even the disagreeing experts here on ET can't controvert it's accuracy. The only thing I could add would be that "Prices may NOT..." See, even I have a sense of humor. Bob
You need to take into account the vol skew. If MSFT had a neg call skew, that would mean the vol would actually rise as the stock went up, even if ATM vols were dropping. You need to make sure you center your vol. When referring to just vol, people are usually referring to the ATM vol. Then they run their vol curves around the ATM. If MSFT had a pos skew, then the vol would have actually dropped as the stock rose. You need to separate the ATM vol from the vol skew. They are two different things.
You current position is as you know equivalent to owning 8 long Jul$95 puts. The premium you payed for the puts (calls) is your risk, the gain is unlimited. When long puts are used as a bearish strategy it is normally done because of the limited-loss property that long options have. It is therefore not usual to consider hedging them. But if you do hedge them, eg. by going long Jul$120C's you essentially will own a long strangle. I think long strangles are ok if you expect increase in IV, but since everyone is already eagerly waiting the numbers, IV will probably drop after they are announced. Long strangles are about the worst strategy to do before numbers., although they seem the most logical ones. Another way to neutralize the -delta is to buy stock (or go less short in your case). If you buy 400 stock you will own -400s + 8c= 4p+4c. Again a long strangle, this time a straddle. Same issues here. Seeing you now own 8 long puts and also seeing you want to study butterflies, you might want to convert this into a put fly instead of a call fly. By buying the 120 puts now and wait for the stock to drop (which is also more in line with the reason for having the long puts in the first place) you can the sell the middle puts and own a 'free' butterfly. Again I want to stipulate that the latter don't exist. If you have a long call and it doubles in value and you sell the next higher call against it, will you own a free vertical? No, of course not, you used the profits from the first call to buy a new vertical. Important, this. Enjoy your stay, glad you came back on your decision to leave . Discovering the truth about options can be very discouraging, but if you keep going it also gets more and more interesting. Ursa..
Urs, no doubt the IV will drop probably with Thursday morning's opening prices. But, I strongly believe that the IV impact will mostly be for the options at or near the money and only for the January and February options. The April and July options haven't really spiked that much anyway. Having said this, I will of course do my diligence and check the IV charts mid morning Tomorrow (Jan 16) just to be sure. Everything you say regarding the equivalencies is probably correct including the fact that I have the equiv of 8 July Puts. Regarding the much discussed $120C purchase with potential delayed Butterfly, let's discuss where my head is presently at. Make no mistake about it, my bias and desire is for AAPL to drop, as evidenced by the present negative 340 deltas. The call purchase thing is simply a "just in case" contingency. But, obviously nobody knows for sure...certainly not me. One additional word about the short stock and long calls. My background is not buying and selling options. I'm a CPA who, while I do keep track of the stock charts through my subscription to Telechart, I closely follow the fundamentals, particularly the Balance Sheet. (I'll have more to say about this in subsequent postings.) I look at all of the published numbers and I love the abundance of free financial information available at Yahoo Finance. I am very comfortable dealing with the actual stock and supplementing my equity position with options...both buy and sell and both Calls and Puts. I prefer shorting stocks to buying stocks solely because shorting requires a much smaller working capital outlay, a fancy term for cash disbursement. In the end it does come down to personal comfort and experience, doesn't it? Bob