What is that HV number on your graph. It's not always 3-4%. But it generally is. Selling vol isn't free money but it is expected value positive.
It is a chart from my brokerage's website, HV(999) is historical volatility, the 999 denoted average for the past 999 days. It can be set from 2 to 999 days. I assumed the correct number should match with the expiration time so here is one that matches a one month (20 trading days) expiration: HV sometimes was higher but sometimes was lower than IV too, in fact for any number between 2 and 999. Any comments and insights regarding IV vs HV is greatly appreciated. Regards,
Any insights on the net returns for selling volatility? Is it greater equal or less than the risk free rate?
Regardless of what the academic papers say, the practical outcome for vol sellers who lack very deep pockets is generally -100%.
What is the right strategy selling calls and puts? In your experience, to be profitable and much better than buy and hold, what should the write strategies be for selling calls/puts, i.e., the frequency, expiration time frame, ATM vs ITM vs OTM... To give you a recent example of my problem, I have been selling OTM calls on BAC since the beginning of this year. It netted me a small profit until Trump got elected. I am now holding one month expiration call contracts that are ~ $3 ITM. The overall net is I would incur a big loss on selling calls on BAC this year. This is another example of picking up pennies in front of a steamroller and I got steamrolled over. What should I do to "manage" my trade? I thought about exit when the stock hit the strike price but then had second thought and tried to wait it out obviously with bad outcome. Appreciate your input.
You are a full time options trader. You should know how to manage this risk. Part of selling vol is taking in small risk premiums in exchange for occasionally getting hit with a hammer. How does it work in reality? An insurance company sells an annuity to a person. They hedge that annuity by buying volatility in the market. They are willing to pay up for the volatility because they are receiving more premium from the insurance policy they have sold. They have to buy volatility in the market as they can't run the insurance policy without a hedge. You sell volatility to them and collect the premium. Most of the time this will earn as the insurance company was willing to overpay for it. Sometimes it won't (which is why the insurance company bought the premium in the first place).
Yes sir. But I am still learning. Most of the time I made money placing directional bets and some of you would certainly say it is like going to Las Vegas. Thinking out loud, if I short volatility (sell calls), I should buy some volatility to cap my risk, so that means a spread? Frankly I tried everything else: Took profits/losses early, took partial profits/losses, roll up, roll down, roll out, roll in, convert into calendar, diagonal spreads... The bottom line is it is still a judgement call as I have not found any automated formula. So now I am writing my own software program to try quantify all the possibilities and their consequences....Very difficult for someone without any finance background, even with just the basic Black Scholes. I always appreciate your replies to my posts, they clarified a lot of my questions. Regards,
It's like packing for a trip ("lay out all your clothes and money, then take half the clothes and twice the money.") Lay out all your capital, then double it (and double it again for good measure). You'll need it some day. Myron Scholes (yes, I know, LTCM...) points out that the return to selling vol is very small if you properly account for worst-case margin requirements.
Well, it won't be much less than just trading the stock as if you sell vol you will always lose less than trading the same notional of stock.