hi guys, i've been trading options with IB's platform for quite some time now, but can't seem to figure out their volatility trader or more specifically, the VOL orders. for some reason the demo does not allow(or work, it doesn't show real time prices) me to test it to see it for myself, and i don't feel like losing money trying to figure it out. so my question is how does the VOL order actually work? i know it is supposed to trade implied volatility instead of the price, but to what extend will the price of the option affect my profit? for example: if i sell the implied volatility (let's say of a AAPL 520 Call), and the IV actually does go down, but at the same time the price of AAPL goes up, doesn't that mean i was short AAPL 520 Call and the price rise ate my profits from the IV drop? i would be very grateful if someone could shed some light onto how the VOL orders work, and what happens if i sell/buy volatility trough IB's volatility trader. thanks in advance!
I haven't looked at Volatility Trader yet, but you are correct that you have market risk with a straight option short. The usual way to trade volatility is with options combinations such as straddle, strangle, verticals, etc. The purest form uses the straddle (i.e. short a call and a put with the same strike). But all combos have market risk as the price of the underlying changes due to the volatility skew. Professional traders adjust as needed to keep the position delta-neutral.
thanks for the answer, but i meant as in if i sell volatility trough the IB volatility trader/VOL order, does it just sell an option? (in the previous example: short AAPL 520 call)
Here is the page that documents the VOL order type: https://www.interactivebrokers.com/en/?f=/en/trading/orders/vol.php It says that you have to enable volatility trading to get it to work, and I don't know how to do that. When you create a volatility tab, it simply displays implied volatility instead of price. Then you place and manage orders based on IV instead of price. But you still need to trade combos to minimize market risk (i.e. due to price change of the underlying). I believe volatility is important, especially to option traders, but I am not sure it's any easier to trade profitably than price is. Figuring out how the software works is pretty simple compared with using it to make money. Let us know if you figure that one out.
just got off the live chat with IB. Even they couldn't tell me anything else except what is written in the description on their website. If anyone has tried this, or has any experience using VOL orders, please PLEASE let me know. Implied volatility trading is like 60% of my strategies, so i would very much like to figure out this feature
How do you run implied volatility strategies and not Know the answer to your own question? Most volatility "orders" i have seen are best efforts execution on the option And the stock for the initial delta hedge. In your example you would have been long stock to offset most of the delta move and your pnl would be dictated by vega and gamma/theta.
The volatility trader at IB is just a different quote system, not a true volatility (or variance) swap platform. What you gain by using it is that pricing is all quoted in VOL and that is it. You also gain the convenience of the system translating between vol and dollars (and vice versa) for you but that is it. Also a little hidden side effect is that you won't get hit with cancellation fees for your order (because the system needs to adjust the dollar price continuously to match your desired vol value). I have used it and it is good if you are more comfortable seeing prices quoted in vols, but make no mistake each transaction is a buy or sell of plain vanilla options so you are exposed to all the conventional risk (delta, gamma, etc). You need to hedge them away by yourself. One thing on my wish list is that they get it to work with combo orders. Then it would be really useful.
thank you! what confused me was that they stated ''it allows you to trade volatility instead of price'' and i didn't know how that's possible without submitting a combo order. When it just sells plain vanillas it doesn't seem all that useful as stated on their website.