Insurance for RTM traders

Discussion in 'Trading' started by shortie, Oct 25, 2008.

  1. from what i read on ET and from my own experience the last two months were great for reversion-to-mean strategies. I would say the great times started in the middle of September when VIX moved above 30. So, it seems the more volatility - the better.

    What happens when the volatility goes away? We all know that we would like it to stay here forever, but it aren't gonna happen :( .

    We can't expect the volatility to stay, but maybe we could insure ourselves by selling volatility. Am I thinking correctly about this? Is the insurance worth it?

    P.S. This is probably relevant to other traders (not only RTM) but I am not sure if other styles have benefited from the high volatility as much as RTM.
  2. as an example, i wrote some OTM Nov puts a while back. they are now underwater, but my account is actually higher than it was before i wrote the puts. this is because RTM has been working so great. Now if the volatility takes a dive, I will collect on the puts but RTM presumably won't work as good. The net result is presumably a smother equity curve.
  3. 1) Sometimes the (DFTM), Diversion From The Mean, can be greater than you expect.
    2) The "mean" should be thought of as a moving target, not a stationary target.
    3) Sometimes if you're far enough from a speeding freight train, it may be able to stop before crushing you. :cool:
  4. should i have sold puts with expiration further out then?

    just to clarify, my RTM strategies on stocks are short-term (usually intraday). writing options are longer-term trades (~1-2 months) to insure myself for a possible volatility drop that will negatively affect my intraday RTM. actually, i don't mind losing some money on options if i am wrong about volatility going down.
  5. the puts i wrote are nicely green now. so i think writing options as an insurance against volatility drop is not a bad idea. i probably should have done it differently. i should have written both calls and puts and maybe close the winner and let the loser reverse.
  6. No. You could've been hurt badly by the gamma and vega. You're a little "lucky" that the market has rebounded since last week. :cool: