Option strategy to deal with up market with IV dropping

Discussion in 'Options' started by thirst, Aug 2, 2011.

  1. thirst


    As you all know, the implied volatility is pretty high on options right now. If one thinks the market will find a bottom and start coming back up, what's the best strategy to use considering that prices will rise, but IV may drop significantly.


    Short a put spread?
  2. I disagree. Implied volatility is not particularly high at all. It's not even at its 200d MA.
  3. thirst


    Point taken. But if the market does settle down, and starts to retrace some of this carnage, could one anticipate that the Vix and IV would drop during the bounce? And if so, buying calls would have to deal with both the theta decay and IV retracement.

    The 25 Delta IV on SPY calls was at 12.5 at the beginning of July and now at almost 19.37%. If SPY does bounce, one might expect the IV to drop back down somewhat?
  4. I don't disagree at all that IV could drop in half over the next few months.

    But it could also just as easily quadruple.

    Personally have nothing against taking risks :) just like to understand the extent of the worst case downside.
  5. MTE


    An OTM long call butterfly would benefit from a market rise and a drop in volatility.

    Otherwise, any long delta-short vega position would benefit.
  6. try spreads, either bull call (buy 1255 spx call/sell 1275 call) or bull put (sell spx 1255 put/buy 1235 put)
  7. Dolemite


    If you are really sure the market has found a bottom and will be coming up (which I am not too sure of) then why not buy a call spread and finance the cost of theta with a short call spread in VIX. Obviously if you are wrong it would be a double whammy but a slow leak down wouldn't hurt the short call spread in VIX as much.
  8. 222bc


    How about a bull put spread on an inverse ETF?
    I never actually looked into how the skew works in this case.

  9. thirst


    Thanks for all your thoughts..

    I ended up just buying a call on OTM september SPY calls after the mid day sell off and when vix had dropped back down a bit. Will sell the August to create a calendar spread when/if we get a decent bounce in the market.