Maverick, Interesting comment and I value peopleâs opinion. I currently donât sell naked premium in the indices do to the low vol, but there are plenty of strategies for low vol also (debit verticals, calendars, diagonals, etc.) So I truly believe that one needs to keep cognizant of the market, or have a keen market awareness and not just doing stuff willy nilly. Even in this low vol environment though, there are still some nice high vol trades occurring in individual stocks (I stick to the most liquid ones at that). Iâve come to appreciate earnings plays for that (higher vol prior to the day of the announcement, vol contraction after). This has also been true in different commodities and currencies in the last few months (gold through the use of GLD and the Japanese Yen through the use of FXY). They both had 100% IVP (Implied Vol Percentile, or their highest Vol in the last 52 weeks). I utilized the hell out of some credit spreads and ICâs during that time. Finally, as a retail investor, Iâm personally trying to mimic the different institutions that have large number of trades occurring at onceâ¦It increases my chances of being right! I manage my winners when I have them, stay small in ALL positions (no one position can destroy me). I average anywhere from 25 â 35 positions going at once (some in the same underlying). Long story short, I emphasize strategy over direction, staying relatively small in positions vs. overall capital, and trade a HELL-OF-A LOT!
Brighton, Point taken. Well then, I guess its good to know that I'm learning from someone with over 30+ years of trading experience, Tom Sosnoff!
Brighton, By definition, a spread can't win or lose more than defined at trade entry (at least conventional spreads like verticals, IC's, butterflies, calendars, diags, etc.) I would believe in that case, the risk is limited. Even if one (some) of the options get exercised, the risk profile doesn't change, only the required capital. If I don't have the amount in the account after exercised options, I close that entire position (this has happened a few times). In the end, if I was up/down on that trade, I will be up/down after options are exercised on my position, at which point given the next available opportunity to do so, I close the position to free up the capital.
I did an earnings play on NFLX the day of their earnings announcement (they announced after market close) and their IVP (Implied Vol %) was I believe greater than 80% at the time. I don't have the #'s anymore (spreadsheet), but I recall that I was able to get about ~3.2SD (just sold 2 calls) out of the money, which was amazing because it was the current weekly options at the time. If I can't do that, then I consider different strategies. Iâm still learning though and that was how I approached it.
If it steadily increases it will (on average) cause you steady losses for as long as it keeps increasing.
True. Nevertheless, raised vol and so unrealized loss doesn't hurt me until I'll figure out chance are high to be expired in money i.e. price is close to strikes. That's why I prefer to be exposed for as short as possible, shorting month expiration options.
Not necessarily. There are strategies for increasing vol. If vol is low relative to where it has been for a particular underlying, then use those types of strategies regardless of direction/range one is betting. This does not mean you will win the bet/trade, but a least a possible vol expansion wonât be the reason why you had to stay in a trade longer in order to see if you would win (be able to manager a winner/make a profit) prior to the options expiring.
Yes necessarily on average on an overall short position, which is what I was discussing. This is just obvious - if you are selling volatility, you need it to go down, not up. Only not being excessively short premium or legs or volatility. You never know ahead of time when the market will switch to a regime of rising volatility. Volatility does need need to be low to go much higher. It might be already high and end up much higher still (e.g a rolling market crash). I am talking about risk scenarios, not about the most common case. I am just pointing out that you can have long runs of losses, even on limited-risk positions. This should not be hard to agree with. You can definitely make money selling options with very good risk control though.
Hi Maverick, If one sells ES naked calls/puts for example, what would be the best hedge in your opinion? I know a futures contract can help, if ratio is set correctly. Anything else? Thanks, redduke
I primarily sell premium (and listen often to Tom and Tony in the early am) but do buy it in low vol environments. I would caution you on the idea of going too far OTM in high vol simply because it is so easy to become complacent and there is a higher risk/reward involved. Also what IS high vol?? That gets pretty subjective...the average the past year? 5 yrs? 10 Yrs? However since you ARE trading small the lessons you learn will not cost much. Good luck...sounds like your on the right track.