Interesting point indeed! http://www.investopedia.com/university/optionvolatility/volatility7.asp " As is clear in Figure 17, ... ... Trading this information is difficult because the direction of the price move is not known. While it is possible to try to see what insiders are doing and to mimic their behavior, this is not always easy and may lead to erroneous results. Buying out-of-the-money options is a poor strategy even if you know which way the stock is headed. This is because the options are trading at extreme price levels, as indicated by the sky-high IV. When the move occurs, assuming you bought the right options, the collapse in IV will often erase most of he gains. Selling strategies, meanwhile, may pose a problem because the price moves can be so big that you may find that the risk is not worth the reward. While there are other ways to trade these high IV levels, the topic is outside the scope of this tutorial. The important point is to know how IV can be used to scan for stocks that ready to make explosive moves and what this means in terms of option pricing. "
Also adding to the risk of long vol, is the fact that volatility can easily decrease as fast as it increases. People always assume vol rises are violent whilst declines are steady. And just as recently as the May-June correction was that disproven, yet again. The vol crush was far more violent than the vol ramp up based on VIX, and anyone holding long vol would've been destroyed if not switching at the top. Same happened during the fiscal cliff debacle in late 2012. Vol from 23 to 15 in a day.
For fat tails, I always think these few things must be doing right: Direction, Timing, Volatility and Stop-loss, otherwise ... .
Well, it's not the violent vol crush that you should be concerned about, it's the slow bleed combined with a slow vol crush. Folks at JPM that did the infamous MSFT trade know this all too painfully (though I doubt any of them are at JPM by now). I can relate the story if anyone cares...
YES..I know I have experienced it and its paralyzing because at the time I just didn't have a clue how to balance my trading to minimize the effects...finally giving up and taking a huge loss
I know of a very good options trader (long calls or puts only, not premium seller) who doesn't concern himself with the greeks, but he's very good at forecasting price direction and has a general sense of whether the option seems overpriced or underpriced.
Seems historically much longer time span for slow volatility crush. http://www.istockanalyst.com/images/articles/vxv500x3632012833311.jpg http://www.istockanalyst.com/financ...0-3-month-implied-volatility-is-extremely-low