RE: Trading the Volatility Cycle

Discussion in 'Options' started by vulture, Apr 19, 2002.

  1. I used to trade the OEX...That being said, I quit trading the OEX, once I saw the volume drop out, the spreads widen and the volume pour into the ES futures and other equity options...This used to be a great trading vehicle back when you had 1/8th spreads across almost every strike, however the index has lost alot since the introduction of the QQQ, the increased competition and spread tightening of the equity options and the ability to put on 1:1 hedges instead of trying to hedge an entire basket of stocks, when in fact, the OEX does not have a perfect correlation to the SPX anyway...

    Anyway, I have always "monkeyed around" with the idea of trading the volatility cycle in the OEX and the seasonal tendencies where there are volatility troughs and peaks...This is not as difficult as it would seem...However, the real difficulty is in adjusting the position so as not to be annihilated when you thought you were a low volatility buyer only to find out low volatility begets even lower volatility...This appears to have happened between February and March of this year...

    Over the years, there is almost always a volatility contraction in the summer months which set up the biggest volatility explosions going into September and October...The statistics tell the full story...There is also a tendency for volatility to contract going into the final months of the calendar year only to make short term peaks in January...These things can be quantified...

    The idea would be to trade a variety of deferred month options in a balanced net long/net short spreading technique, using wingspreads and directional exposure only when the reward and probability of x event happening outweighs the potential of y event destroying the spreads...Spreads would be legged into and rolled into deferred months, etc, etc...

    I have seen many people dibble and dabble with concepts and theories and use certain "popular" techniques to trade options, but rarely if ever have I seen anything that addressed the near constant management of positions(ala Cottle in "Options Perception and Deception)...Alot of people understand what a butterfly, condor, jelly roll is, but few can figure out how to "layer" spreads appropriately to take advantage of the underlying volatility and directional considerations...

    I wanted to start a thread that explored these considerations...i.e. trading into and out of a variety of spreads, when to do this or that and when to take on directional positions...
  2. Yikes, not even one response...
  3. I would like to participate and contribute. I too have been doing a good amount of 2-4 lot spreads and have been genrally successful BUT for a few bad spreads which I did not manage. My main "thing" is calendar spreads and 70% of my spreads made / are making $. The problem is the 30% eating up a significant amount of the 70%. I attribute this to poor trade management/ bad hedging / and inattention ( I am renovating my house ) so I leave my trades to the winds of fate instead of hedging my gamma.

    Ex. I bought the SIEBEL calendar when siebel was in the 40's now SEBL is in the 30's so my cal went from $200 to ... I don;t even know (get my drift about poor mgt?) BUT LLY I bought at 10% vol edge and made $400 on 4 lots holding on to it for 3 weeks! Not bad.

    In a couple of weeks I will finally be finished with my house and will be able to get into it 110%

    Talk to you soon!
  4. tom_p


    SEBL is in the 20's, so it's definitely inattention :D. Good luck with the house.
    As for a response, sorry vulture, but I'm still stuck on Chapter 1 of Cottle's "Coulda Woulda Shoulda".
  5. One should not trade options inattentively.
  6. Just put on EK calendar front month ATM against month + 1 for 25 cents. Decent potential given the vol edge. Just watch the IV implosion for Iv is at around 40% percentile. But I figured vol edge of 13% is worth a shot. Also check out BAC time spread ATM
  7. GATrader,
    How will you exit the trade? Will you put on another spread, or use another strategy if you go to May expiration?
  8. Most likely will use risk reward scenario of 3:1 wherein if I can get a profit of .75 will get out else be willing to lose initial investment. One thing that is slowly becoming evident as I put more of these on is that by doing repair strategies, the position gets so convuluted, the pnl degrades and what once was a simple "risk 25 cents to make a dollar proposition , becomes a much bigger loss due to commish and option spread. Biggest risk in repair is the gamma risk when dealing with diff strikes.
  9. GATrader:
    Funny how it always seems to come back to"simple is better", and sticking to the 3:1 appears the best scenario. On a directional trade when you have a large profit there is a benefit to put on other strategies as per Cottle. Thanks for the reply.
  10. On the topic of option spreads, I used to trade spreads and put some research into the historical movement of the NDX and QQQ which resulted in a trading system. The trading system presented a small edge, telling when to switch between short premium and long volatility positions. Unfortunately I found in practice that 75% of the spread's profits resulted from the prices in which they were legged into. This seems obvious but when you look at it you find that much of this directionless and delta neutral trading breaks down into directional trading after all. I found this to be highly overlooked in the industry information out there. I've now switched to directional trading and concentrating on trend following and position trading futures. Please let me know if any of you have found the same to be true about the nature of your options profits. I'm always interested to hear others insights especially in the area of options.
    #10     Apr 28, 2002