trading strats based off of IV

Discussion in 'Options' started by ireadtape, Mar 27, 2006.

  1. Ive been reading a lot of the options forums lately I just wanted to see if I was getting the right idea on spread strategy. Please forgive my ignorance if I overs simplify things and make sweeping generalizations. I understand that every trade has its caveats, but I'm trying to get the overall idea. It seems that the basic idea is that if IV is at a level higher than usual you want to sell a stradde into it. With this you are shorting vega because you will receive a better premium. Of course this is not without risk. The IV could also be correctly predicted future volatility and you can catch yourself in a bad move, but thats why you would have to trade around this position. ie: use stops and if you can make decent premium off of it, convert it into a fly later by buying the wings at a cheaper rate as theta gets lower and lower. Does this sound about right?

    Im guessing the same goes for the flip side. If IV is lower than normal youd want to be long the straddle because vega is cheap. Of course just because vega is cheap doesnt mean you want to be buying it for no reason. Youre looking for the stock to have a near term catalyst to make it move in one direction or the other. And I guess youd sell the wings at a later time if volatility picked up to get soem premium off of that if you wanted?

    I think this its the very BASIC idea of comboing into flys from a straddle. If I am incorrect in my thinking please do correct me. I would like to learn. Shout out to guys like riskarb and maverick for teaching me more about TRADING options than my options and futures class in college did. I learned all the technical aspects of options but that doesnt teach you how to trade them. Thanks in advance.
  2. MTE


  3. Where do you think I learned all of this ;D. No but really, that thread has single handedly taught me more about options trading than any book Ive ever read. I highly reccomend it to everyone. I read through it daily even though he doesnt post anymore. You learn more the second and third time through it =).
  4. MTE


    In that case, you should be ready to fly on your own.:) :) :)

    I agree, it's a great thread and riskarb will be missed.