So help me understand this please. Assuming that I will hold the stock long term and willing to live through the draw down, why do I care if IV is low? In other words, I'm not trying to trade in and out of the stock by timing the market. Low IV (small premium on the call) prices in the low likelihood of the stock making a large up move and keep going leaving me no chance to re-enter. Can a case be made that when IV is high, the risk of above scenario is much higher? I thought that IV is relative and if it goes even lower, that call that he sold might have been very juicy in retrospect?
Another boring covered call I did yesterday...Apple
- Thread starter Cabin111
- Start date
So help me understand this please. Assuming that I will hold the stock long term and willing to live through the draw down, why do I care if IV is low? In other words, I'm not trying to trade in and out of the stock by timing the market. Low IV (small premium on the call) prices in the low likelihood of the stock making a large up move and keep going leaving me no chance to re-enter. Can a case be made that when IV is high, the risk of above scenario is much higher? I thought that IV is relative and if it goes even lower, that call that he sold might have been very juicy in retrospect?
Because you're not being sufficiently compensated for giving up the upside above 160 plus the premium. I can't help you if you're indifferent to the vol you're selling.
because the return you are getting is from being short vol...you are literally selling low...
I understand I am selling low, but it’s priced low by the market for a reason. So I guess the question is - is it better to be selling constantly/mechanically regardless of volatility, or wait for volatility to spike? While you are waiting for that moment, I may be taking in crumbs every week/month that add up.
Personally, I am trying to figure out a compromise where I must sell at least some regardless of volatility but keep enough dry powder to triple the size on vol spike. Recently, it just feels like I am leaving free money on the table
Personally, I am trying to figure out a compromise where I must sell at least some regardless of volatility but keep enough dry powder to triple the size on vol spike. Recently, it just feels like I am leaving free money on the table
I understand I am selling low, but it’s priced low by the market for a reason. So I guess the question is - is it better to be selling constantly/mechanically regardless of volatility, or wait for volatility to spike? While you are waiting for that moment, I may be taking in crumbs every week/month that add up.
Personally, I am trying to figure out a compromise where I must sell at least some regardless of volatility but keep enough dry powder to triple the size on vol spike. Recently, it just feels like I am leaving free money on the table
There's a number of factors, but here are a couple of big ones:
To put it simply, IV is directly correlated to both the price of the option and the range of movement of the underlying (expected move.) Obviously, you want to sell high and buy low - and since you're normally selling at some distance from the ATM strike, you want the range of movement in the underlying to decrease or stay the same (no, or little movement means the your option has little chance to go ITM before expiration.)
But at low IV, you're upside down on everything. You're selling low and getting paid for a narrow expected move... but the only place IV has to go from the bottom is up - which means that 1) the price of the option will increase and 2) so will its expected move. I.e., you have now taken money out of your own pocket, and put yourself into a scenario of increasing risk.
In super-low vol, the reasonable approach is to buy - because then, you're buying low and expecting the price to increase (so you can sell high.) You're also buying when the range of movement is small... and the guy who sells it to you had better price it right, because now he's the one taking the chance of it increasing against him.
I know this site is more for day traders...I get it. But as a long term investor, talking to a day trader is like talking to a wall. That is not a slam...It's like seeing a car accident. You get different perspectives from different angles.
Where to start...Apple's PE is 28 something (try to find quality in this market with a similar PE). I can see people typing...Trying to refute that. But it is a "good" PE in this market environment. Debt to equity...Apple is sitting on like a gazillion dollars!! Even if they go into the bond market and get loans...Cheap money. They could pick off anything if they wanted to...Apple Car?? Why not?? Yeah, I know it's not that easy...Be people have talked about it for years.
Say my "implied" cost basis is $120. and the stock gets called away in a little over a year at $160...It's a 33% annual return. Oh, and it's a long term capital gain. If it's at $80. in June 2022, I still own 100 shares of Apple. Raise your hand if you believe Apple's demise will be here in 5 years!! Really...Really!!
I don't normally look at Yahoo Finance. But just looked over there...11 Strong buys, 21 buys, 6 holds, no underperform and no sell. I hope to be keeping this stock for years to come...If not, I'll grab my 33% return and look elsewhere.
Where to start...Apple's PE is 28 something (try to find quality in this market with a similar PE). I can see people typing...Trying to refute that. But it is a "good" PE in this market environment. Debt to equity...Apple is sitting on like a gazillion dollars!! Even if they go into the bond market and get loans...Cheap money. They could pick off anything if they wanted to...Apple Car?? Why not?? Yeah, I know it's not that easy...Be people have talked about it for years.
Say my "implied" cost basis is $120. and the stock gets called away in a little over a year at $160...It's a 33% annual return. Oh, and it's a long term capital gain. If it's at $80. in June 2022, I still own 100 shares of Apple. Raise your hand if you believe Apple's demise will be here in 5 years!! Really...Really!!
I don't normally look at Yahoo Finance. But just looked over there...11 Strong buys, 21 buys, 6 holds, no underperform and no sell. I hope to be keeping this stock for years to come...If not, I'll grab my 33% return and look elsewhere.
No, this site is for people who think about finance. That includes investment, as well as many other aspects of it.
You're starting to get pissy because you're not hearing what you wanted - in fact, you're being told (correctly) that you made a very poor trade. Good enough; if you wish to drive away those who offer actual value and knowledge, the way you're doing it will work just fine.
(I'm just a guy who is starting to get a pretty good clue, with lots of room to grow. But I'm certainly going to stop responding to you - because fighting bullheadedness and obstinacy is not a trade I want to engage in. Good luck and all that.)
Do yourself a favor And dont listen to anybody. Run a simulation (orats) on selling premium and use IV30 percentile rank or whatever continuous vol filter you choose..
You ask good questions,now get to work
You ask good questions,now get to work
I understand I am selling low, but it’s priced low by the market for a reason. So I guess the question is - is it better to be selling constantly/mechanically regardless of volatility, or wait for volatility to spike? While you are waiting for that moment, I may be taking in crumbs every week/month that add up.
Personally, I am trying to figure out a compromise where I must sell at least some regardless of volatility but keep enough dry powder to triple the size on vol spike. Recently, it just feels like I am leaving free money on the table
The CC position is eqiuvalent to selling the 160P. So generally you're going to consider it a proxy for shares. So why would you chose a similar margin treatment (less $440) for vol?
Either trade vol or invest. Adding a short call will marry you to the position. I see it all the time.
No doubt a good advice, but I have learned that it doesn’t work for me personally. The problem is that I am not very detail oriented (dangerous trait in this business lol), so I just would not TRUST any results from a simulation. There are just too many factors that can skew results (test period, data, assumptions, etc). I feel like you need to become an expert at backtesting to do it right. So instead I try to rely on common sense, money management, and intuition. I may be using my capital very inefficiently, but at least I will never look back after 10 years and say - Hm, that didn’t quite work as simulated.Do yourself a favor And dont listen to anybody. Run a simulation (orats) on selling premium and use IV30 percentile rank or whatever continuous vol filter you choose..
You ask good questions,now get to work
P.S. I think the shorter the trading time frame, the more valuable back testing becomes. One reason for this is because forward testing will quickly prove or disprove your findings. So you don’t usually see many day trading systems that are robust, but you see lots of systems that kill it over a year and longer.
P.S.S. I know this is very sensitive subject and these are just my personal opinions fwiw.