Best options strategies for various market scenarios

C

Cutten

I'm trying to get some ideas for the best market strategies for some common market scenarios. For example, in the stock indices, tops almost always seem to be accompanied by low implied vol, and the resultant selloffs are accompanied by increasing IV. Bottoms on the other hand have high IV, and the subsequent rallies, whilst volatile in their early stages, are accompanied by collapsing IV. In both cases, at potential reversal points, you want to be long gamma, but at tops you want to be long implied vol, and at bottoms you want to be short it.

So for stocks, I'm looking at:

Tops:

Buy ATM and somewhat OTM puts
Bear spreads (long ATM)


Bottoms:

Short ATM puts, buy OTM calls
Sell bullish time spreads
Bull spreads (short ATM)

Do these strategies sound ok, and are there any better strategies I have missed? Would diagonal spreads be worth using?
 
Using your assumption, ( which is a huge assumption) you'd want to be long OTM calendars to take advantage of long vega during mkt tops and short calendars ATM on the bottoms to capture vol implosions.
 
Calendars, in my opinion, are not the best way to play directional moves. However, I do agree with GATrader that your assumptions are somewhat facile. While bottoms and tops are often accompanied by extreme volatility readings, they aren't always. As a corollary point, extreme vol readings can persist for extended periods of time and thus can give false signals of a pending reversal. Anyone who went short the market this past Spring after the VIX fell some 50% is probably cursing the day s/he first heard of a guy named Vix.

Thus, my advice is to sell vol when it's high, buy it when it's low, do both in a limited risk manner, and avoid positions which, while theoretically "correct" given the prevailing market conditions, are inconsistent with your particular trading personality. For more detail, I'd refer you to Natenberg. Good luck.
 
My assumption is not that volatility extremes lead to price reversals. Rather, it is that identifying a top or bottom allows you to anticipate changes in implied volatility, as well as price. Thus it makes sense to take a position that benefits from both in tandem.
 
Quote from Cutten:

My assumption is not that volatility extremes lead to price reversals. Rather, it is that identifying a top or bottom allows you to anticipate changes in implied volatility, as well as price. Thus it makes sense to take a position that benefits from both in tandem.
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If you are successful identifying tops and bottoms than you can do just about anything, because you were right in your market call, including straddles and strangles either long or short.

Now as we come into earnings season option strategies make the most sense, to scalp gamma, trade volatility, etc.
 
One of the best trades is to sell front months vol at market bottom and then watch as those otm calls you sold are now worth less a couple of days later even though the stocks up 10%. Also, markets can be very volatile at the top as well, IVs explode because rampant speculation sets in. I thought this is how the rally will end, but no luck so far. Even market tops can be tricky sometimes, they can go sideways for a while before that rapid downward spiral. I sold gamma last week because I thought the market might turn, but I didn't think it would happen quickly. It is today at roughly the same spot I entered my trades. This afternoon, I covered, either it will go down from here or go higher. it doesn't matter either way, as long as it moves.
 
Quote from Cutten:

I'm trying to get some ideas for the best market strategies for some common market scenarios. For example, in the stock indices, tops almost always seem to be accompanied by low implied vol, and the resultant selloffs are accompanied by increasing IV. Bottoms on the other hand have high IV, and the subsequent rallies, whilst volatile in their early stages, are accompanied by collapsing IV. In both cases, at potential reversal points, you want to be long gamma, but at tops you want to be long implied vol, and at bottoms you want to be short it.

So for stocks, I'm looking at:

Tops:

Buy ATM and somewhat OTM puts
Bear spreads (long ATM)


Bottoms:

Short ATM puts, buy OTM calls
Sell bullish time spreads
Bull spreads (short ATM)

Do these strategies sound ok, and are there any better strategies I have missed? Would diagonal spreads be worth using?
More...

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Reguardless of whether you use strangle,straddle or directional;
would keep in mind DIA,SPY, QQQ have been real strong directional uptrends , even with September being the weakest historicaly month.
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Like Yale Hirsch nickname for October = bearkiller.:cool:
 
Interesting comments. I'm under the impression bar ranges are much smaller at tops then bottoms. It appears the market makes gains much slower than it gives it back. Good trading.
 
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