Buying Options w/High Implied Volatility, Not Good. But What If...

[atticus]

Quote from Gravestone Doji:

I have to disagree. That's what the floor traders are hoping you believe. But if that were really true, then you could make a bundle because the top and bottom IV's would be ripe for attack if they indeed offered "<i>very little predictive-power </i>" My point is it seems to make more sense to believe that a top decile IV is a good indicator the underlying is unstable and future volatility is in the offing. Thus it may <i>not</i> be a good time to sell options, like the books and guru's say.

That's what makes a market. Vic sold deep otm insurance in SP puts when atm vols were idling at 10%. That ended very poorly. Do your bottom decile vols hold true to your "predictive" argument? Or does it only hold true for the top decile vols?

Absolute vols are essentially meaningless. The path of vol is all that's important, as IluvVol suggested.

I suggest you return those books for a refund.

 

[Gravestone Doji]

Nothing works 100% of the time. Vic got burned because he assumed low vols were an indication of stability in the market, thus selling otm puts seemed like a good trade. Of course he can't expect to win every time, nor should he. But what about put buyers now? Those books tell you to avoid buying when vols are inflated. Want to sell insurance in the SP's now that vols are offering juicy premiums? I'll pass.

 

[atticus]

Quote from Gravestone Doji:

Nothing works 100% of the time. Vic got burned because he assumed low vols were an indication of stability in the market, thus selling otm puts seemed like a good trade. Of course he can't expect to win every time, nor should he. But what about put buyers now? Those books tell you to avoid buying when vols are inflated. Want to sell premium now that vols are offering juicy premiums? I'll pass.

Would you have rather sold vol a week ago, or now? Question assumes you must buy and with the benefits of hindsight.

 

[Gravestone Doji]

I see your point. It basically comes down to how well one can forecast the direction vols are headed. Which by definition is a simple concept, but aint easy.

 

[cvds16]

Quote from forex-forex:

But which direction? You could buy straddles/strangles but then you would need a really big move.

You don't need to have an idea of direction to profitably trade volatility of options: you do it by delta-hedging NOT by buying straddles/strangles and waiting for a real big move

 

[MajorUrsa]

Quote from cvds16:

You don't need to have an idea of direction to profitably trade volatility of options: you do it by delta-hedging NOT by buying straddles/strangles and waiting for a real big move

It's the same thing. Delta hedging is an elaborate form of straddle buying/selling, just with more accurate hedge, thus also giving up more potential.
I think there truly is no way to earn anything from options, however elaborate your method, without predicting direction and/or volatiliy of the underlyer.
There is no statistical advantage in any construct and anytime you adapt the construct (eg. to 'hedge') you make in effect a prediction.

 

[cvds16]

I see were you are going, but this nuance is lost on many retail-investors who are not too sophisticated about options: you can have high volatility without a really big directional move, so it's not quite the same ... if a stock just bounces around heavily for several days, you can make money delta-hedging, you won't have made any money on your straddle/strangle au contraire, you will have lost a bundle ...

 

[MajorUrsa]

Quote from cvds16:

I see were you are going, but this nuance is lost on many retail-investors who are not too sophisticated about options: you can have high volatility without a really big directional move, so it's not quite the same ... if a stock just bounces around heavily for several days, you can make money delta-hedging, you won't have made any money on your straddle/strangle au contraire, you will have lost a bundle ...

The important word is "IF". The point is, you never know in advance whether the path it takes will be ideal for your setup. You get payed now for the times it takes another path and you lose. The number of times and amounts of money even out in the long run.

You assume a gamma-long trade, but the same goes for short-gamma; you then do make money with the stock in a channel.
Long gamma: you pay a little every month so you can make a killing once in a while.
Short gamma: you get payed a little every month but once i a while you get killed.

 

[uniquetrades]

you ask questions alot of traders don't bother to think about or think about it but are in denial.

keep asking those tough questions.

 

[chrismontez]

I read the books and started selling IV as a way to make $. I found out real quickly why the IV was high on the calls I had sold. Stock that had dropped from $127 to $25 turned right around and ran back up. I think selling high IV calls expecting the IV to collapse is the easiest way to take a big hit trading options.