VIX generally inversely correlated with the market. Were I lucky enough to time the bottom of this I don't think we've the bottom), VIX would likely be very high and calls would lose value in the melt up in spite of delta. Is there a general rule about how far OTM and expiry should be in order to best avoid this problem while capturing the theoretical unlimited upside? Assuming there'd be a rally afterward.
How to avoid IV crush on dip buying?
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Big enough delta? Short a higher strike when you go ITM? Buy shorter-dated options?
I've done all three in the last two trading days.
There's no way to avoid it. It's what you pay if you want to play in the volatile arena where big delta moves are made.
Edit: This is somewhat mitigated by the market because a continued down move will bump up your volatility a little bit, while it's not going to sink hugely without a big move up.
Oh, and the obvious one, buy the outright shares.
I've done all three in the last two trading days.
There's no way to avoid it. It's what you pay if you want to play in the volatile arena where big delta moves are made.
Edit: This is somewhat mitigated by the market because a continued down move will bump up your volatility a little bit, while it's not going to sink hugely without a big move up.
Oh, and the obvious one, buy the outright shares.
I wouldn't be betting on a big delta move in the short term, but perhaps within 2 months. So I assume a 3 month expiry would mitigate theta somewhat, at least. I was thinking of buying those really deep OTM ones that are just a few cents each that pay out in the multibaggers range...if one is right. There is the option of holding futures as well I suppose...
Isn't this the whole point of buying the dip as a trader? The deep OTM contracts probably isn't a winning strategy in times of volatility because you're still dependent on a big (and sustained) move.
For most part yes, but combining 2 theses for ease of use, especially if one is not a daytrader, has less risk. Longer term moves are harder to gauge but using volatility within the current downtrend to find the low, then buying to hold through the subsequent uptrend, volatile as it may be, would not require as much skill.
The way I would (and am) playing it is to pick up the big delta move early with slightly OTM calls, close some of the position on the early delta move, short some further OTM calls against your longs to neutralize your theta exposure while leaving most of your upside in tact, and roll out and up as volatility comes down.
There really isn't an off-the-shelf play during volatility to initiate a long-term position with options (except dicing with the short side). But you can catch the move and evolve it into something longer term.
There really isn't an off-the-shelf play during volatility to initiate a long-term position with options (except dicing with the short side). But you can catch the move and evolve it into something longer term.
@beerntrading .......good post. what expiry do you look at with those initial slightly OTM calls ? thanks