Insurance for RTM traders

S

shortie

from what i read on ET and from my own experience the last two months were great for reversion-to-mean strategies. I would say the great times started in the middle of September when VIX moved above 30. So, it seems the more volatility - the better.

What happens when the volatility goes away? We all know that we would like it to stay here forever, but it aren't gonna happen :( .

We can't expect the volatility to stay, but maybe we could insure ourselves by selling volatility. Am I thinking correctly about this? Is the insurance worth it?

P.S. This is probably relevant to other traders (not only RTM) but I am not sure if other styles have benefited from the high volatility as much as RTM.
 
as an example, i wrote some OTM Nov puts a while back. they are now underwater, but my account is actually higher than it was before i wrote the puts. this is because RTM has been working so great. Now if the volatility takes a dive, I will collect on the puts but RTM presumably won't work as good. The net result is presumably a smother equity curve.
 
1) Sometimes the (DFTM), Diversion From The Mean, can be greater than you expect.
2) The "mean" should be thought of as a moving target, not a stationary target.
3) Sometimes if you're far enough from a speeding freight train, it may be able to stop before crushing you. :cool:
 
Quote from nazzdack:

1) Sometimes the (DFTM), Diversion From The Mean, can be greater than you expect.
2) The "mean" should be thought of as a moving target, not a stationary target.
3) Sometimes if you're far enough from a speeding freight train, it may be able to stop before crushing you. :cool:
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should i have sold puts with expiration further out then?

just to clarify, my RTM strategies on stocks are short-term (usually intraday). writing options are longer-term trades (~1-2 months) to insure myself for a possible volatility drop that will negatively affect my intraday RTM. actually, i don't mind losing some money on options if i am wrong about volatility going down.
 
the puts i wrote are nicely green now. so i think writing options as an insurance against volatility drop is not a bad idea. i probably should have done it differently. i should have written both calls and puts and maybe close the winner and let the loser reverse.
 
Quote from shortie:

.....should i have sold puts with expiration further out then?
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No. You could've been hurt badly by the gamma and vega. You're a little "lucky" that the market has rebounded since last week. :cool:
 
There are couple of reliable insurance companies which you can check out. The best way to find those is to read their reviews online. First of all can recommend to kin insurance customer support here and see what they have to offer to you. In case you don't like it for some reason, you can continue the research online.
Good luck and let us know how it goes.
 
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