IV and long call options

[Abundance Magnet]

I think I figured out why a person can be right on direction but still be wrong when they exit the trade on a call option. I believe this is because of how iv behaves in the option pricing formula.

Is going long call options with a long/upward directional bias a fool's gambit? Implied volatility typically goes up when a stock drops, and goes down when a stock goes up. For call options, doesn't this mean the IV value of the call is decreasing as the stock goes up? Therefore, you can right on direction but still be wrong on the your exit price... This has happened to me before.

Or does an uptrend trend for a call option increase the IV value of the call option? Ie IV working in reverse as a put option. I don't think this is the case but wanted get the experts opinions here...

Thanks

 

[smallfil]

I think I figured out why a person can be right on direction but still be wrong when they exit the trade on a call option. I believe this is because of how iv behaves in the option pricing formula.

Is going long call options with a long/upward directional bias a fool's gambit? Implied volatility typically goes up when a stock drops, and goes down when a stock goes up. For call options, doesn't this mean the IV value of the call is decreasing as the stock goes up? Therefore, you can right on direction but still be wrong on the your exit price... This has happened to me before.

Or does an uptrend trend for a call option increase the IV value of the call option? Ie IV working in reverse as a put option. I don't think this is the case but wanted get the experts opinions here...

Thanks

The degree of movement is more important. I do not use IV values to decide on buying call or put options. You are going to have losing trades as well as winning trades. What matters more is how you handle your losses. Keep it small and have some decent sized winners and you will make monies. Your profits will not ride on one trade because if it did, you are taking way big a position relative to your capital and will blow out! Instead, look at it as a business. You have say 500 trades in one year, how much profit did you make relative to the losses? If you cannot make any profits then, something is wrong and you probably, do not have an edge. Take note, there will be windfall profits that are huge and just sort of fall in your lap. The trick is to take each good trade that you see. You cannot pick and choose because the time you do, you will miss out on that windfall profit that you could have had! Coulda, woulda, shoulda does not count in the stockmarket or the real life world! Only what you actually, end up doing is what counts!

 

[Abundance Magnet]

The degree of movement is more important. I do not use IV values to decide on buying call or put options. You are going to have losing trades as well as winning trades. What matters more is how you handle your losses. Keep it small and have some decent sized winners and you will make monies. Your profits will not ride on one trade because if it did, you are taking way big a position relative to your capital and will blow out! Instead, look at it as a business. You have say 500 trades in one year, how much profit did you make relative to the losses? If you cannot make any profits then, something is wrong and you probably, do not have an edge. Take note, there will be windfall profits that are huge and just sort of fall in your lap. The trick is to take each good trade that you see. You cannot pick and choose because the time you do, you will miss out on that windfall profit that you could have had! Coulda, woulda, shoulda does not count in the stockmarket or the real life world! Only what you actually, end up doing is what counts!

Interesting response ... So what is your take on my iv observations and questions?

 

[smallfil]

Interesting response ... So what is your take on my iv observations and questions?

This is just my opinion on IV and I suggest you test it out for yourself. If you are selling options, high IV matters because you are only getting that premium in exchange for the risk that the stock runs up if you are selling a call option by example. You want to maximize the premium you get for the risk you are taking. Now, the flip side of buying options. I do not believe in buying low volatility. Conventional wisdom, they say buy low volatility and sell high volatility. Try that in your trading. I did and it was horrendous. The reason being, a lot of times, low volatility happens when a stock is in a trading range. Options being a wasting asset, your premium is being eaten while, stuck in that trading range and you probably, start to pile on losses too in the process. When a stock is moving, volatility is high and goes even higher! Test everything for yourself. That would validate it in your mind!

 

[destriero]

This is just my opinion on IV and I suggest you test it out for yourself. If you are selling options, high IV matters because you are only getting that premium in exchange for the risk that the stock runs up if you are selling a call option by example. You want to maximize the premium you get for the risk you are taking. Now, the flip side of buying options. I do not believe in buying low volatility. Conventional wisdom, they say buy low volatility and sell high volatility. Try that in your trading. I did and it was horrendous. The reason being, a lot of times, low volatility happens when a stock is in a trading range. Options being a wasting asset, your premium is being eaten while, stuck in that trading range and you probably, start to pile on losses too in the process. When a stock is moving, volatility is high and goes even higher! Test everything for yourself. That would validate it in your mind!

Whoa, slow down. Give us some time to interpret this brilliance.

 

[vegamedic]

I think I figured out why a person can be right on direction but still be wrong when they exit the trade on a call option. I believe this is because of how iv behaves in the option pricing formula.

Is going long call options with a long/upward directional bias a fool's gambit? Implied volatility typically goes up when a stock drops, and goes down when a stock goes up. For call options, doesn't this mean the IV value of the call is decreasing as the stock goes up? Therefore, you can right on direction but still be wrong on the your exit price... This has happened to me before.

Or does an uptrend trend for a call option increase the IV value of the call option? Ie IV working in reverse as a put option. I don't think this is the case but wanted get the experts opinions here...

Thanks

this is a good observation and is discussed at length in "Options as a Strategic Investment" by McMillan

 

[destriero]

I think I figured out why a person can be right on direction but still be wrong when they exit the trade on a call option. I believe this is because of how iv behaves in the option pricing formula.

Is going long call options with a long/upward directional bias a fool's gambit? Implied volatility typically goes up when a stock drops, and goes down when a stock goes up. For call options, doesn't this mean the IV value of the call is decreasing as the stock goes up? Therefore, you can right on direction but still be wrong on the your exit price... This has happened to me before.

Or does an uptrend trend for a call option increase the IV value of the call option? Ie IV working in reverse as a put option. I don't think this is the case but wanted get the experts opinions here...

Thanks

Vol is not an issue with DITM options when trading the calls above 80-delta on single-names. AAPL 210C (80-delta) for October monthlies. 1.70 in extrinsic with the shares at 224.

Generally there is not a exploitable skew in large cap shares (options), but SNs are sensitive to the move in index strips. So no, vol is not generally going to rise, but vol as a variable is overwhelmed by delta. Add 10 pts to the vol-line on the AAPL 210C/P and you're looking at <0.30 in premium. Shares rally $2 and you're up 1.70 (1.60 + 0.10 to gamma).

 

[JSOP]

I think I figured out why a person can be right on direction but still be wrong when they exit the trade on a call option. I believe this is because of how iv behaves in the option pricing formula.

Is going long call options with a long/upward directional bias a fool's gambit? Implied volatility typically goes up when a stock drops, and goes down when a stock goes up. For call options, doesn't this mean the IV value of the call is decreasing as the stock goes up? Therefore, you can right on direction but still be wrong on the your exit price... This has happened to me before.

Or does an uptrend trend for a call option increase the IV value of the call option? Ie IV working in reverse as a put option. I don't think this is the case but wanted get the experts opinions here...

Thanks

IV goes up whenever the volatility of the underlying goes up for whatever reason regardless whether its price goes up or down and that's one of the factors. For example when the earning announcement of a stock is imminent, even if the market believes that the stock price is going down, the implied volatility of its option will still go up because the stock's volatility has just gone up. If you are long in call, another factor that can drive its price down is what's called "theta decay", the diminishing of its time value when the option is about to expire. When the option expires, it becomes worthless so if you wait too long until the last minute before it expires to sell it, unless it's REALLY deep ITM, you are not going to get as much out of it.

 

[destriero]

IV goes up whenever the volatility of the underlying goes up for whatever reason regardless whether its price goes up or down and that's one of the factors. For example when the earning announcement of a stock is imminent, even if the market believes that the stock price is going down, the implied volatility of its option will still go up because the stock's volatility has just gone up. If you are long in call, another factor that can drive its price down is what's called "theta decay", the diminishing of its time value when the option is about to expire. When the option expires, it becomes worthless so if you wait too long until the last minute before it expires to sell it, unless it's REALLY deep ITM, you are not going to get as much out of it.

Ugh.

The series falling under the earnings release is going to rise when the date is announced, yeah, but not necessarily because the share-vol (stat-vol) has risen. Often is the case that share-vol will drop and implied vol will rally.

WTF does the stock price going down have to do with vol dropping?

"If the market believes the stock price is going down" is manifested by a drop in the stock price. WTF are babbling about?

 

[Abundance Magnet]

W

Ugh.

The series falling under the earnings release is going to rise when the date is announced, yeah, but not necessarily because the share-vol (stat-vol) has risen. Often is the case that share-vol will drop and implied vol will rally.

WTF does the stock price going down have to do with vol dropping?

"If the market believes the stock price is going down" is manifested by a drop in the stock price. WTF are babbling about?

What is share-vol? Do you mean the iv/volatility of the actual equity vs the volatility of the different expiries?