Methodology of Volatility Trade

I

ironchef

In the spirit of continue meaningful discussions, I am starting a new thread on volatility trade.

I have to date traded exclusively based on directional. It seems the experts/professionals here at ET favored trading volatility as you stated quite a few times that since volatility was bounded and usually traded within a range, it was "easier" to predict/trade. I have been thinking about how I would trade volatility:

In a way we are trading volatility even with a simple directional call/put trade. We learned that it was better to buy call when volatility was low and direction fitted our view. However, such a trade is still strongly affected by direction and when the direction goes against us, they swam the effect of volatility. To trade volatility I need to construct a delta neutral and gamma neutral trade.

I can construct a lot of delta neutral trades: a hedged call/put with underlying to produce delta neutral positions, a straddle/strangle, a delta neutral ratio spreads, calendar spreads, fly, condors.... Both delta and gamma neutral?

That for me turned out to be the easy part. After doing some paper trades, I found predicting volatility was actually very hard and profiting from it was even harder. The number of conditions, the possibilities are boundless and for me it seems the number of ways to lose money is also boundless.

My conclusion is profitably trading volatility is not something I am capable of doing today. How does one become consistently profitable?

Any comments and coaching are welcome.

Thanks.
 
The only "volatility" trades I can think of are:

  1. +1, -2, +1 butterflies just before earnings - to be closed after earnings when volatility plummets.
  2. Long straddle/strangle a few weeks before earnings - to be closed just before earnings.
  3. Short straddle/strangle just before earnings - to be closed after earnings when volatility plummets.



:)
 
IMHO: "consistently profitable" does not exist. Consider metrics which more precisely characterize what "YOU" really are looking far, without over constraining your search. Expectancy, max drawdown, minimum annual average return or some quantifiable but reasonable set of metrics.
The "low hanging fruit" has either been taken, or is not fit for consumption.
You may wish to learn a bit more about some more complex trades before writing off this area of volatility trading. These require some skill and effort to understand, but may have characteristics (expectancy, success rate) that may be attractive to you. John Locke teaches an "M3" trade that has a substantial following, that may provide some insight to what may be possible. (I have no first hand knowledge of this trading system) There are a number of trades which are less complex, that may suit your fancy as well. -- I can send you a link, if you are interested, to a group which trades and develops some of these more complex trades. Note: These are typically intermediate term trades, not the weekly or monthly duration trades that are more common.
 
ironchef said:
In the spirit of continue meaningful discussions, I am starting a new thread on volatility trade.

I have to date traded exclusively based on directional. It seems the experts/professionals here at ET favored trading volatility as you stated quite a few times that since volatility was bounded and usually traded within a range, it was "easier" to predict/trade. I have been thinking about how I would trade volatility:

In a way we are trading volatility even with a simple directional call/put trade. We learned that it was better to buy call when volatility was low and direction fitted our view. However, such a trade is still strongly affected by direction and when the direction goes against us, they swam the effect of volatility. To trade volatility I need to construct a delta neutral and gamma neutral trade.

I can construct a lot of delta neutral trades: a hedged call/put with underlying to produce delta neutral positions, a straddle/strangle, a delta neutral ratio spreads, calendar spreads, fly, condors.... Both delta and gamma neutral?

That for me turned out to be the easy part. After doing some paper trades, I found predicting volatility was actually very hard and profiting from it was even harder. The number of conditions, the possibilities are boundless and for me it seems the number of ways to lose money is also boundless.

My conclusion is profitably trading volatility is not something I am capable of doing today. How does one become consistently profitable?

Any comments and coaching are welcome.

Thanks.
More...


It depends what you are trading.

Are you trading volatility products such as VIX, XIV, UVXY, VXX, SVXY?
If so they are easier to trade once you have a good understanding of them. You can be quite profitable (30-40% a year) or lose quite a lot if you mess up.

The last time I tried to have a meaningful discussion I had trolls like Redneck and dratsum jump all over me so if they come back with their trolling I am done with this forum. I have a strong feeling they couldn't understand what I was teaching so his reaction was to use profanity.
 
Chubbly said:
Are you trading volatility products such as VIX, XIV, UVXY, VXX, SVXY?
If so they are easier to trade once you have a good understanding of them. You can be quite profitable (30-40% a year) or lose quite a lot if you mess up.
More...


RE: "(30-40% a year) or lose quite a lot if you mess up"


If that's the case then I would stick with only equity and ETF options. They also provided "(30-40% a year) or lose quite a lot if you mess up" but they are a lot simpler to figure out. Those VIX products are confusing as hell.


:)
 
OptionGuru said:
RE: "(30-40% a year) or lose quite a lot if you mess up"


If that's the case then I would stick with only equity and ETF options. They also provided "(30-40% a year) or lose quite a lot if you mess up" but they are a lot simpler to figure out. Those VIX products are confusing as hell.


:)
More...

I would advise to paper trade and backtest quite extensively.

They are quite confusing at first but quite simple once you understand them. They all have predictable behaviors since VIX is basically with a low of 10 and when it does shoot up you know it will always mean revert.

Once you know that you how to exploit it's mean reversion you will get quite high profits
 
Chubbly said:
I would advise to paper trade and backtest quite extensively.

They are quite confusing at first but quite simple once you understand them. They all have predictable behaviors since VIX is basically with a low of 10 and when it does shoot up you know it will always mean revert.

Once you know that you how to exploit it's mean reversion you will get quite high profits
More...

agreed. They are fun to trade once you get a grasp for them
 
I have not traded options no where close in years as some of you, but few years ago I spent one year to go back in time on some of Commodity spreads 60 years. Take for instance Corn, has five different contract months Mar, May, July, Sept and Dec. So starting with Mar/May, Mar/July, Mar/Sept, Mar/Dec and so on till I had all the different pairings of same market, then go back 60 years, so I developed a high and low in spreading, then I developed percentages based on pricing as price changed greatly when corn was being used for sugar then changed again for additive for gasoline and in several years will redo again as many companies not using as sugar or gasoline. I studied the high and lows of spreads so I know in each ten years what I could expect highs/lows to become and in the future when prices gets to extremes AND I have a viable signal to go other way, I could take three times as many spreads that what I would normally take. Commodities have so many many different pairings. And I know many have done pairings in stocks, knowing what highs/lows are for certain pairings.

Nothing in life nor trading is 100%, but doing back testing that most people would see as waste of time, you be surprised what information you gather. One of the most secret info was in the pits and what the extreme spreads were in each pits, no books on them either except in futures that no longer traded like MOB spread or Easter Pork Belly spreads. And when price of spreads where at extremes there was always much volatility as well.

I am very sure those been trading options very long time have their own little book of just waiting for option spreads to get to extremes and put a ton on.
 
Handle123 said:
I have not traded options no where close in years as some of you, but few years ago I spent one year to go back in time on some of Commodity spreads 60 years. Take for instance Corn, has five different contract months Mar, May, July, Sept and Dec. So starting with Mar/May, Mar/July, Mar/Sept, Mar/Dec and so on till I had all the different pairings of same market, then go back 60 years, so I developed a high and low in spreading, then I developed percentages based on pricing as price changed greatly when corn was being used for sugar then changed again for additive for gasoline and in several years will redo again as many companies not using as sugar or gasoline. I studied the high and lows of spreads so I know in each ten years what I could expect highs/lows to become and in the future when prices gets to extremes AND I have a viable signal to go other way, I could take three times as many spreads that what I would normally take. Commodities have so many many different pairings. And I know many have done pairings in stocks, knowing what highs/lows are for certain pairings.

Nothing in life nor trading is 100%, but doing back testing that most people would see as waste of time, you be surprised what information you gather. One of the most secret info was in the pits and what the extreme spreads were in each pits, no books on them either except in futures that no longer traded like MOB spread or Easter Pork Belly spreads. And when price of spreads where at extremes there was always much volatility as well.

I am very sure those been trading options very long time have their own little book of just waiting for option spreads to get to extremes and put a ton on.
More...


And how does Volatility fit in?




:)
 
Most of the time it is volatile at extremes and often as price moves higher on lesser volume, volatility slows down which always gives me signals whether long term commodities, commodity spreads and day trading.
 
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