If I had sold puts and call options before the increase in volatility I would have made a good profit, but how does one cash in on decreasing volatility? I'm sure volatility will decrease as fear smooths out. How do I make money in options when high volatility crashes to low volatility?
Options: How to profit from increasing or decreasing volatility?
- Thread starter Sure Chap
- Start date
Uhm no, if you had sold options BEFORE the increase in volatility you would be sitting on more short premium than you collected, so you would be DOWN. If you think volatility will decrease you can
1) short VXX
2) short VIX futures in current month, 2nd month etc
3) take a short position on VXX or futures through options (long puts, short calls)
4) you can sell the actual options that determine volatility (SPX or SPY)
Before you do any of the above....it's probably good to really understand it. If you think you would have made money being short calls/puts into this vol spike then you clearly have a lot to learn (no insult intended I was in your position long time ago, hell I still make mistakes today)
1) short VXX
2) short VIX futures in current month, 2nd month etc
3) take a short position on VXX or futures through options (long puts, short calls)
4) you can sell the actual options that determine volatility (SPX or SPY)
Before you do any of the above....it's probably good to really understand it. If you think you would have made money being short calls/puts into this vol spike then you clearly have a lot to learn (no insult intended I was in your position long time ago, hell I still make mistakes today)
No problem, I'm still trying to wrap my head around options. So to cash in on a volatility decrease, we sell options. To make money before a volatility spike we buy options?
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There's no certainty at all that VIX will decrease before spiking even higher.
coolraz was mentioning VXX, which I trade, because it tracks the VIX, which, putting it simply, represents market volatility.
Thus, being short or long VXX is making a bet on volatility increasing or decreasing.
However, I strongly second his recommendation that before you jump into trading volatility of any kind, you educate yourself extensively. Because this is an area in which you can get badly hurt, trading the wrong instrument at the wrong time.
I'm planning to read all I can, before I jump in options again. The leverage can be a dream come true or massive devastation. I understand the vix, but how do you profit in a individual stocks volatility? I'm not talking about the broad market like the vix, but individual stocks like BAC?
If you're talking about individual stocks then there's only one way, just trade its options. In general, if you expect the stock's volatility to go down, you would sell options. You have to be careful for example right before earnings the volatility is VERY high and everyone knowns it will drop a lot after earnings are announced. So the logical thing would be to sell options BUT of cousre the whole point is that after earnings announcement the stock can move abruptly, so although volatility will go down and you will profit from your short vega, you will also have delta exposure directionally and could lose a lot if the stock moves more in the direction you are short. So the key is to determine in your mind whether you think the REALIZED VOLATILITY (move of the stock) will be LESS or more than the EXPECTED/IMPLIED VOLATILITy
The answer to that is worth about 300 pages, which others have written far better than I.
However, most simply, options will generally decay as volatility decreases. Thus, to profit if indeed the underlying stock AND the market decreases in volatility, then selling the option would be making a play on that bet. Because you are opening that position when the option price is high, and hopefully closing it when the price is lower, thereby making a profit.
However, pardon the mixed metaphor, but there are a hundred flies in this ointment. Just a few being that both the underlying stock and the market may both need to decrease in volatility, and being short naked options has its own set of issues, worth another 100 pages.
All in all, a very complex subject that is worthy of your study for about 90 days before opening a trade of even 1 contract.
Best of luck.
