Options strategy feedback: SPY options / vertical spreads

[ashkelon]

Just sort of a devil's advocate on your strategy. Often enough, especially when everyone, their brother, their nutty uncle Vic, their crazy aunt Karen, etc are selling index options, IV will be pushed down and not be close to actual (historic) vol. You are trying to predict future vol using IV and of course it is just based on current option prices. For example in the graph above 30 day realized for Sep is way lower than average IV. You need IV to be large enough to push your wings out to match actual vol.

But still, if it is working have at it. Just don't fly too close to the sun and think you can bet your kid's college fund!

Thanks for the comment; it's appreciated, esp implied vs historical volatility, this distinction makes sense. For me, IV is just a general gauge, especially on intraday, I don't think any intraday IV calculation is consistently accurate.

Question: how is it that retailers selling index options pushes down the price? Assuming you're referring to general law of supply/demand? Wonder, then, how much retail traders account for movement of volatility? I always thought IV was more a gauge of the big companies hedging their positions, thus the connection with VIX and 'fear index'?

 

[ashkelon]

I am the last person to give you advice on options, but fwitw, I think you will have losses which will wipe out multiple days/weeks of your wins so often that you will not be able to continue, much less scale it meaningfully..

Yes, that's my fear also. Hence my attempt to hedge my spreads via opposing naked options or with an opposing spread. But this works only when price moves in my direction at some point after the initial trade. Thus the importance of a good initial entry. Also, probably my scalping is more at risk of exploding my account than my spreads which have a built in buffer as well as theta decay in my favor. My temptation will be to scalp too much without the initial spread in place to reassure me of at least some green on the day...

 

[Option_Attack]

Wasn't really referring to just mom and pop traders jumping on the "sell far OTM spreads and make millions" bandwagon. It was a snarky reference to people like Niederhoffer, who famously blew up a couple times and Karen the "Supertrader" who illegally deferred massive losses and defrauded investors. But as always, seems like in any form selling OTM spreads carries the inherent risk of losses being far larger than gains. Win a lot of small ones, lose a few big ones, so what's the net p/l over a decent amount of time? Who knows. Some who do this survive a long time and seems like you usually have hedges on so... And heck, if there is no risk there is no reward!

Thanks for the comment; it's appreciated, esp implied vs historical volatility, this distinction makes sense. For me, IV is just a general gauge, especially on intraday, I don't think any intraday IV calculation is consistently accurate.

Question: how is it that retailers selling index options pushes down the price? Assuming you're referring to general law of supply/demand? Wonder, then, how much retail traders account for movement of volatility? I always thought IV was more a gauge of the big companies hedging their positions, thus the connection with VIX and 'fear index'?

 

[qlai]

have a built in buffer as well as theta decay in my favor.

I don't think theta even matters with weeklies in your case. I think these are pure gamma plays - a binary outcome. Also, I think mentally, you will drive yourself crazy with this strategy. So many decisions to be made in short amount of time.

My temptation will be to scalp too much without the initial spread in place to reassure me of at least some green on the day...

Well, my friend, this issues I'm very familiar with and has nothing to do with your strategy

 

[ashkelon]

I don't think theta even matters with weeklies in your case. I think these are pure gamma plays - a binary outcome. Also, I think mentally, you will drive yourself crazy with this strategy. So many decisions to be made in short amount of time.


Well, my friend, this issues I'm very familiar with and has nothing to do with your strategy

Not sure what you mean -- 'pure gamma plays'. Still relatively new to options strategies beyond what I've developed here. Can you explain? please excuse my ignorance. I am still trying to understand 'gamma' strategies and how they impact how I trade.

Theta works for me in my selling of spreads, on day of expiry, in that near end of day, the spreads are worth much less than at beginning, and even if don't expire worthless, I can buy back for much lower price. Unless the underlying has moved significantly against me and the OTM spread is now ITM or near ITM. But the commissions on IB will take a big chunk of profits here (up to 50%) so it's favourable to just let expire worthless and not have to execute another commission-based trade if possible

 

[ashkelon]

May I ask you, if you had access to enough capital, would you simply day trade the underlying?

Also, with options, I find there is much more versatility with delta/theta choices on different date strikes that seem to give an edge so that even if direction does not move in my favor, I come out either b/e or much smaller loss than with the underlying alone. Ie it mitigates risk, without closing off potential reward.

 

[qlai]

Can you explain? please excuse my ignorance.

Well, it's not that I don't want to help, it's that I'm afraid to tell you something that is completely wrong and/or misleading Just because I know there are many way more knowledgeable people here. So you've been warned. Whoever bought this option from you did not buy it so they can hedge for a few hours, they bought it because if there's a Trump tweet or whatever, they will make lots of money from the directional move. This money is made by being long gamma which will explode as option moves ITM. You don't have enough time to rely on mean reversion to bail you out.

 

[TommyR]

gamma decreases as it moves in the money.