Right Entry vs. Implied Volatility - what is more crucial for Optionstrading?

Atikon

Atikon

Hey Guys,

pretty much self explanatory title. Selling at the high/low vs only Selling when IV Rank is at it's peak.

Would you pass on a trade where the IV Crush will be high but the technicals don't line up?

What about the middle ground when it comes to Indexes? Where the IVR is mostly between 30-40%?
 
I prefer to chose a trade that will provide best return on risk. One needs to have good estimates for underlying price as well as IV for the period you plan to be exposed to the trade. Both price and volatility, as well as time should be examined closely. Volatility expectations for a future point in time can seem like trying "to catch a flatulent and paint it green", but one may have some insight on expected bounds for IV movement (expected to decrease, etc, or expected to continue to follow the present volatility surface inference). Observing how volatility can alter the ROR for trades, may aid in shifting your trade choice to a lesser ROR candidate by a small amount to get a position that will deliver nice results over a wider range of volatility changes. (I am assuming your original post relates to taking a Directional position {as opposed to some delta-neutral strategy})
 
stepandfetchit said:
I prefer to chose a trade that will provide best return on risk. One needs to have good estimates for underlying price as well as IV for the period you plan to be exposed to the trade. Both price and volatility, as well as time should be examined closely. Volatility expectations for a future point in time can seem like trying "to catch a flatulent and paint it green", but one may have some insight on expected bounds for IV movement (expected to decrease, etc, or expected to continue to follow the present volatility surface inference). Observing how volatility can alter the ROR for trades, may aid in shifting your trade choice to a lesser ROR candidate by a small amount to get a position that will deliver nice results over a wider range of volatility changes. (I am assuming your original post relates to taking a Directional position {as opposed to some delta-neutral strategy})
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Sure if you have an expectation about the future, all these consideration make sense. But my question is more about fine tuning your trade. When everything else is lined up, except for these two factors. Let's say you have an idea where the stock is going to go and now either

a) IVR is High but the stock trades in the middle of e.g. Bollinger
b) The IVR is at 50% but the Stock is trading at Resistance/Support
 
I am merely suggesting that a more mechanical view may be helpful. For example, if you have a VXX directional trade that you wish to take and expect VXX to drop 15% in 10 calendar days and you also expect volatility to remain as implied by the current vol surface, you may be able to consider something like this:
----------------------------
GetTrade.pl n .VXX200515 10 -.15 0 -slippage 0.1 -BA .2
max(ts) -> 20200417.1553 Local TimeStamp -> 20200417.1253

CRITERIA Used: Time?=Now->20200417.1253, term =VXX200515, Symbol= VXX, days=10, uChange=-15.0%, ivChange=+0.0%
EntrySlippage->0.1 MiniBA spread:.2 Commission:0.65 Candidates->5
Target date = 20200427 is on day# 1 of the week (Mon=1...) Database is "tda_api"
U= 38.87, Target U-> 33.04
ATM IV= 0.96, Target ATM-IV-> (0.93 -> 0.93):(0.95 -> 0.95)
Results of evaluation listed below:

Summary in ROR order for each type
ROR Type Description Order type
68 % Long PUT VXX200515P34 Buy to Open
45 % Put Spread 7 29 / 36 Buy to Open
44 % Put Spread 10 29 / 39 Buy to Open
44 % Put Spread 8 29 / 37 Buy to Open
43 % Put Spread 6 29 / 35 Buy to Open
42 % Put Spread 9 30 / 39 Buy to Open
40 % Put Spread 5 31 / 36 Buy to Open
35 % Put Spread 4 31 / 35 Buy to Open
26 % Put Spread 3 31 / 34 Buy to Open
19 % Call Spread 8 38 / 46 Sell to Open
19 % Call Spread 6 38 / 44 Sell to Open
19 % Call Spread 7 38 / 45 Sell to Open
19 % Call Spread 9 38 / 47 Sell to Open
19 % Call Spread 5 38 / 43 Sell to Open
18 % Call Spread 10 38 / 48 Sell to Open
17 % Call Spread 4 38 / 42 Sell to Open
13 % Call Spread 3 38 / 41 Sell to Open
7 % Put Spread 2 33 / 35 Buy to Open
2 % Call Spread 2 38 / 40 Sell to Open

-----------
A slightly different way to look at the problem.
 
This is why I learned to stay the hell away from options, too many parameters to get right in order to make money. Of the five inputs in a BS pricing model, absolute level of the underlying, absolute level of volatility, and time decay are the factors you most need to get correct.

That's three parameters versus one when trading the underlying. Get one parameter wrong, and the other two right, and you may still lose money. Don't be seduced by the leverage options offer or the plethora of possible strategies.

If you are fascinated by leverage, trade a leveraged ETF or futures instead.
 
I think I understand. You found a setup to trade delta, and you are not sure how to mitigate or take advantage of IV?

I have to get to know IV for the underlying, to see what "normal" is and if it directly correlates or, is inverse with the underlying's price movement, (ie what drives people to speculate or hedge the underlying) So you can make a prediction about future IV.

Then I use different option spreads to enhance or mitigate IV. (vega)
Example: long delta, long vega - buy single OTM call long dated expiration
long delta, short vega - buy ITM vert call spread

These examples are over simplified, you really need to play with an options calculator and watch the greeks to customize your spread to your prediction.
 
stepandfetchit said:
I am merely suggesting that a more mechanical view may be helpful. For example, if you have a VXX directional trade that you wish to take and expect VXX to drop 15% in 10 calendar days and you also expect volatility to remain as implied by the current vol surface, you may be able to consider something like this:
----------------------------
GetTrade.pl n .VXX200515 10 -.15 0 -slippage 0.1 -BA .2
max(ts) -> 20200417.1553 Local TimeStamp -> 20200417.1253

CRITERIA Used: Time?=Now->20200417.1253, term =VXX200515, Symbol= VXX, days=10, uChange=-15.0%, ivChange=+0.0%
EntrySlippage->0.1 MiniBA spread:.2 Commission:0.65 Candidates->5
Target date = 20200427 is on day# 1 of the week (Mon=1...) Database is "tda_api"
U= 38.87, Target U-> 33.04
ATM IV= 0.96, Target ATM-IV-> (0.93 -> 0.93):(0.95 -> 0.95)
Results of evaluation listed below:

Summary in ROR order for each type
ROR Type Description Order type
68 % Long PUT VXX200515P34 Buy to Open
45 % Put Spread 7 29 / 36 Buy to Open
44 % Put Spread 10 29 / 39 Buy to Open
44 % Put Spread 8 29 / 37 Buy to Open
43 % Put Spread 6 29 / 35 Buy to Open
42 % Put Spread 9 30 / 39 Buy to Open
40 % Put Spread 5 31 / 36 Buy to Open
35 % Put Spread 4 31 / 35 Buy to Open
26 % Put Spread 3 31 / 34 Buy to Open
19 % Call Spread 8 38 / 46 Sell to Open
19 % Call Spread 6 38 / 44 Sell to Open
19 % Call Spread 7 38 / 45 Sell to Open
19 % Call Spread 9 38 / 47 Sell to Open
19 % Call Spread 5 38 / 43 Sell to Open
18 % Call Spread 10 38 / 48 Sell to Open
17 % Call Spread 4 38 / 42 Sell to Open
13 % Call Spread 3 38 / 41 Sell to Open
7 % Put Spread 2 33 / 35 Buy to Open
2 % Call Spread 2 38 / 40 Sell to Open

-----------
A slightly different way to look at the problem.
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Thank you for that example. At first glance I thought you would take Advantage of Volatility Scew but you are solving for ROR based on the Option Chains Price?

How do you account for Theta? Or are you buying min 6month duration?

Are you using a data provider or is this taken from IB/some other broker?
 
what PnL driver are you trying to isolate - direction, decay or vol? Know your greeks PnL attribution - that will tell you which sensitivity corresponding to its driver is contributing to your aggregate greeks PnL
 
panzerman said:
This is why I learned to stay the hell away from options, too many parameters to get right in order to make money. Of the five inputs in a BS pricing model, absolute level of the underlying, absolute level of volatility, and time decay are the factors you most need to get correct.

That's three parameters versus one when trading the underlying. Get one parameter wrong, and the other two right, and you may still lose money. Don't be seduced by the leverage options offer or the plethora of possible strategies.

If you are fascinated by leverage, trade a leveraged ETF or futures instead.
More...

and yet for the indoctrinated/initiated, options are a godsend best thing since sliced bread
 
faust said:
what PnL driver are you trying to isolate - direction, decay or vol? Know your greeks PnL attribution - that will tell you which sensitivity corresponding to its driver is contributing to your aggregate greeks PnL
More...
No trying to isolate any greek, I'm just curious what ppl what prioritise. Some ppl say Reversion to the Mean of Volatility is more dependable than picking a Bottom/Top. The Former intuitivley is my view as well. But I wanted to check with you guys
 
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