The Good, Bad, and Ugly of a Low Vol Environment

VolSkewTrader

VolSkewTrader

Even with all that's going on and all the uncertainty, we're stuck in a relatively low volatility environment. The tight bid/asks are great for the retail customer/trader, but awful for vol-scalping market-makers like myself. Although I can put on positions I like without giving up too much edge, the slow static nature of low implied vol (IV) and the IV surface makes impatient short-term time horizon traders like me lose their mind waiting for the position to play out.

As for trading vol, selling low vol is just not worth the risk to collect a little time decay everyday, and I hate managing a large short gamma position. Buying low vol sounds like a good idea in principle, but you have to wait it out and pay that theta bill everyday. Like they say, unless IV is at irrationally low levels, it doesn't makes sense to inventory option premium. Buying options is all about timing - get long just before the big move and vol explosion. Selling options is about being patient, maybe taking a little heat, waiting for the vol implosion, and collecting theta while you wait.

Low volatility is a daytrader's nightmare. Better to just let your algos scalp micro inefficiencies in the marketplace while you go play golf or go on vacation. But if you are a junkie like me and are addicted to trading, be nimble and trade small, stay flat premium, trade the mean-reverting moves of the vol range, and don't get caught short premium just before the inevitable breakout move.
 
no matter how you slice it, it's still a directional trade...

in April I predicted that with the sentiment level, 2019 will turn out to be similar to early/mid 2018 where the corrections were about 5-10%, and walaa we just had one that deep and can profit from.... this has not changed so far... the dumb money is still moderately bearish, therefore my pro boys will keep pulling it up, with 5-10% corrections.

in other words low/high vol doesn't matter, if you know where the limits are, and adjust accordingly.
 
Although the direction, velocity, and size of move of the underlying completely determine the level of IV of the options I trade, I try to not have a strong opinion on the direction of the market. I would just trade stocks or futures if I wanted to pick direction. I'm trying to predict the level of vol, steepness of the term structure and curve skews, and the shape of the vol surface given a move in the underlying. I usually take delta or directional risk out of the equation and isolate the vol component.
 
the low volatility makes my trading much more difficult than years ago. I have an algorithm which worked great till 2015. it is still profitable, but the profit is only 1/10 of its peak.
 
VolSkewTrader said:
Although the direction, velocity, and size of move of the underlying completely determine the level of IV of the options I trade, I try to not have a strong opinion on the direction of the market. I would just trade stocks or futures if I wanted to pick direction. I'm trying to predict the level of vol, steepness of the term structure and curve skews, and the shape of the vol surface given a move in the underlying. I usually take delta or directional risk out of the equation and isolate the vol component.
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Do you just trade VIX products? Are there other instruments good for vol play without insane delta hedging?
 
Despite its popularity and the many offshoots derivative instruments and ETFs it has spawned, the VIX is really the only game in town when trying to take opinions on volatility as an asset class. Unfortunately, there are surprisingly no good tradeable VIX-like instruments in commodities or interest rates given how popular the VIX index and futures are.

Unless you're an active player in the OTC variance swap market, which are pure plays on volatility without the "insane delta hedging", delta hedging is an essential part of options trading.
 
trend2009 said:
the low volatility makes my trading much more difficult than years ago. I have an algorithm which worked great till 2015. it is still profitable, but the profit is only 1/10 of its peak.
More...

How did your algo do during last year's Q4 high vol environment?
 
VolSkewTrader said:
Despite its popularity and the many offshoots derivative instruments and ETFs it has spawned, the VIX is really the only game in town when trying to take opinions on volatility as an asset class. Unfortunately, there are surprisingly no good tradeable VIX-like instruments in commodities or interest rates given how popular the VIX index and futures are.

Unless you're an active player in the OTC variance swap market, which are pure plays on volatility without the "insane delta hedging", delta hedging is an essential part of options trading.
More...

Are there any good references on delta hedging? How do you drive costs low enough to continuously delta hedge like the options market makers?
 
traider said:
Are there any good references on delta hedging? How do you drive costs low enough to continuously delta hedge like the options market makers?
More...

Delta hedging is part art and part science. A good easy-to-read book on volatility and delta hedging is Trading Volatility... by Colin Bennett.

Continuous delta hedging kills you on commissions. Hedging less often if you're short premium/short gamma, letting your deltas ride more if you're long gamma/options premium, and having a more directional bias seem to be decent solutions to that problem.
 
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