I don't know if I'm going to get any responses here about this topic, but I figured I'd ask anyway! So, what's the best billing software out there? Is it called GreenRush? Or does anyone have any suggestions? I want something simple for small operations that doesn't require a lot of work, yet provides good accounting/billing options. Thanks for reading!
The IV risk with short strangles
- Thread starter MrAgi1
- Start date
In my 20 years I have only had that happen to me twice.
5 cent options become worth 10 dollars.
I did a study, if I closed out every 5 cent option I was short how much would I leave on the table vs saving that 10 dollars. The calculation yielded that I could afford 1 of those blowups every year.
You mean the IV risk before expiration, as at expiration IV does not play any role anymore --> ie. no IV risk then.
Here's a tip for you:
You can eliminate IV risk before expiration by using a Cash Acct and trading Puts only (Put spreads etc) plus optionally LongCalls:
Here you are using Cash-Secured Put (when shortselling), and by this all the risk is already pre-covered; the IV can rise as much as it wishes, as you won't get any Margin Call or whatsoever.
But with American Style options there exists an early assignment risk (equaly bad). But not so with European Style options.
It means:
With European Style options there is neither an early assignment risk nor any IV risk! [that's when using a Cash Account]
Q.E.D.
Ie. American Style is shit, as usual...
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Ok take a look at the pictures attached.You mean the IV risk before expiration, as at expiration IV does not play any role anymore --> ie. no IV risk then.
Here's a tip for you:
You can eliminate IV risk before expiration by using a Cash Acct and trading Puts only (Put spreads etc) plus optionally LongCalls:
Here you are using Cash-Secured Put (when shortselling), and by this all the risk is already pre-covered; the IV can rise as much as it wishes, as you won't get any Margin Call or whatsoever.
But with American Style options there exists an early assignment risk (equaly bad). But not so with European Style options.
It means:
With European Style options there is neither an early assignment risk nor any IV risk! [that's when using a Cash Account]
Q.E.D.
Ie. American Style is shit, as usual...
That is an option pricing calculator.
The first pic shows the amount we would be losing on an OTM put, if price falls by 20% almost immediately after we put the trade on. I know unlikely but this things happen. The risk is huge but the pain is bearable. For a $3 credit we are at almost a $5 loss.
Now it unrealistic but such large drops in price would cause volatility to spike. Now take a look at what happens if volatility rose from 30% to 150%. A factor of 5, which does happen some times in the market. The current payoff is showing a $40 loss and we initial wanted to make just $3. Now this is not bearable. This is an absolute disaster.
MrAgi1, did you understand what I said?: IV does not play any role at expiration!
When concentrating on IV only (and assuming spot stays the same or is in our favor), then:
time decay works for the option shortseller: meaning each day the result improves automatically, till the expiration day, on which it stops, and IV ceases to play any role anymore for the outcome of the trade.
So, then where (or what) is your problem?
When concentrating on IV only (and assuming spot stays the same or is in our favor), then:
time decay works for the option shortseller: meaning each day the result improves automatically, till the expiration day, on which it stops, and IV ceases to play any role anymore for the outcome of the trade.
So, then where (or what) is your problem?
This is to good to be true. If that’s the case that means that’s free money? Or am missing something. Then why do short vol firms blow up when there is vol spike?
If that’s true then that means I have been getting options wrong all this time and making it complicated. That means there is actually a difference between short put and a covered call even though their payoffs are identical?
However, I think this is too good to be true. Something ain’t right.
You seem not have undertood the difference between American Style options and European Style options. Read this.
The problem is IV surge before expiration. I am not worried for the expiration payoff graph. My question is about what happens if IV rises. Well enough theta decay can work in my favor but when there is a massive vol spike the decay is not enough. I am in massive losses due to IV. I don’t care about expiration, most trades are managed and closed way before expiration.MrAgi1, did you understand what I said?: IV does not play any role at expiration!
When concentrating on IV only (and assuming spot stays the same or is in our favor), then:
time decay works for the option shortseller: meaning each day the result improves automatically, till the expiration day, on which it stops, and IV ceases to play any role anymore for the outcome of the trade.
So, then where (or what) is your problem?
I understand the assignment thing and American and European options. But exactly is the difference in payoff for a naked put and covered call? How can increase in vol affect one and not the other?
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I was talking of the situation where one keeps the option till expiry.
Otherwise consider options spread trading: if the short leg loses (due to IV rise for example),
then the other leg (long) gains equally, net effect: practically zero, ie. long side compensates for the losses of the short side.
Study for example Bull Put Spread, Bear Put Spread, Bull Call Spread, Bear Call Spread,
Long Butterfly, Short Butterfly, Long Condor, Short Condor etc...
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Thanks. I understand how spreads reduces vega exposure, therefore reducing/eliminating IV risk.
@earth_imperator Now let’s talk about keeping the trade till maturity. I want to understand something you said earlier. You mean if I sell a call and own the stock(cash) which results in a covered call, then you mean no matter how high IV rises, I don’t need to post extra margin to my my broker and can hold the trade till maturity?
However from the pricing calculator below. I combined a stock with a short call which gives me the payoff of a short put but the IV risk is still there before expiration. So you mean my broker would ignore that risk because I own the stock, therefore I can continue holding till expiration(and of course the high IV becomes irrelevant at expiration)?
I have always wondered why people referred to covered calls and naked put as 2 different strategies when they have exactly the same payoff? And covered call required you to buy the stock which could be higher margin.
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