Trading Volatility

I

ironchef

Many options traders (I for one) started life trading the underlying. So, when we started trading options, the first inclination was directional, betting on whether the underlying would go up or down and tried to profit from that. And when we "guessed" correctly, the profit amplified (leverage) and since there was no margins calls against long options, it eliminated the biggest headache of leveraging using margins - forced to exit our positions at the worst possible time.

I know there were a lot written on selling options being superior to going long. For me personally, I started with Buy-Write of the stocks in my portfolio but very quickly moved into long options as I found early on that going long was more profitable: Limited risks but unlimited profits, perhaps because 2013 and 2014 were great bull markets.

Then, I noticed that experienced options traders here often traded volatility rather than directional. Several threads discussing hedging/dynamic hedging essentially were about hedging away the delta risks (making the trade non-directional) and to profit from volatility.

What are the advantages of trading volatility? Any words of wisdoms is greatly appreciated

Thanks. I welcome any comments.
 
Combining directional and volatility is IMO the best mix.
I like this: if price is high and volatility is high --> buy puts
 
Now granted, only been learning past 3.5 years and trading options for a profit past 1.5 years, I have always used options before this time for hedging. I have developed through the years sensible trading systems for longer term trading, smoother equity curve more important to me than jagged drawdowns. So I been using directional models but I wait for underlying to drop like a rock to areas it been tested to hold, Puts are at Prem so better to do for me Put credit spreads long term durations and buy short Call Debit spreads, although costs of margin higher, I have found legging in works best for me. It has back tested well enough for me, so...And if I like the stock after trend change to up, I will buy them as well as I only buy dividend paying stocks, can do covered calls when I expect downturn. Buying any option, seldom a good deal cause of time decay and I don't have much patience on it not going into direction I require as per Trading Plan.

Volatility is very good for selling Prem and safe guarding oneself with spreads, no sense on betting the farm, and if you have signal for reversal, you can buy very short duration outright options, or do Debit spread and starts going you way, sell off the shorts. But I prefer to be slow moving train-don't want any excitement.
 
Martinghoul said:
Really? So you like buying expensive options?
More...
Not necessarily expensive. It depends on what you mean with "expensive options". Options are normally fair priced for the current situation.
And if it is somehow subjectively "expensive", then at closing of the option you will also get an "expensive" price... So what?
Btw, you can always use an OTM strike to get "cheaper" options...
 
botpro said:
Combining directional and volatility is IMO the best mix.
I like this: if price is high and volatility is high --> buy puts
More...
or sell calls for an immediate credit. But of course this variant is riskier than long puts.
 
botpro said:
Not necessarily expensive. It depends on what you mean with "expensive options". Options are normally fair priced for the current situation.
And if it is somehow subjectively "expensive", then at closing of the option you will also get an "expensive" price... So what?
Btw, you can always use an OTM strike to get "cheaper" options...
More...
You have much to learn, Grasshopper...
 
Martinghoul said:
You have much to learn, Grasshopper...
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Unfortunately your such meaningless comments are useless in any discussion.
You think, in such an arrogant way, that you know it better, but which I strongly doubt; one just needs to study your postings in the archive...
 
botpro said:
Unfortunately your such meaningless comments are useless in any discussion.
You think, in such an arrogant way, that you know it better, but which I strongly doubt; one just needs to study your postings in the archive...
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Study away, my young and turbulent friend... My comment was meaningless, since, in the past, when myself and other people offered you meaningful advice, you refused to listen. So you really have to learn by doing stuff yourself, which is exactly what I stated.
 
Martinghoul said:
Study away, my young and turbulent friend... My comment was meaningless, since, in the past, when myself and other people offered you meaningful advice, you refused to listen.
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I had some good reasons... :D And I don't need any ill advice...
 
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