18 lines
1.2 KiB
Plaintext
18 lines
1.2 KiB
Plaintext
A decrease in value of the options from time decay causes an increase in
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profitability. This profit potential pinnacles at the center (strike) price at
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expiration. Rising IV will cause a decline in profitability at each stock price
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point. Declining IV will raise the payout on the Y axis as profitability
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increases at each price point.
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Smileys and frowns are a mere graphical representation of the technique
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discussed in this chapter: buying and selling realized volatility. These P&
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(L) diagrams are limited, because they show the payout only of stock-price
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movement. The profitability of direction-indifferent and direction-neutral
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trading is also influenced by time and implied volatility. These actively
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traded strategies are best evaluated on a gamma-theta basis. Long-gamma
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traders strive each day to scalp enough to cover the day’s theta, while short-
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gamma traders hope to keep the loss due to adverse movement in the
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underlying lower than the daily profit from theta.
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The strategies in this chapter are the same ones traded in Chapter 12. The
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only difference is the philosophy. Ultimately, both types of volatility are
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being traded using these and other option strategies. Implied and realized
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volatility go hand in hand. |