17 lines
1.1 KiB
Plaintext
17 lines
1.1 KiB
Plaintext
CHAPTER 5
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An Introduction to Volatility-Selling Strategies
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Along with death and taxes, there is one other fact of life we can all count
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on: the time value of all options ultimately going to zero. What an alluring
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concept! In a business where expected profits can be thwarted by an
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unexpected turn of events, this is one certainty traders can count on. Like all
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certainties in the financial world, there is a way to profit from this fact, but
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it’s not as easy as it sounds. Alas, the potential for profit only exists when
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there is risk of loss.
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In order to profit from eroding option premiums, traders must implement
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option-selling strategies, also known as volatility-selling strategies. These
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strategies have their own set of inherent risks. Selling volatility means
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having negative vega—the risk of implied volatility rising. It also means
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having negative gamma—the risk of the underlying being too volatile. This
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is the nature of selling volatility. The option-selling trader does not want the
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underlying stock to move—that is, the trader wants the stock to be less
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volatile. That is the risk. |