37 lines
3.0 KiB
Plaintext
37 lines
3.0 KiB
Plaintext
Chapter 39: Volatility Trading Techniques 833
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In reality, one would have to be mindful of not buying overly expensive options ( or
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selling overly cheap ones), because implied volatility cannot be ignored. However, the
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price of the straddle itself, which is what determines the x-axis on the histogram, does
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reflect option prices, and therefore implied volatility, in a nontechnical sense. This author
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suspects that a list of volatility trading candidates generated only by using past movements
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would be a rather long list. Therefore, as a practical matter, it may not be useful.
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MORE THOUGHTS ON SELLING VOLATILITY
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Earlier, it was promised that another, more complex volatility selling strategy would
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be discussed. An option strategist is often faced with a difficult choice when it comes
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to selling (overpriced) options in a neutral manner - in other words, "selling volatili
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ty." Many traders don't like to sell naked options, especially naked equity options, yet
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many forms of spreads designed to limit risk seem to force the strategist into a direc
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tional (bullish or bearish) strategy that he doesn't really want. This section addresses
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the more daunting prospect of trying to sell volatility with protection in the equity
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and futures option markets.
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The quandary in trying to sell volatility is in trying to find a neutral strategy that
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allows one to benefit from the sale of expensive options without paying too much for
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a hedge - the offsetting purchase of equally expensive options. The simple strategy
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that most traders first attempt is the credit spread. Theoretically, if implied volatility
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were to fall during the time the credit spread position is in place, a profit might be
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realized. However, after commissions on four different options in and possibly out
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(assuming one sold both out-of-the-money put and call spreads), there probably
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wouldn't be any real profit left if the position were closed out early. In sum, there is
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nothing really wrong with the credit spread strategy, but it just doesn't seem like any
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thing to get too excited about. What other strategy can be used that has limited risk
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and would benefit from a decline in implied volatility? The highest-priced options are
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the longer-term ones. If implied volatility is high, then if one can sell options such as
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these and hedge them, that might be a good strategy.
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The simplest strategy that has the desired traits is selling a calendar spread
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that is, sell a longer-term option and hedge it by buying a short-term option at the
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same strike. True, both are expensive (and the near-term option might even have a
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slightly higher implied volatility than the longer-term one). But the longer-term one
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trades with a far greater absolute price, so if both become cheaper, the longer-term
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one can decline quite a bit farther in points than the near-term one. That is, the vega
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of the longer-term option is greater than the vega of the shorter-term one. When one
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sells a calendar spread, it is called a reverse calendar spread. The strategy was |