37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
Chapter 39: Volatility Trading Techniques 827
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above outlined several expiration months, then computed the break-even prices, so
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should a volatility seller. Generally he will probably want to sell short-term options,
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but all expiration months should be considered, at least initially. Also, he may want to
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try different strike prices in order to get a balance between a low probability of the
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stock reaching the striking price of the naked options and taking in enough premium
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to make the trade worthwhile. To this author, the sale of naked options at small frac
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tional prices does not appear attractive.
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Of course, merely selling such a put and a call means the options are naked, and
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that strategy is not suitable for all traders. The next best choice then, I suppose, is a
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credit spread. The problem with a credit spread is that one is both selling expensive
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options and also buying expensive options as protection. The ramifications of volatil
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ity changes on the credit spread strategy were detailed two chapters previously, so
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they won't be recounted here, except to say that if volatility decreases, the profits to
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be realized by a credit spreader are quite small (perhaps not even enough to over
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come the commission expense of removing the position), whereas a naked option
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seller would benefit to a greater and more obvious extent.
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The choice between naked writing and credit spreading should be made based
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largely on the philosophy and psychological makeup of the trader himself. If one feels
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uncomfortable with naked options, or if he doesn't have the ability to watch the mar
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ket pretty much all the time (or have someone watch it for him), or ifhe doesn't have
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the financial wherewithal to margin the positions and carry them until the stock hits
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the break-even point, then naked writing is not for that trader.
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Another factor that might affect the choice of strategy for the option seller is
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what type of underlying instrument is being considered. Index options are by far the
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best choices for naked option selling. Futures are next, and stocks are last. This is
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because of the ways those various instruments behave; stocks have by far the great
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est capability of making huge gap moves that are the bane of naked option selling. So,
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if one has found expensive stock or futures options, that might lend more credence
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to the credit spread strategy.
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There is one other strategy that can be employed, upon occasion, when options
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are expensive. It is called the volatility backspread, but its discussion will be deferred
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until later in the chapter.
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USING A PROBABILITY CALCULATOR
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No matter which method is used to find options that are out of line, and no matter
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which strategy is preferred by the trader, it is still necessary to use a probability cal
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culator to get a meaningful idea of whether or not the underlying has the ability to |