sbuck143
88 posts
msg #90813
- Ignore sbuck143 |
4/5/2010 2:43:24 PM
Straken used a pretty indepth example, but the basic premise is what is known as the dreaded "Volatility crush".
My first foray into options many years ago was trying to run straddles against Biotech companies in advance of major FDA announcements of trials, etc. Nary a winner to be found unless the stock moved so far that one of the options went deep ITM.
Leading up to earnings or FDA announcements, but especially right before *say a week or so*, the options on both sides - puts and calls - become massively over-priced with volatility driven "time-value". This effect is most apparent at the ATM strikes. When the big news is announced, the volatility on the options implode, and the so-called volatility crush deflates the price of all the options in that front month, no matter the direction of the stock.
As mentioned above, the only sure bet during these kinds of events is to be selling those options to the folks who don't know anything about volatility crushes or who absently hope that "this time will be different". Unfortunately, you have to have a mucho big acct to sell options naked, so its not a little mans game.
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abelincoln
126 posts
msg #90827
- Ignore abelincoln
modified |
4/5/2010 7:57:25 PM
Thanks for responses
it's a lot more crystal now...
so the feverish straddle traders looking to profit regardless of direction in fact caused the increase in activity (IV) well above normal especially in the front month to the point that the weight of the increased volatility imploded (back to the 'normal') and crushed those same traders
basically if to many traders pile in at the same time with the same play ;
the play becomes obvious and worthless except to the astute IV option seller
...
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sbuck143
88 posts
msg #90849
- Ignore sbuck143 |
4/6/2010 11:40:14 AM
Thanks for responses
it's a lot more crystal now...
so the feverish straddle traders looking to profit regardless of direction in fact caused the increase in activity (IV) well above normal especially in the front month to the point that the weight of the increased volatility imploded (back to the 'normal') and crushed those same traders
basically if to many traders pile in at the same time with the same play ;
the play becomes obvious and worthless except to the astute IV option seller
********************************************************************************************************************
Well its important to uthe volatility crush doesn't occur because there was a breaking point of too many people on the wagon.
It occurs simply because the news/event/announcement that was driving all the rampant speculation becomes a known event. Thus ending all the speculation and rumor that fueled the volatility spike in the first place. No hysteria = equals massive deflation as IV reverts to normal.
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sbuck143
88 posts
msg #90851
- Ignore sbuck143 |
4/6/2010 11:44:47 AM
One strategy I've meant to investigate but havent had the time.......
Buying far month OTM options as your long basis, and selling front month ATM options to be that "astute options seller".
The far month options serve as your cover to allow you to sell the near term overpriced stuff.
The key is finding the far month options whose IV is not out of line and thus wont be too badly hurt when the Vol Crush comes.
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sbuck143
88 posts
msg #90876
- Ignore sbuck143 |
4/7/2010 8:34:42 AM
There is however one instrument that doesn't exhibit any IV, and thus will not get crushed on big announcements - well as long as you get the direction right.
THE STOCK!!
If its a popular stock you maybe could do a synthetic margin position, buying a deep ITM LEAP call or put (but not both), and just play the stock movement instead of the option.
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abelincoln
126 posts
msg #91903
- Ignore abelincoln |
5/1/2010 1:07:00 PM
found in b&n on 3rd ave yesterday
interesting browse to kil time
trading options as a professional: techniques for market makers and experienced traders
james bittman
hey m4m why don't you have a meeting at b&n i'll be there, lol
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abelincoln
126 posts
msg #91904
- Ignore abelincoln |
5/1/2010 1:10:30 PM
u know i was stinkin'
tinkin :-) volitility gave you an edge but it's up in the air like everything else
except.... Error: This message has been deleted
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abelincoln
126 posts
msg #91905
- Ignore abelincoln |
5/1/2010 1:11:11 PM
happy MAY day
swing around the MAYpole
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Eman93
4,750 posts
msg #91906
- Ignore Eman93 |
5/1/2010 2:34:51 PM
Options Express has a option calculator ...... you can do all kinds of spreads and iron condors put spreads..... everything..
Like anything you need to build enough in your account and then you can sell the options naked....
Trading the ES mini seems like a good way to get started IMHO..... a lot of bang for the buck.... if you are just buying
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