Thursday, March 4, 2010

Take That Vol Sellers!

How bout that MDVN... Wowza! If that doesn't give volatility sellers the heebie jeebies I don't know what will. That type of monster gap is the exact reason why selling naked strangles in front of a huge event is often considered crazy talk. It also supports the notion that options can indeed be a buy at 250% + volatility levels. I suppose it's a good thing I'm not a betting man because my volatility fade mentioned in the last post would have gotten absolutely smoked.

Ahhhh... the safety of the sidelines.

Let this serve as a lesson to any of you newcomers to the options arena that volatility gets bid up in biotech stocks for a very good reason (click to enlarge).

[Source: Livevol Pro]


Mark Wolfinger said...


I respectfully disagree.

One example does not make a case.

If volatility sellers won every time, then no one would buy volatility.

This is a probability game. This is a risk management game. BTW, it's a game I no longer play - devoting my time to other endeavors. This one takes far too much time.

I DO NOT endorse selling IV before a news release. But, the idea is to size each trade properly - to avoid a big loss. Patiently choose your spots. Expect to win often and occasionally take a big loss. That's the game.

Play it or don't. But suggesting that it's 'crazy talk' because of a single example - that's just not good advice for your readers. In my opinion.

Best regards

Tim Justice said...

Great couple of posts Ty...

Crazy talk to most but after executing maybe 1000 short strangles its my most consistently profitable model and does have a positive equity curve. This is a lesson to all have to build drawdowns into your expectations and have strict money management guidelines.

I did some backwards modeling at to what my loss would be had I sold volatility on this trade with the general guidelines I use and I know you won't believe this but I would have profited on this trade. On the 1st of March the 55 c and 22.5 p for June had a credit of 11.10. That was roughly equal distance both directions and at a put delta of .15 that I would have been comfortable with. That same spread today is worth 9.42.

I always say there are no such things as good strategies and bad strategies. There are just some models to the strategy that work well and others that don't. The biggest risk in volatility plays is the gamma. Conversely had I used front month straddle at the price on MOnday for a March 40 c and 35 p the credit would have been 12.40 and now that spread is worth 21.75 so a big loss.

Selling volatility in one model would have made money but using another construction you would have been beat up.

As bugs bunny would say....berry interesting.


Tim Justice

Tyler Craig said...

Thanks for your thoughts Mark. I respectfully disagree with your respectful disagreement:) Perhaps I didn’t explain myself clear enough. Truth is I quickly penned the post before I ran out the door to run some errands. I’m not using this one example to “make the case” that selling naked strangles is always a losing proposition. Rather I’m pointing it out as one example why traders don’t like selling naked strangles in front of unknown events or as one of the events you’re going to have to deal with if you use short strangles. I’ve mentioned numerous times before how vol sellers don’t win all the time and how long term success is contingent upon risk management. Now, I suppose the phrase “crazy talk” may have been a bit strong, but I know traders who indeed think selling naked strangles is crazy, hence the use of the phrase “often considered crazy talk”, not “always considered crazy talk”.

I’m not advising readers one way or the other. Simply making an observation

Tyler Craig said...

Hey Tim,

Boy, that’s the last time I use the phrase “crazy talk” in my As mentioned to Mark, I probably should have been more specific. Front month strangles took it on the chin the worst and those are what I was primarily referring to. I don’t doubt that some type of longer term play may have worked- as you’ve no doubt done well with in your own trading. Far be it from me to make all encompassing statements as to what can and can’t be profitable. My primary point was a gap like MDVN is what most volatility sellers hate to experience. I’d prefer just about any other outcome if I had short strangles on.

Tim Justice said...


Keep the "crazy talk" coming! The reason we love your blog is that everything you write on is well researched and you have an honest and straight forward approach to market education.


Take care my friend,


Tyler Craig said...

Many Thanks Tim.

west coast tom. said...

I too agree with what Tim said. Thank you for taking the time.

All the Best,


tim said...

hey Tyler,
may i pick your brain on this?
my nuetral index ETF plays
(condors and calendars) got wacked friday. I finally yield to the bulls. so now for repairs to protect upside risk.
Two considerations:
Buy M19/M31 calendars or
Buy M19 broken wing butterflies.
Positives -Low cost debit, low loss if market pulls back, good profit hedge for short range upside.
Seems better than hedging with stock -adds some theta and costs less.
1. It seems like you can use calls or puts with simular results on calendars, but not butterflies?
2. What is risk of OTM puts getting assigned on ETF's?
2. Is there any downside I am missing on this strategy?
(trying to explain in few words w/out showing a risk graph.)

Tyler Craig said...

Thanks for the kind words Tom-

Tyler Craig said...


I think I get the gist of what you're asking, but we'll see.

So we're looking at selling upside calendars or butterflies to gain positive delta & positive theta. I'll agree on the advantages you cited. As to whether its better than hedging with stock, that depends. I don't think there's a right answer here as much as there are trade-offs.

The advantage of just using stock is commission and ability to get the exact delta you want. With a butterfly you're looking at adding 4 legs which can add up commission as well as slippage. I don't mean to make too much out of trading costs, but I think one important question to consider is whether or not it's worth weathering the additional trading costs of using the butterfly or calendar to garner the benefit of positive theta and any other advantage you see.

I've never really used calendars or butterflies to hedge, so I don't really have any experience I can share with you on those specific approaches. I would simply assess the risk graphs and account greeks to make sure I'm comfortable with the new position.

tim said...

Once again, thanks for sending a quality answer.
You did get the gist of the question.
As I trade and repair with more contracts on the ETF's I am realizing the effect of commissions and bid/ask loss.
So I am starting to trade the RUT more.
I was hedging with stock until my reserve capital got tight. Calendars M19/M30 were very cheap to gain protection to upside which I am glad I purchased last week. Overall portfolio vega did increase. But with VIX below 20 I am not too concerned.
Theta decay did help some these last days and I will hold up to FED announcement next Tuesday.

Tyler Craig said...


Glad the answer helped. Once you start trading 10+ contracts on the ETF's, it definitely is worth taking a look at the index options such as the RUT.

Best of luck on the trades-