There's a really commonly cited inaccurate statement of "buy options when IV is low and sell options when IV is high". This ultimately misleads tons of traders, and while I've been trading for over 18 years now, it confused me too.
While we absolutely want to try and sell expensive IV when selling, and buy cheap when buying, these are SECONDARY factors (unless we're actually isolating vol and trading vol directly, which is another story).
For example, if I think a stock is going to move aggressively to the upside and IV is high, I still would prefer to buy the call (or run a synthetic long) and NOT cap my upside profit potential. This in the long run makes way more money.
The takeaway is do your best to focus on the main profit mechanism you're trading and what structure fits the best. THEN try to get as good of a deal on it as you can vs focusing on getting the deal first.
Good luck out there!
Posted by esInvests
5 Comments
I wondered about what you said as well. The way I take it is this, selling just a few months when the IV is high gets me a lot more profits than trying to eke out small profits for a long time when the IV is low.
Coming to buying calls when IV is high, when market drops and IV rises up I usually like to buy the stock outright and sell CCs rather than take risks with buying calls. Also selling long dated puts during that time is much more profitable.
Someone said: it’s a good idea on filling up your tank when gas prices are low
You were looking to buy a new car. You were looking at cars with large gas tanks and finally bought a tanker truck.
This is kind of like that. The tail shouldn’t wag the dog.
it’s even unclear what “cheap” and “expensive” means for IV. Not only do you need what current volatility is at, but also what the futures are pricing at. VIX might look expensive as oppose to their historical averages, but it might be cheap compared to what the market expects it to be.
In my mind, better going long calls in bull market. You accelerate your gain than holding the stocks. And selling covers call/put during bear market. You mitigate the loss by getting stable income and worst case you got stocks at a discount
So far selling csps has been a good strategy for me. I just keep rolling them each week. If the stock dips I don’t make a great premium but on weeks where it goes up closer to the strike I make decent money. The only way I can get wrecked is if the stock absolutely bottoms out or I get assigned. I sell weeklies, so I try to roll them on Wednesday or Thursday so my chance of getting assigned is lower. I like the strategy so far.