Index options vs stock

[Geos 0]

So far my impression is that index options like SPX and VIX are quite a bit more volatile than the stock trades. Not sure I have the stomach for all that volatility. If I avoid the index trades and just do just the stocks will that give me less volatility (and less profit)? Is that a viable strategy?

[Edwin 63]

I'm not sure if you are new to SteadyOptions or not, but the SPX and VIX trades are volatile because the market is volatile right now, the VIX is above 20.

There is much better liquidity in SPX, SPY, and VIX compared to equity options (except for perhaps FB, AAPL, NFLX, and a handful of other names), so you have to take that into consideration.

In my opinion, there are more opportunities to get in and out of trades like the SPX butterfly and VIX calendars when the markets have big swings, as long as you have the time/duration for the trade to play out.  But that doesn't guarantee that every trade is a winner.  I don't think there have been many instances where the VIX calendar has been as big as a loser as the last one that was rolled.

[TDM 33]

Edwin makes a good point. This is pretty abnormal volatility lately, so it's not a great metric. Some trades like the current NFLX and AAPL trades do inherently have less volatility, but also less profit. I actually take extra large allocations of the SPX, VIX, etc trades since they are easy to get filled on, and the strategies are solid--however, that does expose me to much bigger swings than if I followed the model porftolio, especially in the current environment.

 

Second, these trades are often taken in the context of the overall portfolio. For example, the current SPX butterfly helps offset any losses from the VIX calendar and SPY/TLT combo, and vice versa. Often, if we've got a calendar open (Say a GOOG calendar) that's stretched to the upside and will benefit substantially from a pullback, we might enter another trade that is delta positive, so they provide somewhat of a hedge. You can certainly skip the index trades, but you do need to take into account the context of what you do choose to trade, and make sure the trade is well positioned independent of the rest of the portfolio. (Generally this is the case for non-index trades, but not always).

 

Finally, the volatility of any trade is really just a question of your risk tolerance, and your risk tolerance should be based on dollar losses, not % losses. If a trade has the potential to lose 50% or 100%, it may make sense to take a half or quarter allocation. I think this generally makes more sense than just skipping a trade because it swings a lot from day to day. For example, Steady Condors almost invariably gains or loses 5-10% on a given trade in a month, so its an incredibly low volatility strategy. Nevertheless, I often have my biggest winners and biggest losers (more of the former, fortunately!) from Steady Condors because I have allocated 4x as much by $ to SteadyCondors as to SteadyOptions, so a 10% gain on SCO is comparable to a 40% gain on SO. This means the dollars risked on all of my trades is pretty comparable, regardless of the strategy.

 

There are some articles here on position sizing, and I highly recommend them--Kim has done an excellent job. Of course, you should always be prepared to lose everything on an options trade because "worst cases" do happen (QIHU straddle a month ago lost 40%, most straddles lose no more than 10%). However, most of the time you should be able to limit your losses to 1-3% of your total portfolio, which is an amount you need to be comfortable losing if you're trading options.

 

Hope this helps!

-T