There are huge opportunities for an option seller

[cuegis 683]

The general feeling that I am hearing is that this is such a terrible time for selling premium because the "market" is in an eternal upward climb, and VIX is at historic lows.

While this IS true for "equity-related " markets....nothing could be further from the truth.

By ONLY trading equity, equity index, and equity related ETF options, you are shutting down a very big world of opportunity to sell very expensive options with very small delta's.

Let's face it. This is not "equities" finest hour.

But, if you would open the door to commodities, you will find some of the greatest opportunities available.

As an, almost entirely, uncorrelated class of assets, they are not subject to the world of "Vix" as the guide as to where options prices are.

The opportunities are unlimited and, it seems to me, that you are limiting your potential  and, avoiding a world of enormous opportunities.

Because they are so uncorrelated, IV can be near all time lows, in Coffee, for example, while being at all time highs, in Gold, or Crude oil.

A crude oil option with a delta of .10 and 60 days to expiration will be $500, in many cases. And between 60 days and 30 DTE will lose 50% of it's value.

That is just 1 example.

It would , no doubt, improve your profitability, to move outside of a world, where everything is highly correlated , and  premiums are at their lowest levels in history, and open a totally different door, using the same knowledge, and applying the same strategies, where some of the best trades are plentiful.

Equity markets will have "their day" , once again, at some point in the future. But it is definately not now. And a Vix of 9 proves it.

The lower equities premiums go, and the vix REALLY could go to 6, the more risk you have to take on as a premium seller and, the more you have to force yourself into areas that you normally would never go to.

 

Edited August 9, 2016 by cuegis

[Kim 7,513]

Could you give some example please? I just checked /CL Oct $52 call option which has delta of 10, and it's is trading at 0.26/0.28. Considering around $1,100 margin, that's potential return of 2.5% in 2 months if you hold till expiration. Doesn't sound too attractive. Am I missing something?

[cuegis 683]

I'm sorry for bringing up crude oil , today, in the thread that I created.

It misses the whole point of what I was trying to say.

The thread was about commodity markets NOW vs equity related markets NOW.

I was just trying to bring up the point that there is a world out there, that has far more opportunities, than the equity markets.

Along with the fact that while virtually all equity related products will not bring in worthwhile premiums, the margin system for commodities (the "Span" system), allows for the ability to do a lot more with a lot less, and take on way less risk in doing so.

To find the best opportunities you will have to do the same research you are already doing now. Just in a different arena.

As a starting point, you can use ivolatility.com " advanced futures ranker/scanner"  to search for those  commodities trading at the highest IV levels.

But, because of "Span", it will  ALWAY's cost less money , to do the same thing, than it would in the equity markets.

And, as you already know...the higher the IV, the farther away you are able to sell, with lower the delta's, and can provide the same premiums.

There is no question that, for a premium seller, the equity markets, at this point in time, are the worst place to be and, commodities markets have infinitely more opportunities by any means you want to measure by.

[Kim 7,513]

I'm definitely open to new opportunities. However, we have to remember that high IV is there for a reason. High IV is usually associated with more volatility. There are no free lunches.

 

If you can bring some examples it would help.

[Dadeeman 28]

Help me out here guys, is it true that it is difficult to find equity related option trades right now such as straddles, strangles, and calendars (that rely on big changes in volatility)  because we are in a low volatility market judging by the VIX which is near all time lows? And that maybe @yowster's brand of trading thru earnings may find us better equity picks in this environment? Please share. I'm looking for your thoughts on this subject. Thanks!

Edited August 9, 2016 by Dadeeman

[Yowster 8,047]

Actually, entering pre-earnings calendars during lower IV periods have a great SO track record.     Also, the hold through earnings calendars that I have highlighted are more about that one day IV drop after earnings are reported (instead of the overall market volatility at the time).    I still like the declining VXX trades here too (because the VXX tends to drop both when the VIX is falling and also when its relatively stable - and hedges are really cheap during these low IV times).    Straddles/strangles have limited downside when entering during periods of low IV so it's not a bad time to have them in play, as any increase in IV and stock price movement will help.   The only SO trades I don't like here are the SPX butterflies as these are best to put on during higher IV periods as dropping IV will help these trades.

[cuegis 683]

On 8/9/2016 at 0:23 PM, Yowster said:

Actually, entering pre-earnings calendars during lower IV periods have a great SO track record.     Also, the hold through earnings calendars that I have highlighted are more about that one day IV drop after earnings are reported (instead of the overall market volatility at the time).    I still like the declining VXX trades here too (because the VXX tends to drop both when the VIX is falling and also when its relatively stable - and hedges are really cheap during these low IV times).    Straddles/strangles have limited downside when entering during periods of low IV so it's not a bad time to have them in play, as any increase in IV and stock price movement will help.   The only SO trades I don't like here are the SPX butterflies as these are best to put on during higher IV periods as dropping IV will help these trades.

Remember, there is no such thing as a "butterfly". As with anything,there is "Buying" , or "selling" , a butterfly.

Sometimes , what makes buying, or selling, a strategy a good choice, has everything to do with the "pricing" of the strategy, more than the strategy itself.

Free lunches DO exist but, much less so now in the age of electronic trading because when a "free lunch" first gets noticed by a handful of people, where in the , pre electronic, floor days, the free lunch could continue for quite a long time. Now, it is noticed very quickly, and , as a result , the pricing of that method slowly, then rapidly, changes , taking away the "edge " that existed.

When I traded Crude Oil, on the floor of the Nymex, there was a solid 3 year period where buying a butterfly whenever price was exactly at a strike was profitable 100% of the time.

By "buying" , I mean, when price was ATM, you would buy the ATM straddle, and sell the next lower strike put,and sell the next higher strike call.

But, on 30 day options, it was the price of this, which was a .30 cent debit, that was more responsible for it being 100% profitable, than the strategy itself.

It also helped that during that 3 year period, crude touched, at the very least, 2, or more , strikes everyday.

There was zero time decay because these things were held for less than 1 day, sometimes 1- 2 hours.

The price ATM was .30 cents ( in crude that is x 1000, in stocks it is x 100, so $300, not $30)

When price got to the next strike, the butterfly was priced at .70 ($700). And, the second price started to move away from the original strike, in either direction because it is a delta neutral trade, the butterfly increased....35, .40, .45 etc

We were able to put them on at .30 and roll up, or down to the next strike, for .70, several times per day.

The key to all of this is being able to do the butterfly at 30% of the distance between the strikes, no matter what the underlying, or the strikes.

It definitely is a very different ballgame in the retail world.

But, if you can find butterflies that are priced at 30% of the distance between strikes, with at least 30 days to go, and you only plan to hold them for 1-2 days, there is no time decay, and they WILL make money, if you are dealing in a product that touches several strikes per day , on a typical day.

The problem is that it id very hard, if not impossible, to find butterflies priced at 30% these days.

Then, you HAVE to be dealing in a product that is extremely liquid so that you can easily get in, an out of these without giving up more than 2-3 points. Very difficult in the retail world.

I would like to give a recent example but, they are just too hard to find these days.

This is how free lunches get discovered, and the "free" eventually gets priced out of the trade.