Options Volatility and Market Direction

What the ‘Experts’ say

https://www.bloomberg.com/news/articles/2016-12-14/ftse-100-seen-hitting-fresh-peak-in-2017-as-hedging-costs-slide

1x-1

So what’s to do?

The above chart reflects the huge slide in put options volatility. Bad news for people who just sell puts. The market doesn’t need them anyway. They just dilute prices, and cry when they get blown up.(My personal opinion,but there are many who got blown up-like Karen the super trader) The market always offers opportunities, and when the experts tell us the market is going up………. Nobody knows the future but they could be right-there’s a 33% chance of that. The market can go up, go down, or stay the same. The passive ‘investor’ will be happy to collect 3-5% in divi’s as a reward for the massive risk. Index investors may do ok too, for modest possible returns. Luck is not what we are concerned with.

  1. What about a Straddle? FTSE= 6950 roughly. Jan options: 6950 put 104.5 and the 6950 call 98. Cost of trade 104.5+98= 202.5.         Profit if market moves >200 points either way or if there’s a big bump up in volatility, usually when the market drops.
  2. Put spread?  ( Jan options) buy 6700 put 30 and sell  6600put  18.5. Cost of trade 30-18.5= 11.5. Profits on a big drop-previous support seems to be 6700.Max profit 100-11.5=88.5 Max loss=11.5(or when you decide to do something else)
  3. Puts are too cheap to sell-what about calls? 7150/7200 call spread sell the 7150 for 27.5 and buy the 7200 for 18.5. Credit 9, limited risk, max loss=50-9=41(unless you do something to adjust)

    These are NOT recommendations

    The 3 ideas above just give an idea about how to think about the market. Everyone’s a genius when they paper trade-you may wish to be just that, and why not? Options are fascinating for traders who go the extra mile,and we love the trading process while making money.

 

Filed Under: Strategies

About the Author: First found out about options in 1995.From the arcane magazine Exchange and Mart! First trade- a covered call on VOD in 1999. Made 10%,VOD almost doubled. That's when I realised I was not a good trader,and I was forgiven thanks to the amazing world of exchange traded options

RSSComments (1)

Leave a Reply | Trackback URL

  1. Terrapin Trader says:

    There is a history of smug traders who just sold puts, considering them overpriced-but I have seen puts go from 3 to 300 in a few days, when the market got too smart and vol spiked up massively. I think this happens at least twice each year, barring the years I was selling calls! 2003-2005- as usual DYOR. Good options trading is about limiting risk,and not paying over the odds. Happy trading

Leave a Reply