Selling Options When IV is High

[Giri89]

Hi,

I have heard on many occasions people recommending to sell options when IV is high which I have a few questions about.

Firstly, are they referring to the sale of naked options?

If not, and they are referring to spread strategies such as credit put spreads for example, won't the higher premium earned from the sale of an option with a high IV be offset by the purchase of the long option which will presumably also have a high IV??

Also, if you have the view that the IV of an option should be lower than what it is trading at, how would you act on this without having to sell the option naked? An example is this... I believe that a stock is going to stay around $11 and so I decide to sell a 9 (IV 84.32)/10 (IV 78.20) credit put spread. If I think that IV is going to be around 60... I guess I would try sell the 10 put as it is buy the 9 put for less, but in reality how would this work if I can only buy at what the market makers are selling at?

Therefore, is there actually a difference in selling IC's in high or low volatility periods if any extra premium earned or lost is simply offset when the second option is bought/sold?

I guess I'm just trying to understand how the concept of buying/selling mis-priced options works in reality.

Any help with this would be great!

Thank you!!

Giri

 

[Martinghoul]

If all you want to do is sell vol, without taking a view on direction, you need to sell ATM straddles, rather than puts etc. As to the your general question about selling vol, it gets complicated very quickly. I can try to answer specific questions you might have, though.

 

[anley]

I guess I'm just trying to understand how the concept of buying/selling mis-priced options works in reality.

You'll never be able to find 'mis-priced' options (unless you have a crystal ball). And even if you can your cost of doing business will eat up any of the meager profits.

Think of it like this, you've probably spent less than £1,000 on your technology setup to help you find any mis-pricings. But your competition have collectivly spent several hundred million on theirs.

Plus, how well versed are you at trading and pricing options, because again the people you're trading against will likely be multi-year veterans.

Not saying this to hurt you but options trading is a very very very very sophisticated game and most private punters (at least 95%) will lose overtime. Don't forget there's 2 ways to lose, 1 you get the direction wrong (market or volatility) or 2 you get slowly eaten alive by the costs.

To sum up: if you want to have any chance of making money in options become a market maker.

Hope this all helps

 

[luckyd1976]

Hi,

I have heard on many occasions people recommending to sell options when IV is high which I have a few questions about.

Firstly, are they referring to the sale of naked options?

No, When people say Vol is high and you should be selling, they are generally referencing ANY and ALL Selling strategies

If not, and they are referring to spread strategies such as credit put spreads for example, won't the higher premium earned from the sale of an option with a high IV be offset by the purchase of the long option which will presumably also have a high IV??

Any and All Selling of Options. Credit put spreads offer higher premiums collected and Debit put spreads offer a lower entry purchase price (Debit) per play.

Also, if you have the view that the IV of an option should be lower than what it is trading at, how would you act on this without having to sell the option naked?

Credit Spreads, Non-Directional Calendar Spreads, Collars, etc... there are tons of combinations you really have to pick one you are comfortable with the risk profiles.

An example is this... I believe that a stock is going to stay around $11 and so I decide to sell a 9 (IV 84.32)/10 (IV 78.20) credit put spread. If I think that IV is going to be around 60... I guess I would try sell the 10 put as it is buy the 9 put for less, but in reality how would this work if I can only buy at what the market makers are selling at?

Ahh the market makers, somtimes yes getting the fills at a Net Credit sometimes can be difficult. SO some days you have to split the Bid/Ask and wait, modify, and play to get the best fills.

Therefore, is there actually a difference in selling IC's in high or low volatility periods if any extra premium earned or lost is simply offset when the second option is bought/sold?

IS there a difference,

yep it's in the returns from higher returns (AAPL JUL 1.83 Net Credit on 300/290/210/200 IC) on the premiums/strike on individual stocks and the higher premiums on index(s) are the same but spaced further OTM.