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Hello Duc,I just wanted to flesh out some observations about how the options market trades in Australia in addition to my broader comment about IV and HV.Volatility crush can be deadly when long a call, probably more so for positions entered ATM, then OTM, and to some extent ITM (but this can vary a lot depending on how deep ITM you enter).Sure, you may see a bullish stock rally up, then pull back sharply in a counter trend, and then resume the bullish trend after 1-4 counter trend days. With sharp pull backs, the IV can swing up substantially increasing the premium in long calls.Interestingly, often it is the ATM, and slightly above and below calls (time to expiry is also a factor) in this case that often spike up in value as IV swings up in a pull back (not always though). What often happens is a stock pulls back after a bullish drive, somtimes up to half the range of the last drive more or less, then reverses and continue the next bullish leg up. Some stock traders buy into this kind of pull back - the really good ones get good at picking their entry near the pivot low, and aim to enter a share position as near to the pivot as possible. An options trader has a more difficult task, and may also have a good technical skill here, but there is an added layer of consideration understanding IV in the timing of a straight long call entry. This includes factoring all the relevant Greeks including IV in terms of anticipated ranges of direction, magnitude and time.Sometimes a good options player can get set at a better entry price in the option they have identified with the best risk to reward characteristics balanced with probability for success depending on their overall system choices: (For example, some traders look for 30% correct positions, but look for positive expectancy from a high enough percentage of outlier winners to derive an overall profitable system. Others may look for higher percentage correct trades – maybe 50% or more, but with less risk, and lower rewards on winning trades than the more risky outlier system, but aim to make a profit from having a percentage edge biased to the winning trades).Hence, on the reversal day the IV may spike well up augmenting the premium significantly. One choice is to consider a spread – bull puts, bull calls, ratio back spread if expecting a strong move and there is a sufficient skew, or even some diagonal spreads depending on your technical outlook. If considering a long call on the other hand, it may pay to wait 1-4 days for IV to drop to an acceptable level. If the underlying shoots up 2 days, then crawls for another 2 days with inside days, or slight pull back days, you may find the price of the desired option actually falls below the available entry price on the reversal day. So yes Duc, IV crush can happen quite quickly. Sometimes it pays to sell this in a spread (especially if you can get a good skew in our favour and make IV work for you!).Variables involved are the strike price (ATM, OTM, ITM) and expiry chosen (current month, one month out, 2 months out etc), and the duration of the trade. For shorter term trades, the entry day may be the next one after the reversal day for instance, while longer trades, you may get a better entry on the next pull back, and maybe a day or two after that – this requires experience in both T/A and options trading to evaluate – hence it is in a way an art. Specifically dealing with straight calls, if the trader’s view is that the underlying is likely to scream up, then a consideration may be to wear the volatility and accept the crush, or maybe move more to ATM to ITM positions in the current month for short sharp moves – although a good OTM position may have the best risk to reward parameters for really big moves in short time frames – there are a lot of variables to consider here, hence having a good modelling tool is vital in my opinion. But this is highly risky, and not the way I tend to trade. I prefer a bit more time if possible in the option, looking for more than 30 days time left in the option for when I exit – but this is a personal preference.I found that trading the current month was dangerous when I got it wrong, and didn’t have the time to get it right, even when my T/A was right in the long term, the theta decay can really hurt short term positions, hence looking for more time although it reduces the percentage returns in risk to reward terms, it also really reduces the losses when you get it wrong, or more importantly allows you to hang through temporary moves against you (counter trends) long enough to reap profits when the main trend resumes (but you have to know enough about the way markets trend to do this). This presumes a longer term approach, where a trade may last 2 weeks, a month, or even 3 months.Please note that I’m focussing on bullish plays here with straight calls. This is just one approach, since both Duc and Lismore seemed to focus on this strategy. But please be aware that playing straight puts works almost in reverse to playing straight calls, since the IV tends to fall on a bullish counter trend to a bearish trend. But this is hopefully food for thought for straight options plays – there is a lot just to this, let alone dealing with spread characteristics.RegardsMagdoranP.S. Glad this helped Lismore – do read through the various threads on this site on options, you can learn a lot here. Especially look up all the threads Wayne and Margaret have commented on, and others like Mofra amongst others who have options knowledge. I suspect many of your key questions may be answered in these discourses.
Hello Duc,
I just wanted to flesh out some observations about how the options market trades in Australia in addition to my broader comment about IV and HV.
Volatility crush can be deadly when long a call, probably more so for positions entered ATM, then OTM, and to some extent ITM (but this can vary a lot depending on how deep ITM you enter).
Sure, you may see a bullish stock rally up, then pull back sharply in a counter trend, and then resume the bullish trend after 1-4 counter trend days. With sharp pull backs, the IV can swing up substantially increasing the premium in long calls.
Interestingly, often it is the ATM, and slightly above and below calls (time to expiry is also a factor) in this case that often spike up in value as IV swings up in a pull back (not always though).
What often happens is a stock pulls back after a bullish drive, somtimes up to half the range of the last drive more or less, then reverses and continue the next bullish leg up.
Some stock traders buy into this kind of pull back - the really good ones get good at picking their entry near the pivot low, and aim to enter a share position as near to the pivot as possible.
An options trader has a more difficult task, and may also have a good technical skill here, but there is an added layer of consideration understanding IV in the timing of a straight long call entry. This includes factoring all the relevant Greeks including IV in terms of anticipated ranges of direction, magnitude and time.
Sometimes a good options player can get set at a better entry price in the option they have identified with the best risk to reward characteristics balanced with probability for success depending on their overall system choices:
(For example, some traders look for 30% correct positions, but look for positive expectancy from a high enough percentage of outlier winners to derive an overall profitable system. Others may look for higher percentage correct trades – maybe 50% or more, but with less risk, and lower rewards on winning trades than the more risky outlier system, but aim to make a profit from having a percentage edge biased to the winning trades).
Hence, on the reversal day the IV may spike well up augmenting the premium significantly. One choice is to consider a spread – bull puts, bull calls, ratio back spread if expecting a strong move and there is a sufficient skew, or even some diagonal spreads depending on your technical outlook. If considering a long call on the other hand, it may pay to wait 1-4 days for IV to drop to an acceptable level. If the underlying shoots up 2 days, then crawls for another 2 days with inside days, or slight pull back days, you may find the price of the desired option actually falls below the available entry price on the reversal day.
So yes Duc, IV crush can happen quite quickly. Sometimes it pays to sell this in a spread (especially if you can get a good skew in our favour and make IV work for you!).
Variables involved are the strike price (ATM, OTM, ITM) and expiry chosen (current month, one month out, 2 months out etc), and the duration of the trade. For shorter term trades, the entry day may be the next one after the reversal day for instance, while longer trades, you may get a better entry on the next pull back, and maybe a day or two after that – this requires experience in both T/A and options trading to evaluate – hence it is in a way an art.
Specifically dealing with straight calls, if the trader’s view is that the underlying is likely to scream up, then a consideration may be to wear the volatility and accept the crush, or maybe move more to ATM to ITM positions in the current month for short sharp moves – although a good OTM position may have the best risk to reward parameters for really big moves in short time frames – there are a lot of variables to consider here, hence having a good modelling tool is vital in my opinion. But this is highly risky, and not the way I tend to trade. I prefer a bit more time if possible in the option, looking for more than 30 days time left in the option for when I exit – but this is a personal preference.
I found that trading the current month was dangerous when I got it wrong, and didn’t have the time to get it right, even when my T/A was right in the long term, the theta decay can really hurt short term positions, hence looking for more time although it reduces the percentage returns in risk to reward terms, it also really reduces the losses when you get it wrong, or more importantly allows you to hang through temporary moves against you (counter trends) long enough to reap profits when the main trend resumes (but you have to know enough about the way markets trend to do this). This presumes a longer term approach, where a trade may last 2 weeks, a month, or even 3 months.
Please note that I’m focussing on bullish plays here with straight calls. This is just one approach, since both Duc and Lismore seemed to focus on this strategy. But please be aware that playing straight puts works almost in reverse to playing straight calls, since the IV tends to fall on a bullish counter trend to a bearish trend. But this is hopefully food for thought for straight options plays – there is a lot just to this, let alone dealing with spread characteristics.
Regards
Magdoran
P.S. Glad this helped Lismore – do read through the various threads on this site on options, you can learn a lot here. Especially look up all the threads Wayne and Margaret have commented on, and others like Mofra amongst others who have options knowledge. I suspect many of your key questions may be answered in these discourses.
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