The Siren’s Call of Long Volatility

The call of long volatility is often referred to as a Siren’s Song.  The unwary investor will dash themselves on the rocks of time decay and rotting deltas.  When I put it that way it sounds like a no-win situation to buy options at any point in time.  After all they decay every day since that is what Black Scholes Greeks says on the Theta risk line.  There is absolutely no reason to buy options since they decay and we all know decay happens every day.  When I co-host the Options Insider Radio Networks The Option Block we refer to it as the “dark side” of option trading.  One of the old guest hosts would famously say “options are meant to be sold, or not sold.”  And that is straight from the Don and he wants none of that Long Volatility.

Theta, Option Decay, is not constant

The thing with options is that everything is relative.  Option Pit created a whole course based on Relative Option Pricing, The Platinum Course, and it is very popular and one of our best sellers.  Traders need to understand that Black-Scholes assumes all inputs remain fixed to generate a Greek.  If the inputs to the model stay fixed, Black Scholes does a great job of estimating performance and the Greek Risk is accurate.  Option inputs are the like the weather in Maine, they change every day so there is that problem.  You want to be a good option trader, trade the inputs that create the Greeks.  If the inputs move, the Theta that was there goes on layaway, paid back at a date sometime in the future.  If you can just…hold….on.

CSCO IV getting low with earnings coming out

Livevol Charts

Lower Implied Volatility via Edge Hunter

EdgeHunter Trading Sheets are here

Low VIX is not low forever

VIX is just heading into Zone 1 (9-12%) and this has been a problem area  for SPX to stay in since September.  The once thing that low volatility delivers is the Greek Gamma.  Low Volatility at long time frames produce relatively high gamma that only happens a few times a year or all year in 2017.  We are going into the next earnings cycle with very low option prices relative to the potential move.  Options are delivering more gamma than normal.

Low VIX is not low name equity volatility

Index IV in the SPX can get real cheap ATM, down to 7% or less.  Equity IV in select issues is cheap too so separate individual name volatility from SPX.  I like long equity volatility In XLV type stocks as long volatility is cheap right now but won’t be forever. Stocks can move but the market can sit.

Disclosure: Long vol in multiple names

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