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CATEGORY OF DAYS FOR OPTION SELLERS
This thread is about how premiums behave in different setups. Though identifying them early takes years of practice, being mindful of what's happening in the present can give us an edge. So we can be better prepared with our strategies.(1/n)
This thread is about how premiums behave in different setups. Though identifying them early takes years of practice, being mindful of what's happening in the present can give us an edge. So we can be better prepared with our strategies.(1/n)
1) Gentle decay in premiums/ less delta moves
Such days are pure delight for option sellers. The adjustment cost is less because of less delta moves, so vega realisation is more. Usually such days are plentiful when Vix is below 15. (2/n)
Such days are pure delight for option sellers. The adjustment cost is less because of less delta moves, so vega realisation is more. Usually such days are plentiful when Vix is below 15. (2/n)
2) Decay with High delta moves
Such days are common when Vix is high. Since delta moves are more, vega realisation is less because of high adjustment cost. Those who don't adjust their positions usually miss out on it's profit potential. (3/n)
Such days are common when Vix is high. Since delta moves are more, vega realisation is less because of high adjustment cost. Those who don't adjust their positions usually miss out on it's profit potential. (3/n)
3) Rapid rise & fall of Premiums
This situation is when volatility is relatively high in the markets, with dominant SL hunting. Compulsive straddle sellers usually get exhausted during such days & those in the habit of scalping or selling when IVs rise, make some profit. (4/n)
This situation is when volatility is relatively high in the markets, with dominant SL hunting. Compulsive straddle sellers usually get exhausted during such days & those in the habit of scalping or selling when IVs rise, make some profit. (4/n)
4) Rise in premiums with High delta moves
This is the most dangerous scenario for any kind of option seller. If caught in such move with no decent SL in place, can lead to huge drawdowns. In such times it's important to skew your strategies & ride the trend. (5/n)
This is the most dangerous scenario for any kind of option seller. If caught in such move with no decent SL in place, can lead to huge drawdowns. In such times it's important to skew your strategies & ride the trend. (5/n)
5) No decay & No delta moves
Such days usually confuse the retailers, as the decay stops for a while. These are typical days when market is waiting for an event to unfold. What may follow after the event is vol crush but with high delta moves (combination of 2 & 3).(6/n)
Such days usually confuse the retailers, as the decay stops for a while. These are typical days when market is waiting for an event to unfold. What may follow after the event is vol crush but with high delta moves (combination of 2 & 3).(6/n)
Since there are so many variations in how premiums behave, no single strategy works all the time. So an option seller needs to have different strategies in his armoury to profit from different scenarios. There are some categories like 3&5, where making profit would be tough.(7/n)
Strategies that can be used:
1) Straddle, Strangle, Ratio spreads, Ironfly
2) Straddle/Ironfly (High adjustment), Ratio spreads, Credit spreads
3) Ratio spreads, Straddle/Strangle scalping
4) Ratio spreads, Credit spreads
5) Let the event unfold & act accordingly.(8/n)
1) Straddle, Strangle, Ratio spreads, Ironfly
2) Straddle/Ironfly (High adjustment), Ratio spreads, Credit spreads
3) Ratio spreads, Straddle/Strangle scalping
4) Ratio spreads, Credit spreads
5) Let the event unfold & act accordingly.(8/n)
Aim of this thread was to make new/struggling option sellers realise that theta decay is not always consistent. There are variety of skill sets like adjustment, execution, strategy selection, following volatility which is required to make decent money through option selling.(9/n)
