Three Reasons to Sell Implied Volatility This Week: Holidays, Holidays, Holidays
12/22/2015 7:00 am EST
Fred Oltarsh, at Options Strategy Network, shares two goals he feels are the keys to successful selling of options and outlines why he believes that—for those confident they can attain both—holiday selling can often be successful.
The title of the story appears to indicate that I am a proponent of selling options for income. The key to successful selling of options is getting good value from numerous perspectives and having a risk management style which provides for position liquidation at reasonable levels. If one is confident that they can attain both goals, holiday selling can often be successful. The caveat, as always with selling options, is managing the risk as well as possible (be prepared to take losses at predetermined levels).
Whether one is trading stocks or futures contracts, an analysis of historical and implied volatility is essential. If one is fortunate enough to have a strong market bias, selling premium can be a very comfortable strategy. If, however, there is no bias, analyzing implied volatility becomes even more essential. Trading in a liquid product is also essential because slippage can be the demise of any trader over a long period of time. The chart below shows historical and implied volatilities for certain stocks and futures contracts going into Monday morning. They can be used as a guide as information to look for. Everyone has stocks and futures that they are most comfortable with, so gleaning the same information is an important start for developing an options trading strategy.
Once one has an opinion on the direction of the movement of the underlying they can choose an options strategy which provides the appropriate Delta, Vega, and Theta to meet their trading purposes. Be sure to take into account special announcements that could affect the underlying contract. With two short weeks of trading ahead, if one can solidify a trading plan now, the chances are that they will initiate a successful short volatility position. Remember trading options from the short side involves a significant amount of risk and one must be well capitalized, disciplined, and insightful to be successful.
Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is no way guaranteed. Past results are not indicative of future results.
By Fred Oltarsh, Proprietary Trader and Editor, Options Strategy Network