From the prospective of an options trader, one should know the basic categories of being a net premium seller vs a net premium buyer. Each category clearly has is pros and cons, but it more or less could debatably come down to one’s volatility forecast. It is popular, for example, to fade the implied volatility pump pre-earnings; for uncertainty rules around catalysts. Then as the event comes and goes implied volatility collapses and traders cover their short premium. The former is very dependent on a good risk reward ratio, forecasted IV crush, and underlying asset…but it is all based around volatility.
The five-year (#Fibonacci) average of the VIX (252 trading days in a year x 5= 1260) over 1260 periods is around $26.00. This is roughly 60% from current levels, but it is important to remember that when the VIX decides to move, it really moves. The last time we were at a $26 VIX was in June 2012.
Large trades in the VIX seem to confirm this upside potential. Big players were trading the upside call skew in November, more specifically, the NOV 23/28 1×2 call spread. This is taking advantage of the upside bid in the VIX calls, for this trade takes in a small credit by selling the short strike of a long call spread 2x. It profits big in-between the strikes, but profits start to trail off after 28, should the VIX really explode by NOV VIX expiration.
Equity option strategies that would most likely profit from this kind of VIX scenario include the loved & hated gamma scalp. While Greeks are obviously important here, the concept is really simple. Long straddles fluctuate, benefiting from volatility, then as one side of the straddle profits, traders sell or buy stock to neutralize their deltas as the straddle becomes delta bias toward the winning side. As the stock moves up and down, small profits are made via scalps; offsetting time decay. The challenging part of this strategy is when to neutralize said delta along with scanning for a good underlying. Scanning for a stock with not too much IV, but with just enough bang is what most find challenging, for if volatility or the stock does not move, this strategy is crushed.
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