[Options] Balancing Prudence and Opportunity

Sean McLaughlin
March 10, 2020

Yesterday, $VIX printed the highest level we've seen since the financial crisis in 2008. That's a twelve year high.

It exceeded the "government shutdown" spike of 2011, the Chinese stock market scare of 2015, the 2016 election fear mongering, and the Brexit noise.

Editors note: The chart police (aka, JC) would like me to point out that this is a weekly chart and the last bar on this graph is not complete. The horror!

We can point to a couple big reasons why volatility is spiking (Coronavirus, oil crashing) and a few smaller ones (we're overdue, debt, whatever....). But none of that really matters. Only price pays, right @Alphatrends?

You come to All Star Options for options trade ideas. But you also come to ASO for responsible risk management and strategy selection. Here's my thoughts now (subject to change as new information presents itself) for the next few weeks.

This current level of volatility is likely to stick with us for at least another month. And it is both a blessing and a curse.

It's a curse because it is extremely hard to put on any directional bets in this tape. Whipsaws in both directions are neck-breaking right now. Worse, you could be dead right, but a drastic shift in the gamma or vega of your trade might have an unintended consequence. And these overnight gaps? Fugghedaboudit.

On the flip side, this is the type of volatility that regular options sellers dream about. If you're somebody who likes to regularly put on Iron Condors and Strangles -- you've got to be LOVING this environment. Of course, I don't mean to insinuate that it's easy to be an options seller right now. Definitely not. It simply means that this market is giving you a lot of room to be wrong and still make money.

For those of you willing to wade into these choppy waters to seek out opportunity, I implore you to search for opportunities to sell premium. As long as $VIX is above 30, this will be our modus operandi around here. Whether you seek out delta-neutral trades or directional bets, be sure to leverage these high premiums in your favor via credit spreads of some kind.

These are the types of strategies I'm looking to put on in this environment:

  • Naked Puts
  • Strangles
  • Iron Condors
  • Bear Call Spreads
  • Bull Put Spreads.

Head to the All Star Charts Education zone and hit the options modules to learn about these strategies, how I enter these trades, and how I manage them.

Stay nimble, stay smart, stay small, and focus on edges.

~ @chicagosean

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