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Watch full video ↗In a low volatility environment, selling iron condors or other credit spreads may yield smaller premiums. However, the non-linear impact of volatility on option prices means that even small changes in volatility can significantly affect the value of the positions. Traders should consider adjusting their strategies or waiting for higher volatility to increase potential returns.
The speaker identifies PayPal as a candidate for selling a put option due to its volatility skew pointing towards the upside. The implied volatility is 45%, which is higher than the VIX, and the skew suggests the market perceives more risk on the upside. By selling the 42.5 put, the trader generates $2.74 for $600 of capital, leveraging the time decay (theta) as the option approaches expiration.
Lower volatility significantly reduces the theoretical value of options, as demonstrated by the example of the 745 SPY put. When volatility dropped from 20% to 15%, the put's value fell from $16.84 to $11.73, representing a 30% decline. This non-linear relationship highlights the disproportionate impact of volatility changes on option prices.
The speaker identifies high volatility products by comparing the IVX (volatility index) of individual stocks to the VIX. High volatility is indicated when the IVX is significantly higher than the VIX, as seen with SanDisk (S&DK) at 139% compared to the VIX. This approach allows traders to focus on stocks with higher implied volatility, which can offer more opportunities for generating theta through options selling.
The speaker emphasizes that trading is a professional job, comparable to other specialized fields like teaching or underwater welding, and acknowledges that some jobs may be more valuable or challenging. This insight highlights the perception of trading as a legitimate and demanding profession.
Low volatility reduces the theoretical value of options, as demonstrated by the example of the 745 SPY put. When volatility dropped from 20% to 15%, the put's value fell from $16.84 to $11.73, representing a 30% decline.
TakeawayTraders should be aware that low volatility can significantly reduce the value of their option positions, especially when selling premium strategies like iron condors.
The speaker does not make a directional prediction about PayPal's price movement but focuses on the volatility skew and market perception of risk. The skew indicates the market sees more risk on the upside, which influences the decision to sell a put option.
TakeawayThe speaker emphasizes that volatility skew, not directional movement, is the key factor in the trade decision.
The speaker describes a method of trading that involves screening for stocks with high volatility, liquidity, tight bid-ask spreads, and open interest. They emphasize that this is their personal approach and not a recommendation for others.
TakeawayThe speaker's approach focuses on identifying liquid, volatile assets with tight spreads and open interest, but it is not presented as a recommendation.