Find out the most important options trading takeaways and lessons to improve your probability of success!
See more videos from the Market Measures Series: http://ow.ly/GBCqz
Now that the end of the year is upon us, we thought it would be a good idea to take a step back and review some of the most popular Market Measures of 2014. Not only are these some of the most viewed segments, they also highlight a number of our main trading strategies. Tom Sosnoff and Tony Battista will be covering why we sell premium, two of our favorite strategies (Strangles and Straddles) and how we can defend these strategies by rolling the trade.
First, the guys look at a great study of why we sell premium instead of buying it. Tom and Tony explain how Implied Volatility (IV) is often overstated. This provides selling premium with an edge over buying it. By this we mean that we are able to sell premium that is overpriced compared to the move that the underlying will actually see.
Next, Tom and Tony look at two very popular strategies, Strangles and Straddles. They compare the two using a number of metrics including total profit and return on capital. This is very important because we always want to use our capital as efficiently as possible. The guys take the study one step further and show the results of both strategies when they are placed in High IV compared with their results in Low IV.
Finally, Tom and Tony cover how they would defend a Strangle that has been tested. Traditional position management would suggest defending the tested side of a position. However, we have found that it is more beneficial to roll the untested side in order to bring in additional credit and extend our breakeven points. The guys show this by comparing 4 different rolling strategies and proving that rolling the untested side is the most beneficial.
It's not always easy to take the measure of a market, whether you've been trading for a day or a decade. On this segment we look under the hood—options probabilities, volatility, trading strategies, futures, you name it—so your trading mechanics are built to manage more winners.
You can watch a new Market Measures episode live and check out all previous episodes everyday at http://ow.ly/EoyGW!
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7:11 "Buying strangles comes in at 17%, which is exactly where it's supposed to be." But why? If you just said you have 70% POP then wouldn't it be 30% buying and 70% selling? Is that because of the fluctuating IVR, or how does 70% become 83% for selling strangles?
The difference is because POP is based on implied volatility and implied volatility almost always overstates what turns out to be the realized volatility. Options are just like insurance. Think of it like selling hurricane insurance on your home. For example, say you have a $100K house and the probability of a hurricane hitting the house is 30% a year (incredibly high). If insurance was a zero sum game then you'd have to pay me $30K each year to insure your house. Except insurance and options isn't a zero sum game, so I'm going to price the insurance/options higher than $30K so that I earn a profit. So to analogize to the video, I'm going to charge you $43K a year to insure your house against hurricanes even though in a zero sum game I should be only charging you $30K. However, when you're selling options you do have to recognize that a certain percentage of the time the hurricane will hit and you will have to pay out a significant amount of money on the insurance/option.
+Johan Benade Hi, Johan: When we roll the untested side, we will leave the tested side alone. This additional credit will widen our breakeven and we will look for the underlying to revert lower so that the entire position can be closed for a win. Make sense?
Hi, Onix: IV is readily available on both dough and the TOS platforms. Rolling up refers to moving the untested side of a two sided spread (Iron Condor, Strangle) closer to the money in order to collect a larger amount of credit. This is done by closing your original leg and selling another option closer to the money. Hope this helps - thanks for commenting!
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