Income from Options Weekly, Nov 27


In today’s video Orbit we talk trading in a low VIX environment and how realized vol vs implied vol tends to work at low IV vs how it works at high IV and how that can help with strike selection. In a nutshell, when IV is low the chances of a stock, or the market going outside the expected move is more often, however, it is much less likely to do so by a large magnitude. At high IV levels the chances of going outside the expected move are less, however, the magnitude of those moves outside the expected move will tend to be of large magnitudes. This scenario is both simple math but also is because of the gamma backdrop. At low vol levels the market is loaded with long gamma and moves get sold into or bought and act as a governor on large moves. In high IV conditions, the opposite happens, moves get chased, exacerbating moves in either direction.

We currently find ourselves in a VERY low IV environment, which means much smaller expected moves, and much smaller actual moves. Therefore strike selection on option sales for income need to take the factor above into account, and account for moves outside the expected move more often, but the magnitude of those moves more likely being less. We also discuss what would most likely need to happen for these low IV conditions to change:

Hope you enjoy:

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Based upon publicly available information derived from option prices at the time of publishing. Intended for informational and educational purposes only and is not any form of recommendation of a particular security, strategy or to open a brokerage account. Options price data and past performance data should not be construed as being indicative of future results and do not guarantee future results or returns. Options involve risk, including exposing investors to potentially significant losses and are therefore not suitable for all investors. Option spreads involve additional risks that should be fully understood prior to investing. Securities trading is offered through Options AI Financial, LLC, member FINRA and SIPC

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