HIGH VOLATILITY SCENARIOS
Volatility can rise in different ways. Below are few scenarios which i remain mindful of during market.
1) Small delta move, rise in IV
This is not usually a dangerous scenario because you have received more premiums, though MTM is momentarily -ve.
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Volatility can rise in different ways. Below are few scenarios which i remain mindful of during market.
1) Small delta move, rise in IV
This is not usually a dangerous scenario because you have received more premiums, though MTM is momentarily -ve.
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2) High delta move, rise in IV
Major damage happens in such scenario in non-directional & the loss also becomes irrecoverable. Usually this scenario happens in a persistent low realisation environment where adjustment cost is high.
Good opportunities come after this move.
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Major damage happens in such scenario in non-directional & the loss also becomes irrecoverable. Usually this scenario happens in a persistent low realisation environment where adjustment cost is high.
Good opportunities come after this move.
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3) High delta move, IV remains stagnant/less decay
This is a very dangerous scenario as due to high index moves the adjustment cost has increased but because IV didn't rise, there's no addition to the premiums you've pocketed.
Gap openings occur usually after such scenarios.
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This is a very dangerous scenario as due to high index moves the adjustment cost has increased but because IV didn't rise, there's no addition to the premiums you've pocketed.
Gap openings occur usually after such scenarios.
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Because option premiums are affected by both delta & IV, it becomes very important to know the behaviour of them together. This can help us decide whether to trade in directional or non-directional strategies or avoid them altogether.
Clarity comes when you practice it everyday.
Clarity comes when you practice it everyday.
Original thread posted few years back.
https://twitter.com/SarangSood/status/1290167579659481090?t=Z41GWtFgrTgJV6gppiln7g&s=19
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