One of the main reasons we are premium sell is that although prices are not necessarily Mean Reverting Implied Volatility (IV) is. What gets in the way of making money is that prices are not always cooperative. A graph of the SPY and the VIX was displayed. The graph showed that even when you sold high IV, and were right about it being mean reverting, a large up market move can make profits disappear.
A variance swap is a pure way to trade volatility but this type of non standard contract has its notional value determined by the parties. It is an over-the-counter product that is great for hedge funds but which isn’t available to retail traders. There is an alternative. A table listed different volatility products in which a retail trader can replicate a variance swap. The VIX and the VXX both have options but the VIX is a better choice because the VXX’s structure causes it to trade without a particular “mean” value.
A table displayed how to get long or short future realized volatility against the current IV level by either selling puts or calls. The table included the current VIX price, 1-year mean, the option strategy and when the trade was profitable. These strategies are not affected by market price action. Because of the chance of a volatility spike on a large down move in the market we will by a far out-of-the-money (OTM) Call.
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the valuable takeaways and information on how to trade market Volatility and minimize the impact of market direction.
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