Optionalysis: Writing Options Fraught With IV Rise Danger, But Risk/Reward Favourable


This is a post for Capital Mind Premium subscribers, sent on 02 May 2014.

You might think the Vix is high, at 33. Or that implied volatilities look very high. And that the index is likely to be seriously volatile after the 16th, when the election results are announced. But is there a play till then?

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  1. I’m taking the other side of this bet with a 6400-6900 strangle I bought today for a total cost of 279. As discussed in Google groups. Lets see how it goes.

    Vega is more than Theta now so its profitable if IV rises more than 1% every day (on average) for the next 5 days. Maybe the exit poll will remove uncertainty and dampen IV in which case maybe will hold position only till 13th (otherwise will hold till the 15th). Will have to take a call next week.

    • My trade is done :) It was a one week play, and I think the time value loss has been good and useful, but not great. I think you’re right in your approach now, but it’s a bit of a risk since now time decay is higher going closer to expiry.

      • Woot, I did not expect such quick profits on my position. The strangle has moved from 279 to 378 in one day! 35% return. The IVs have changed from 37.5 to 43-45 which is what I was hoping for.

        Win or lose, I wanted to track the IV numbers this time as they had been breathtaking in 2009 and I wanted to compare. The put and call IVs on 10% OTMs had peaked at 50% and 65% (1 day before results). Right now, this is where we are at:

        8th May: 6400 Put: 132, 6900 Call: 150 (Nifty 6657) IVs 37.5/38
        9th May: 6400 Put: 101, 6900 Call: 277 (Nifty 6859) IVs 42.7/45
        Theta is 3.5% per day

        Risk of losing quick is there if market reverses or IVs just decide to come down. Hard to know how long to hold the position now. I guess best case scenario is if we get close to 50% IV on Mon/Tues. Maybe that is the point to close the trade.

        • Very good move. I had short calls yesterday, I went long 6800 calls today on the open (since the future bounced off that long term 6700 support shown in the post) – and used the June call which had lower IVs and would lose less time over the weekend. That’s gone up 40% or so.

          It’ll be interesting to trade up the trend and see where the markets go on Tuesday. But yes, the strangle should continue to work if IVs keep moving up!

          • Nice trade!

            The strangle was worth 422 at close today. Closed the trade at ~50% gains.

            12th May: 6400 Put: 70, 6900 Call: 352 (Nifty 7014) IVs 46.47/47.44

            I thought about delta hedging by buying more puts, which would lock in the profits, while still playing for more IV and gamma. But, IVs seemed high enough at 47 so I didn’t go for it. Actually, I’m not sure why the IVs in your post are significantly lower. I’ve been using ICICI Direct’s IVs. I hope they calculate properly otherwise the IV numbers here will be useless and there may be more IV upside possible.

            It will be interesting to track how these options do for the rest of week.

  2. Strangle close: 396
    13th May: 6400 Put:35, 6900 Call: 361 (Nifty 7109) IVs 41.1/40

    We got the IV sucked out of the options based on the post poll survey releases, as usually happens post event announcement. Although, the actual event is on Friday so we could have IVs go back up. Its been a two part event situation and one gets the feeling that the first part event might have been the main play in the context of the strangle.

    Nonetheless, I was wondering about a rinse-repeat trade for the next two days with a 6900/7400 strangle. Decided against it for the moment…
    13th May: 6900 Put:124, 7400 Call: 101, IVs 35.2/34.8

    • Great stuff mate. Interesting to see how it’ll play out Wed and Thu. Unless there’s some adverse news, IVs should stay low, no? As you said, the big thing is done already. Save for surprises, IVs should stabilize into the event…

      • Strangle close: 411
        14th May: 6400 Put: 38, 6900 Call: 373, IVs 43.5/43.5

        Strange2 close: 254 (up from 225)
        14th May: 6900 Put: 136, 7400 Call: 118, IVs 38.7/38.7

        I thought IVs at 35 were cheap yesterday and today morning. I wasn’t able to trade today or else would have looked into strangle2. If it was a good buy in the morning. IVs have gone up 2-3 points today and could go up more tomorrow. Even if they don’t go up much and stabilize, they shouldn’t go down either so it was a fair trade to try. Now, I’ll just be a spectator. :)

          • Strangle close: 445
            15th May: 6400 Put: 50, 6900 Call: 395, IVs 49.88/47.44 (Nifty 7123)
            Strangle2 close: 289
            15th May: 6900 Put: 154, 7400 Call: 135, IVs 44/42.5

            So, rinse-repeat would indeed have been fun with a 28% return in less than 2 days, which is pretty good if one considers that the market is flat over the trade period of last two days. If we had got a directional move as before the first part event, this strangle might have done even better.

            Well, now IVs might peak in the morning before the poll results announcements and then get sucked out after the announcement, with or without a directional move.

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