What do I mean when I say I want to go long volatility? Here it is, in a nutshell.
Basically, I am planning to put on a position whereby I have positive gamma. In other words, I get longer if the stock rallies, and shorter if it declines. In a simple example, let's look at the OIH, which is right near $140. Let's say I purchase April 140 calls and short stock on a 2:1 ratio. If OIH tanks, I get short by virtue of my short stock, and if it goes higher, I get longer by virtue of my extra calls.
Sounds great, but alas, it costs me money each day in the form of the daily decay of the calls I own. So what do I do? Well, I fade both strength and weakness from here, and then either flip the stock if it turns the other way, or keep fading if it keeps going.
Now if I put on such a trade, my assessment is that I will be able to "flip" the stock well enough between now and option expiration in order to pay for the decay of the options, and then some.
In general, I prefer the other side of the trade, shorting volatility, earning that time decay each day, and defending the position (hopefully) occasionally by purchasing strength and selling weakness. But there are spots and situations where i prefer the long volatility trade.
Such as these Exchange stocks right now.
So that is what I mean when I say I want to own volatility. It is a judgement that the stock itself will prove more volatile than the options price in.
3 comments:
Adam,
If OIH tanks, I get short by virtue of my short stock, and if it goes higher, I get longer by virtue of my extra calls.
Understood.
Stock falls: Delta of the stock is 1, whereas the delta for the call was initially near 0.5 falls as the stock moves downward and away from the strike price. Thus, your short makes more money than your loss on the calls.
Stock rises: Delta of the stock is 1, whereas the delta for the call was initially near 0.5 rises as the stock moves upward and away from the strike price. Thus, your calls make more more money than your loss on the short.
Sounds great, but alas, it costs me money each day in the form of the daily decay of the calls I own. So what do I do? Well, I fade both strength and weakness from here, and then either flip the stock if it turns the other way, or keep fading if it keeps going.
fade both strength and weakness? So when the stock rises, you fade (sell) calls? When the stock falls, do you buy calls?
flip the stock if it turns the other way? I am guessing Adam that you do you inertial adjustments to kept delta neutral by buying or selling calls, and then if the path reverses, you then buy or sell stock (flipping) to keep delta neutral?
I am sure that this is obvious stuff, but I just want to be sure that I am correctly following along. Or please correct me if I have erred.
Thank you for your help.
Kevin
Hey Kevin:
Yeah, that's basically what i meant. Except instead of selling the calls i was actually long, I meant i would fade with short stock. And if that trade "worked", I would buy the stock back on dips.
Or conversely if it kept going higher, i would short more to the extent that my calls allowed.
Now remember, this is just hypothetical.In real life I would maybe buy calls at a higher strike if it lifted, and keep shorting stock. MAybe, depends on the timing, et. al.
Great, thanks Adam!
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