Ryan & Beef

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Was There Really Less Opportunity Last Year?

Ryan & Beef

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
It wasn't as bad as you think

In hindsight, on a nominal basis, 2017 was one of the least volatile years on record. It was an especially frustrating time for traders whose strategies centered around selling option premium. “This is insane” and “these short VIX positions are going to blow up!” were constant murmurs from the trading desk each month.

The common perception was that an increase in volatility was just around the corner. So, with the potential for risk to flare up at any moment, opening an option chain each day and seeing less than juicy option prices didn’t present much of an opportunity.

But, were we missing potential trades by not looking under the surface, focusing our attention solely on implied volatility?

On today's show, Frank joins Ryan and Beef for a special research piece.

The guys explain the importance of realized volatility relative to implied volatility. If our edge is in selling overstated volatility via option premium, it matters how the underlying security moves. Essentially our assumption is that the current levels of implied volatility are overstating the future levels of realized volatility.

If we focus on what our inherent assumption is when we’re selling “high” implied volatility, our bet is essentially that future realized volatility will be lower than current implied.

To analyze this, the guys take a look at the spread between average implied volatility and realized volatility from 2004 to 2017 to determine if 2017 presented any less of an opportunity for selling option premium.

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