Hi there again. I’m still trading, but have not posted a blog post since 2011!
Since then, some things have changed, and some have not.
I still consider every option trade a trade in volatility. I still do most of the old strategies that I used to do, but have added on some more.
I’ve archived all of my old posts and plan on posting regularly again. I’ll summarize my trading briefly here:
I started trading covered calls in 2003 when my friend Joseph told me about them. He came into my office and briefly explained his covered call strategy. I bought my first book on options trading from Amazon and read it immediately. I started selling calls against my long stock positions. I then read McMillan cover to cover twice, and then Natenberg. I then started trading options in many different strategies. I have read so many more books since then. The first two years were challenging with some wins but overall losses. Since 2004 I’ve doubled my initial trading account 2.5 times to date, 15 years later.
My philosophy; also what I call “my edge”:
I trade around the four things that I believe that I know to be true, and do not predict market direction (mostly)
- “Volatility is mean reverting”. When it’s high, it eventually goes down. When it’s low, it eventually goes back up. I use the ‘percentile of trailing 12 month implied volatility” to make these predictions. I buy IV when it’s below 20th percentile of trailing 12 months. IE: when it has been higher 80 percent of the time over the past 12 months. I sell volatility when it’s at least over the 50th percentile, but preferably when it’s in the 80th percentile or greater. I do this mostly on indices and ETFs to avoid ‘headline risk’.
- “Over long periods of time, markets tend to go up”. Over all periods of history (so far, to date), the stock market indices go up to new highs, always….!
- “Markets go up and down and not only in one direction”. Stocks and markets have up days, and they have down days along their course of the previous belief of ascending markets over long periods of time. This also applies to longer time frames than days. Weeks, months, etc.
- “Time goes on”. This one seems pretty simple. There is nothing we can do about this one. The calendar goes on, hour by hour, day by day and there’s nothing anyone can do about it.
So, taking these 4 truths into account: 1) I trade volatility to be mean reverting, selling high IV, buying low IV. 2) I take a long term outlook of a positive delta over long periods of time. 3) I scalp gamma and delta hedge positions to take advantage of up and down fluctuation. 4) I’m positive theta on many positions to take advantage of time decay.
If the above appeal to you as an option trader, please bookmark this site. My intention is to launch a podcast to discuss my strategy and discuss individual trades, and use this blog as an adjunct to encourage discussion through comments and spread my philosophy. I want to help all of you readers that have the same love and enthusiasm for derivatives trading that I do! I would also use the comments and a Facebook group to learn form the many smart people out there. Oh, and why not try to monetize both the blog and the podcast by selling advertising! I hope you’ll come back soon. Lawrence – The Vol Trader