If you use TOS, or watch tastytrade, high implied volatility would be based on the Implied Volatility Rank or Percentile being at a very high level, say over 75 or 80. This compares Implied Volatility level for an underlying against itself, say over the last 12 months, or some other period.
The delta for the spread is about 0.5 lower then the naked option. If you use 1625 and 1350 that brings the delta of the spread to 3.15 which is closer to the 3.21 of the naked option.
The higher delta spread does better than the lower delta spread but still worse than the naked option. I think part of the reason the spreads are doing worse is that the drop this time is less. We haven't dropped 228 in 7 days.
Here is a study I did using 12/29/15 for the date of entering positions. That would have been the worst day to add positions. A 220 drop in 22 days (1/20/15).
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The ES 6.00 delta short and two 1.50 delta long spreads give you black swan coverage and a higher ROI under normal times. For the last 3 weeks they would have given you worse coverage and ROI but you didn't hit margin call.
The spreads cover a black swan event but don't do better in smaller, slower drops.
I will probably never sell options naked. The markets right now have too great a chance of having black swan events. If you can exit the positions at 50% drop in 30 days held, the spreads have a far better ROI.
We can all see that the stock market hasn't been behaving well over the past few weeks. Given that
1. It's impossible to predict the bottom of any market
2. It's very difficult to predict if this is going to be a long-term trend or just some short-term pain
Are there any particular signs, signals, or particular bits of news that you all look for before you believe that it's a good time to begin pursuing options again? Are you looking at volatility? Overall trends? What particular pieces of fundamental data make of your list that would get you to say
"hey, this particular market move is nearing its end and it's now time to explore small positions again."
The reason I ask this is that there's just so much noise out there, so many people saying the "end is nigh" and others saying "stay the course" that it makes it nearly impossible for someone to get a grip on what really is happening.
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ES is a very hard one to predict because is has so many variables in it. And now there is a 96% correlation between oil and ES.
NG has far less things to look at, US temp vs normal forecasts, inventory, production, cost of coal. etc.
So many times over the years I found a trade that worked well and I then say to myself I can do this for years and do well. But usually after a couple of years it no longer works and you have to find something else.
So I am saying I don't have a clue which way ES is moving this year.
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