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Trading Defined and Undefined Risk Options in Low IV
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Trading Defined and Undefined Risk Options in Low IV

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Elite Member
Incline Village + NV or elsewhere in the world
Trading Experience: Intermediate
Platform: E*Trade, TOS, IB & T'wrks
Favorite Futures: Emini ES
Posts: 19 since Jan 2016
Thanks: 17 given, 11 received

Trading Defined and Undefined Risk Options in Low IV

I am trying to assess my options trading results and determine whether to continue defined risk (DR) options trading. After an eight month focus on selling premium (verticals, iron condors and a few butterflies) and some undefined risk (UR) trades, I have reached the conclusion that, at least in this low VIX environment, it is very hard to make money in DR trades (- $6 k in net trading losses, - $4 k in commissions, and -$1.1 k in fees) in my Tastyworks IRA account.

I have been following the TastyTrade game plan of focusing on stocks with high IV, 45 DTE, and trying to take profits around 50% of max profit. Additionally, for each stock, I studied the price chart for support and resistance levels to select strike prices, reviewed the Thomson Reuters Detailed Stock Reports for target prices and other insights, and assessed the market environment before entering the trades.

My trade results seem to match the PoP forecast of 50 - 60% chance of a profit. However, the losses realized 40 - 50% of the time far exceed the profits, even after rolling and other mitigation efforts. While some studies may have shown that actual volatility is less than the forecast volatility, so the actual PoP should be slightly higher than than the forecast, my results (over 150 trades) have been net negative despite the "exaggerated volatility".

While DR trading seems to be a futile effort, the UR trades (usually 80% PoP strike price with 60 - 90 DTE) in my larger investment account were profitable (all my past Google, Amazon, Apple, Tesla and Priceline naked put trades were successful). I understand the risk in naked put trades and only trade the stocks that I would want to own but at a price much lower than the current market. Also, I only have one or a couple of naked put trades at any time in case of a large market correction move.

I would truly appreciate some feedback from any veteran option traders about the potential for consistent profitability with DR trades in low and normal IV environments.



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