IF, and I mean a big IF, this is the start of some volatility than we are about to enter the BEST type of market for options.
There is one Greek that will absolutely make trades quicker, more manageable and less of a binary decision: up or down. In fact, this is where
60 days duration truly becomes the "sweet" spot and sometimes, even 90 days.
First a primer on the Greeks:
No, not Sorority Greeks. The options greeks.
We are only going to focus on GAMMA. Ok, really simple: Gamma is ACCELRATION. I've used this in live sessions but here it is again: if you imagine an option is a car, and Delta is the speed of the car, then GAMMA is the ACCELERATION. On large move days, GAMMA makes the DELTA change dramatically.
IF this is a market change and we get more volatility, then here's why I love it:
Big UP days = BUY PUTS and SELL CALLS
Big DOWN days = SELL PUTS and BUY CALLS
Example: KRE today. Because of the big down day, we could sell/close out puts for a profit and then on a big up day, buy them back cheaper. Rinse and repeat.
Volatility gives me choices to enter and exit contracts much quicker. Sort of like scalping for gains.
Instead of the trade being binary, I will now have the ability to trade in and out of contracts IF we have some volatility.
If the market starts going down, GREAT. Because the market does not go straight down, on rally days I can buy PUTS and then sell them on down days for a gain, DUE TO GAMMA. Inversely, I can buy CALLS on down days and sell them on up days for an inflated value, due to GAMMA.
GAMMA exaggerates the price of an option because the way an option price is calculated; when an option price is calculated, the formula does not take into account that the current conditions are temporary. It treats the Greeks as if they will last through the end of the contract. Thats why you get spikes in options prices, and dives, on large move days.
Structurally, I am doing this:
Reducing position sizing to half of what I want to own. If I own calls on JETS and a day like this happens, I am buying the other half to lower cost. This will be very important for when the market rallies.
+20 to +25% profit on LARGE MOVE DAYS only, and I am out half, and will reload the other half when the market reverses.
This style is like covered calls for options. Reducing the basis as the market moves up and down. BTW - if you have common stocks, I would be absolutely writing covered calls. Ask me how and I will explain. And no, I don't write covered calls with the intent of holding.
That's it. Quick and easy explanation. We could be entering a market that I absolutely love. Other than my children and my God, I don't love much. But volatile markets I do. Last note: I am not talking about IV here. I am talking about moves that are greater than .75% (for now anyway).
Buckle up for some fun and REAL TRADING. Hopefully.