Liberal Forum

LowIQTrash » Today, 11:38 am » wrote: ↑

Today, 11:38 am

No, I am only holding short positions against gold miners, gold, and At&T stock. Those are less than halfway to their bottoming point and have much more to fall. 

The others fell much harder in the selloff and while there is still room to fall, I calculated the gains and determined it wasn’t worth it due to something called “IV compression.”

Let’s say you buy a call option on a stock currently at 100, that normally has an IV (implied volatility) of 30%.

The stock surges to $120. You calculate the likely next topping point at $130. The question is do you hold? The answer isn’t that simple. 

Because the stock moved unexpectedly (unexpected by the market’s views, not yours), the IV surges to 65%. This IV expansion is basically a “bonus” to the gains you already made. 

If you choose to hold until $130, yes the additional price movement will increase the value of your calls, but you deal with the risk that the IV by then will have settled to its normal baseline of 30%.

Your “IV expansion” bonus gets wiped out. You also continue to hold the risk that the stock tops lower than your $130 estimate. 

Many of the options I sold have downside left, but the IVs almost doubled. This is a 2-3 standard deviation event (very rare) and I determined it wasn’t worth it, because now I not ONLY have to deal with the risk that there is a sudden, frenzied rally in the stock, but the IV gets crushed back down. That would wipe out at least half the gains. 

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2 of the put options I bought went up 217% and 312% respectively. Before I bought those, I estimated I could net around 270% and 290% respectively. Just a few inches away. 

My target has been almost reached even before the price point converged to the intended destination, and I determined the headache of worrying about a sudden, unexpected rally wasn’t worth losing sleep. 

“It is better to sleep well than eat well”
 
On the other hand, gold miners and gold fell much more slowly and there is significantly more downside ahead. So I am not afraid to hold those for longer.