VRP

sharpetwo

The wheel on an index is a very different animal than the wheel on single names, and a much simpler to deal with at the first place. With SPY or QQQ, you do not carry idiosyncratic risk, and history has a strong bias: indexes go up. That alone makes it a better long-run play than wheeling Tesla, AMD, or whatever happens to be volatile this week. The real pain is almost always on the call side. Even when VRP looks attractive, it is usually driven by puts. That means you are getting paid well to take downside risk, but your call premium is skinny, and that is exactly where you get punished when the market rips higher. Two ways to manage it: 1/ Sell fewer calls than puts and overall give yourself breathing room on the upside. 2/ Or, if you must sell calls, consider financing them by buying further OTM calls. You cap your upside less brutally, and you avoid being short into a runaway tape. At the end of the day, indexes grind higher. Structuring your wheel so the call side does not choke your equity curve is the real edge. Good luck.

sharpetwo

This is the classic covered call trap: it feels like income until the underlying rips, and suddenly you are short a ton of upside. Rolling here is basically paying rent to stay in the house you already own. You are buying back a deeply ITM call (expensive) and re-selling further out and often cheaper than you wish. Therefore you end up lock in the loss on the short call and hope the new one earns it back. You are basically short the stock, while owning it or trying to get out of the contract you knowingly sign with the market. Fine. That can work, but in your case XLK is $40 above strike, you are not rolling, you are digging. Your choices are really just three: 1/ Take assignment: you sell at 230, pocket your premium, and move on. Painful, but clean. 2/ Buy back the call: expensive, but it frees your shares. You then decide if you still want XLK exposure at $270. Who knows, it may get to 300+ by the end of the year and all of that will just be a bad dream, or an expensive lesson. 3/ Do nothing: accept you capped your gains lose your shares, and take the lesson. Rolling here is not fixing anything, it is just kicking the can at a worse price. Covered calls are best written when vol is fat and you are okay losing the shares. If you are not okay, then you should not be writing them. For what it is worth, XLK has been on a strong run, implied vol is not extreme, and the VRP has thinned. This was never the time to be selling calls hand over fist at the first place, particularly in short expiries. Good luck.

sharpetwo

If you’re looking at GME post-earnings, the vol surface pretty much tells the story: 1/ ATM calls/puts are still rich and you can do the classic covered call juice here if you’re long stock. Not riskless, but you’re getting paid well above realized. 2/ Short strangles look tempting. Yes the skew isn’t screaming in either direction compared to what it was over the last 3 months but VRP is elevated across the near tenors. You’re basically renting out your balance sheet to speculators at a nice premium. Just remember, this is GME the ultimate meme stock. Mean reversion is not your friend when tails kick in. Size it small, treat it like a trade, not a paycheck. That said, you should be able to do it week in week out as long as conditions do not drastically change. Professionals do trade GME by the way, under the following thesis: am I selling rich premium or am I handing out cheap protection? Based on the data lately, the edge looks more on the sell side. Good luck.

sharpetwo

# Everyone obsesses over DTE and strike like there is some magic formula. But there is none. The real game is whether the premium is actually rich. Institutions do not sell calls based on “cost basis.” They sell when the vol surface is paying them. For instance, on indices, calls are usually the cheap side of skew because every fund manager on earth is leaning short them for yield, while buying puts for hedging. That is why the pain on covered calls is always bigger than people expect. But that is not necessarily the case for meme stocks. You need to have the same mindset for tenor: weeklies bleed fast, but you are stuck babysitting gamma. Monthlies have a cleaner carry. Without all these insights, you are trading blind and that is what makes the difference between pro and retails. Pro do not backtest or trade on "mechanics" - they compute odds all the time and then put them in context of what is happening in the market right now. First thing you can do: check realized vs implied. If implied is not higher, you are just clipping coupons in a ghost town. Covered calls look “safe,” but if the VRP is thin you are warehousing risk for free and giving away convexity. If you really want to run the wheel, the smarter money is usually providing liquidity on the put side where funds are overpaying. On the call side, be picky. Only sell when you are getting overpaid, otherwise, you are better off keeping your upside. Good luck.

sharpetwo

The “call spread vs. outright call” framing is only half the story. Spreads look optimal because you cap your premium outlay — sure, convexity per unit capital is higher. But you are also capping exposure exactly where your thesis needs it most. If you are building a sleeve to express 6–12 month conviction, you are paying for the right to catch an outlier. Why capping yourself with a short leg that works against you the moment you are right in size? Because the end, if you really want optimal convexity per unit capital the math is simple: out-of-the-money calls. If you want realistic expression of your concentrated portfolio’s edge, the structure needs to fit the distribution of outcomes you believe in. Tenor matters too. Six months is not long-dated in vol terms: you still carry decay and skew. Twelve months+ is where the vol surface flattens, and you often get a cleaner VRP pickup. And finally, strike selection is not just delta, it is about what you believe: do you want to monetize grind-ups (30–40d calls), or do you want convexity to tails (10–20d)? The trap is thinking the spreadsheet answer (call spreads look better!) is the whole answer. Sometimes you want to own the ugly, overpriced optionality because you only need it to pay once. Good luck.

sharpetwo

That is a sound idea ! You are not exposed to idiosyncratic risk like normal stock. That said, most people who “wheel” SPY think they are running a rent-collection business. Sell puts until you get stock, then sell calls until it goes away. Clean and simple. But the reality is you are plugging yourself into the equity risk premium machine and that machine has quirks. On the put side, you are usually providing liquidity to fund managers who are perpetually long equities and pay up for downside protection. That is where the edge tends to live. The call side is trickier. Everyone and their mother already sells covered calls to juice yield. Supply is heavy, skew is flatter, and upside tends to surprise higher. In other words: short puts have historically paid you, short calls have not. The real trick is checking the volatility risk premium (VRP). This summer, SPY puts were handing you fat VRP. That is when the wheel looks good. Other times, like early this year or during tariff headlines, VRP was razor thin — and the wheel would have just been catching falling knives. So the smarter way to answer him is: – The put side of the wheel is usually your friend, if VRP is there. – The call side is more questionable; upside in SPY often runs harder than people expect. Overal, pnl will look great in quiet tapes, miserable in sudden gaps, so timing matters. But it's a sound idea. Good luck.

sharpetwo

LLMs are not edge detectors by themselves. They are not going to tell you whether SPX vol goes up or down next week and that is where the “hallucination” problem kicks in. Where they do shine is into turning raw features into trade frameworks (e.g. “this skew/VRP setup implies you want to do a calendar vs diagonal”). I find them particularly useful to bridging ML outputs into natural language so you can actually use the signal. Think of them less as forecasters and more as front-ends for your models. The heavy lifting is still done by your vol surfaces, regressions, or whatever statistical framework you run. The LLM makes it usable at scale. The mistake people make is asking them to predict. The real win is asking them to translate what your actual models say into human-readable setups and risk calls. That is the difference between science fiction and a desk tool. Good luck.

sharpetwo

Verticals on NDX work the same way mechanically as SPX/QQQ, the difference is in the underlying dynamics. NDX trades with fatter tails, more single-name concentration, and less broad equity risk premium cushion than SPX. That is why the credit spreads tend to pay a little more but also blow out harder when tech wobbles. The real question is not “can I keep running my 45-min breakout filter?” It is “does the structure itself still offer edge?” Right now, selling premium in NDX is still structurally better than doing it in SPX because vol is richer versus realized and because equity risk premium is carried heavier in tech. But you need a data-driven read on VRP and skew, not just intraday breakouts. So yes, paper trade the setup if you want but at some point you will want to step back and ask: is implied > realized, is skew clean, is the term structure favorable? That is the real story for whether verticals make sense in NDX, not whether the first 45 minutes of the session go your way.

sharpetwo

You are getting flamed because nobody wants to be told their adrenaline rush is just noise trading. But you are right. 0 dte is flow-driven, not edge-driven. The winners are brokers (fees) and market makers (bid/ask + skew). For retail, it is variance scalping while paying the house vig. With longer-dated options, at least you can structure risk: size in vol terms, lean into skew, capture VRP, roll, adjust. That is where consistency lives. A good day on 0 dte is often luck for retails. A good process in longer maturities can totally be edge. That difference is the whole game.

Euphoric_Tailor_9708

I asked ChatGPT to apply your logic to my current strategy this is what I got Lessons From sharpetwo 1. The “Good Stock List” Isn’t Static - There’s no magic list of tickers. - What works depends on your goals (safety vs. premiums). 2. Two Paths in the Wheel Strategy - Safety & Steady Premiums: • Use big, liquid ETFs (SPY, QQQ, IWM). • Pros: tight spreads, steady fills, less risk of random headlines blowing you up. • Cons: huge buying power required (not practical for smaller accounts). - Juicy Premiums (Higher Risk/Reward): • Semiconductors (NVDA, AMD, SOXL) or meme-adjacent stocks. • Pros: fat premiums. • Cons: gap risks; must accept being assigned 10% lower overnight. 3. What to Avoid - Thin names with wide spreads (hard to exit). - Low IV stocks (premiums too small). - Biotechs, penny stocks, earnings roulette (binary risk = wake up assigned garbage). 4. The Wheel = Short Volatility in Disguise - You’re selling volatility when you run the wheel. - Edge isn’t a magic ticker → it’s about finding where options are expensive (look at IV rank, VRP, vol surface). - Success = managing risk once you’re in the trade. ■■ How This Helps Us - Since you don’t have buying power for SPY/QQQ, we scale his idea down to $5–20 tickers with liquid options. - We split tickers into Steady (safer, smaller premiums) and Juicy (riskier, bigger premiums) categories. - The main principle we keep: • Stay in liquid names, manage risk, avoid traps. I feel like this help me Thanks

sharpetwo

ORCL is not a bad candidate, but you need to know what you are selling into. Right now the surface is lit up as one would expect ahead of earnings, with fat VRP in the near tenors (7–14d, Z-scores > +2). That means implied is way above what the stock has actually realized. In plain English: options are expensive, and you want to be a seller. Skew also shows that puts are cheaper than calls. The market is leaning one-sided into upside risk, leaving downside convexity underpriced. So yes, an iron condor makes sense in the sense that you are clipping inflated premium in a name but placement matters as you want to avoid the earnings risks: \- Go outside the std move implied by earnings. That would mean at least delta 30. \- Keep the wings balanced, but know the real juice is on the call side: that is where skew is richest. Finally size it like an earnings lottery ticket, not a paycheck. Good luck.

sharpetwo

The phrase “super safe put” is the trap. By definition those are the ones that blow up when the world shifts. Yes, you are selling on indexes rather than single names, so at least you are avoiding idiosyncratic blow-ups. But two things kill people here: 1/We are terrible at predicting tails. When vol gaps higher, deltas jump, liquidity vanishes, and your 95% OTM option is suddenly in play. IV behavior in tail events is a whole field of risk management and hand-waving probabilities will not save you. 2/ Sizing is the reason people blow up.. because it feels safe. The ironical destructive loop. People load up with margin. Then the one time it does not expire OTM, it wipes out months or years of income. The usual next conclusion is: well easy then. Do not size up. But then comes the question of capital efficiency. Even if you size carefully, the margin requirements are still chunky and on a risk-adjusted basis, it is not as efficient as it looks. For me, the bigger question is more if your method has worked the last six months, why rush to change it? At least spend some time asking why it has been working. The last three months especially have been a gift: VRP has been unusually fat in SPY, QQQ, and broad index ETFs. That will not always be the case. The real edge is not in finding “an illusion of safety,” it is in recognizing when setups like the one you just had appear again, and pressing them appropriately. Tails are not a shortcut to that; it is just leverage on the wrong problem. Good luck.

sharpetwo

An iron condor is not a “neutral chart” trade. It is a vol smile trade. You are short the middle, long the wings. So it only makes sense when both wings are overpriced relative to the body. In other words: skew + VRP have to be in your favor. That is why you see setups in places like GLD right now: wings bid up on crash fears, but realized is running tame. That makes the smile juicy enough to sell both sides. For cash-secured puts or vertical spreads, yes, chart context can help with timing since you are taking directional risk. But even there, the bigger driver is whether you are selling expensive vol or cheap vol. So the real order of operations you need to check if implied > realized (and if skew makes the wings even more expensive.) Then decide if you want a directional lean via puts/spreads, or stay neutral with a condor.

sharpetwo

Good luck ! Which one exactly the AAPL one? The VRP is indeed very negative at the moment.

thatstheharshtruth

That's not relevant. OP said CSP. If you're selling puts you're not harvesting VRP. You have large delta exposure and that is what mostly determines profitability. If you want to harvest VRP you have to do it in a delta neutral way. CSP ain't it...

sharpetwo

This is the classic 0dte trap: you are focusing on the money you “left on the table” instead of the risk you actually avoided. Morning premiums are expensive for a reason, they carry the juice of overnight gaps and the heaviest implied vol for the day. It is more often than not a sell because they exceed the realized vol. However, the VRP is really hard to extract so I wouldn't play that game too much here. Anyway, that is why you feel like you are overpaying. By afternoon, the lottery tickets are cheaper because most of the day’s uncertainty is gone. But the VRP is still there while gamma is through the roof - one move and your risk profile is totally different. Not a game for the feint of heart, and again, pros often play it very differently than retail - they often warehouse cheap gamma as an hedge in these very short expiries. Your brain is doing what every new 0dte trader’s brain does: replaying the hindsight chart and thinking “if I had just held…” That is the gambler’s loop. Professionals flip it around: “if I had held and it had gone the other way, how dead would I be?” That is the risk frame you need. So yes, scale down. Yes, pick your time window instead of chasing both. But more than anything, stop playing the “what if I held” game. That is the casino whispering in your ear. Last thing, because that was my main message really - why on earth play 0/1 dte? There are much easier place to be in the option game. Leave that for gamblers. Good luck.

sharpetwo

You are right to be suspicious. Comparing ATR to implied vol is like comparing a yardstick to a compass — different units, different purpose. Pros do not look at ATR at all by the way. They compare realized volatility (annualized properly from returns) to implied and that spread, called the variance risk premium, is the basis of many strategies or at least positioning. If you want to level up from “income strategy crash courses,” here are a few nice and practical addition to your bookshelf: * Sinclair’s *Volatility Trading:* the best bridge from retail heuristics to professional vol thinking. * Sinclair’s *Positional Option Trading:* even better for the system-builder mindset, where you stop asking “which spread?” and start asking “what edge does the market give me?” This one is particularly useful to start looking at trading like a business. * Taleb’s *Dynamic Hedging* dense, dated, but still the trader’s manual. Not for everyone and if you had only one take away: always buy some very OTM options, and usually far in time, because the market is notoriously bad at predicting tail scenarios. Start calculating realized vol yourself, line it up against the term structure of implieds, and you will see why the “ATR vs IV” framing is a dead end. Once you see the VRP, you cannot unsee it.

thrawness

I am little late to party, but have something to share that changed my approach on trading options fundemantally. It's Dispersion. The VRP argument to sell options an collect theta

sharpetwo

Thank you and glad I can be helpful. 1/ Yes it has to be on the same timeframe. 2/ The VRP in SPY turned negative on Mar 20 and despite being ever so slightly positive at the worst of the crisis (Apr 8-9) it was mostly at 0 and then negative for a long time, as IV got mercilessly crush and realized was still high. VRP is really positive (+5 on average) since early June, and indeed since then it's been fairly easy making money selling options again. Especially with a particularly forgiving realized vol and gentle path drifting on the way up. It's not always like this, and sometimes you have to delta hedge. 2b/ VRP is a measure of the past - yes and no. The best estimate of RV tomorrow, is often RV today. Therefore, VRP today is very often a great predictor of VRP tomorrow. There are other factors, but in my ML model, VRP today come (not surprisingly again) as one of the top feature. 3/ The key is still to put it in context and to capture moment where it is really stretched - knowing that it is positive or negative is already great. Knowing when it is really stretched compare to recent past is even better. 4/ I expose almost all of my research in my app. I know how painful that stuff is to recompute because.. well I've been trading for a while. Retail traders are at a massive disadvantage to pros because... well they don't have data but sometimes tech skills and even more often time. There are other tools in the market, do a quick google search and you will find the one that suits you best. 5/ Stop loss: never. I size small and I am not buying wings either. Again, it's like being an insurance provider. You can decide to reinsure yourself, but it eats your margin (especially with the volatility smile, you end up buying a vol that is often much higher than the one you sold). If you insist in hedging, you should consider calendar, they are probably the best of both world, but not a magic solution either: you are now expose to the term structure.

sharpetwo

Yes - most of the time, riskier stocks have a bigger VRP. But the VRP is often there for a reason. So you have to know when things are really out of place. Hence a zscore.

whyalwaysme-_

Been reading your posts lately and I have to say I learned a lot. Especially about the VRP, IV surface, etc. I do have some questions for you and hope to get some clarifications. To my understanding, what you recommend is that when IV > RV, it’s a good time to sell. It has to be the same frame, like if you’d want to sell 14 DTE options you need to compare RV in the last 14 days and 14 DTE IV ATM. Most of the time this should work. What did it look like in this March or April? At one point the VRP would turn from positive to negative, and to me RV is a measurement for the past and it may not indicate future movements. Another question, for us who don’t have our own tools to calculate the VRP, can we just use the IV/HV and sense the premium? Like when IV/HV is greater than 100%, you have a higher chance of winning by selling options. How does the volatility skew, different strike price affect the premium? Do we have to get the VRP for each delta (most common would be 0.2)? Is there an easier way (like tools/websites) to get it? One last question, when the position goes against you, do you set a stop loss or just let it ride? I feel like you must have some pretty strict rules for stop loss. Thanks.

Histole

So you're assuming that its not unlikely for TSLA to have VRP > 1 on average, so you have to go to another level of abstraction? Am I understanding?

sharpetwo

yes it is the same. At least, cards on your side. But you still need to put it in context. For instance - selling VRP (IV - RV) at 30 days at roughly 4 in SPY is not the same as selling 4 VRP in PLTR or TSLA. You have to always take into consideration the underlying you are working with.

sharpetwo

Even if it is backward looking it is already a great indicator to look at. Mainly because the best prediction of tomorrow's RV is today's RV. So you can often say, if there is VRP today, there should VRP tomorrow. Volatility's behavior is much "predictable" in this sense. I personally do some more advanced stuff where I predict if IV sold today will be above what we are likely to realize over the course of the life of the option. That is also what people would do on a trading floor. But still do not overlooked IV - RV. And if you can zscore it, you are already pretty advanced.

sharpetwo

The trap you are in is thinking there is a "rule" like 50% profit = close, or Thursday = reset. That was popularized by brokers and inherently there is some truth to that, but the management mechanics should be first and foremost driven by risk/reward analysis: 1. Risk of ruin vs premium left: when a strangle is 50–80% harvested, the remaining premium is pennies but the tail risk is still the same monster. That is why pros cut them early. You are not getting paid enough to hold through Thursday afternoon headline risk. 2. Surface conditions and therefore, is there still some edge? Sometimes the week starts rich, sometimes thin. If front-end IV is elevated relative to realized, you can afford to reload after closing. If not, better to sit out a cycle than force a roll. "Always be in" is how people blow up. On rolling the call after 80% profit: that is not risk management, that is just selling more gamma in the same expiration. You feel busy (once again, isn't it waht Tasty say all the time - be busy, be nimble? Well guess who pockets the commissions?) but you are not really improving the position... you are just doubling down on theta/gamma imbalance. If you want to re-sell, do it as a new trade with fresh margin and fresh risk checks, not as an auto-roll. As for the calendar cycle (Mon–Fri vs Thu–Thu): it does not matter. The pie is the same. What matters is whether you are collecting VRP when it is mispriced, and whether you exit before the odds flip against you. Avoid thinking in terms of “how do I maximize collected premium?” and start thinking in terms of “am I still being paid enough for the risk?” Once the answer turns into "no," the position should be flat - whether that is at 50% profit on Tuesday or 80% on Thursday.

sharpetwo

Those are good hygiene rules but notice they are all about not blowing up, not about extracting edge. Trading small, sizing by VIX, avoiding prediction… those keep you alive. Survival is step one, but it is not the game. The real principles that matter for success in options: 1/ Know your carry: If you are short vol, understand the VRP you are actually harvesting and how it behaves across tenors. Selling “because VIX is high” is sloppy — sometimes VIX is high because realized is higher. The spread is the trade, not the level. 2/ The term structure is king and I wish more people would take time to study it and understand its mechanics. Steep contango vs flat/backwardation tells you when shorting premium is free money versus when you are catching a grenade. 3/ Skew matters but as a retail, a little less than the two listed above. If you master the two above then, index skew, single-name skew, vol-of-vol: if you are not watching them, you are missing some important bits and pieces and often when some very interesting edge hides. 4/ Hedge mechanics: this one is obvious but how do you survive the tails? Small size alone is not a hedge. You need convexity somewhere in the book, even if it is just 2–3% bleed into crash puts or VIX. 5/ Execution discipline: Yes, slippage and tax treatment matter, but so does working orders like a pro. Fill quality is an edge over time, this means spending time fighting with a MM in the order book to get the price you want. So your list is the table stakes. The actual game is knowing when the distribution shifts, and structuring trades that monetize that shift without getting carried out.

TheGreedyPickle

"Selling vol exposes you to the same tail risk regardless of what delta you sell, generally speaking. Best to collect more VRP along the way with a higher delta IMO." Can elaborate on that last part please? Selling vol you mean selling csp during high vol environment? Why does it not matter what delta to sell? Sorry if the uestion is stupid. I wanna learn more 

sharpetwo

This is the classic “short OTM puts every week = free money” pitch. It sounds like a paycheck (look Mommy I generate income! Im a vol trader!) and as long as NVDA drops less than 10% of the time, you collect $3k a week, retire happy. In reality, you’re just underwriting crash insurance on one of the most volatile, crowded, single names in the world. You need to focus on the weeks it doesn’t work to get a reality check. When NVDA gaps 10–15% on earnings or a bad guide, you’re suddenly long say $5M worth of stock against your will. This is why pros don’t size naked short puts that way in a single name. They diversify across tickers, tenors, and strikes, and they always respect the volatility risk premium (VRP): yes, options usually overprice realized vol, but you only collect that premium if you can survive the tails. A one-name, one-week, all-in short put book has zero tail hedge and its frankly a recipe for disaster. If you really insist on doing this, do it on a basket of stocks where your tail hedge is a bit more embedded - think SPY, QQQ. The risks outlined above won't magically disappear, but at least you have baked in diversification in your product and your strategy now resembles a buy-the-dip on something that overtime, goes up and to the right. That is not always the case for individual stocks and to build some intuition around it, rethink your entire post but instead of putting NVDA, put TSLA and imagine you wrote it exactly a year ago... Good luck.

duqduqgo

Will work until such a time when you can’t roll for a credit. Selling just a week out on a stock with this volatility you will find yourself stuck before long and owning a lot of NVDA for which you paid too much. Selling further out gives you more room to manage the trade when it approaches your strike because less gamma (option price changes more slowly), more time for a vol spike to flatten. Selling vol exposes you to the same tail risk regardless of what delta you sell, generally speaking. Best to collect more VRP along the way with a higher delta IMO.

flynrider58

The market is right most of the time which is why one needs an “edge” to be profitable. IMO, nothing you suggested (e.g. P/C ratio, volume, OI,s diversity etc…) are an edge. I believe VRP (e.g. IV prediction end use) is the only edge for option trading though much of what you suggest are ancillary usefull.

sharpetwo

You’re not kidding yourself and congrats for finding out about the wheel’s dirty little secret: the trade looks great when you’re selling CSPs or slightly OTM calls, but once your CC goes deep ITM, you’ve basically morphed into a stockholder who’s leasing away upside for pennies. That’s why it feels like “even Steven.” Right now you’ve got two paths, and it comes down to how you want to play expectancy: – Keep rolling: sure, you’re still pulling in yield, and you’ve got a fat buffer under you. But the juice shrinks the deeper ITM you get. Eventually the call is just synthetic stock plus a loan you’re writing for not much premium. That’s a lot of effort for very little edge. – Take the assignment and reset: this is often the cleaner play. You lock in all those gains, free yourself from the grind of trying to roll thin premiums, and redeploy into fresh cycles where VRP actually pays you. Rolling isn’t wrong, but don’t confuse “grinding 8% annualized” with “beating the market.” You’re basically long XLK, capped, and being drip-fed yield. Nothing wrong with that in a Roth if income was the whole plan. But if the point was to juice returns, then freeing capital and starting again probably gives you more bang for the buck. The real question isn’t whether you “lose” by letting it assign, it’s whether the capital tied up in that ITM cc could be working harder elsewhere, or the timeless opportunity cost dilemma. Good luck.

sharpetwo

Because the market doesn't owe you anything. You will have periods making tons of money because everything aligns, and then periods were things simply won't work. 2025 is a prime example - almost 0 VRP and more often than not negative VRP for most of Q1. It actually paid to be long options. Then the big firework of April. And since early June, the VRP is back in full force in SPY and selling options will make you feel like a genius, especially in short dtes. It won't stay like this forever.

FrangosV

Have you built your own tools to monitor VRP and skewness or are you using some online source ?

sharpetwo

I systematically try harvesting VRP and skew. Most of the time that shows up as calendars/diagonals, so think long cheap vol where the market underprices it, short richer vol where it’s bid up. That keeps me close to vega-neutral while monetizing term structure or skew dislocations. I’ll lean into short straddles/strangles when the surface is clearly overpriced relative to realized, but only with sizing and hedging that makes the tail survivable. And I’ll sometimes take the other side (long convexity) if the surface is asleep while realized is waking up. Finally I am almost all the time in some sort of risk reversal in equity index to monetize the eauity risk premium (index stocks go up). So yeah, I don’t think of it as “favorite trade” so much as “framework”: find where the vol surface is wrong (rich VRP, steep skew, weird curvature), and structure around that with something that neutralizes delta/vega so the P&L comes from the mispricing, not the tape.

sharpetwo

That POP number on your broker isn’t magic. It’s just a model (usually Black–Scholes with current IV) telling you what the market thinks the odds are under its assumed distribution. Everyone sees the same number, so you don’t get edge just by trading things with high POP. What matters is expectancy or not just how often you win, but how much you make on winners vs how much you lose on losers. You can have a 75% POP trade with negative expectancy if the 25% losers nuke you, and you can have a 30% POP trade with positive expectancy if the winners pay fatly. Pros care about skewing expectancy positive, not chasing high POP. That’s where the vol surface comes in. The only way to tilt expectancy in options is to sell insurance when it’s overpriced (VRP), fade skew when downside protection is bid too high, or buy optionality when the market is underpricing it. In other words: find where implied odds are systematically biased relative to realized outcomes. That’s the business. So yes, there’s merit, but not in treating POP as gospel. POP is the market’s prior now your job is to identify when that prior is wrong, and trade in a way that makes the expectancy positive. Without that, you’re just selling insurance at actuarially fair prices and hoping not to be the one holding the bag on storm day.

sharpetwo

On paper it looks like “QQQ has to drop 3%+ in a day, that never happens, free money.” In practice you’re shorting pure gamma and selling crash insurance. That 560 put is priced the way it is because once in a while the index does puke 3–5% in a session, and when it does you don’t just lose the premium: you’re suddenly long a ton of deltas into a falling market. That’s the trade: a few pennies for max problem in a problematic situation. Pros don’t usually think “I’ll sell this one naked put.” They’re either running it as part of a systematic VRP book across strikes/tenors/tickers, or they’re offsetting one tail with another: think short where skew is bid, long where it’s cheap, because anyway, when shit hits the fan, correlation goes to 1 and everything goes south. Sometimes they’ll structure defined-risk spreads for margin or tactical trades, but the real way they cap tails is through diversification and balancing exposures, not a single 560/550 vertical. That said, as a retail trader, nothing wrong with that: I was just laying that out there to maybe sparkle other ideas inspired by the pros. So “reasonable”? Only if you treat it like insurance underwriting: it works most days, and sometimes the storm comes. The real edge is understanding when there is a storm, when there will be a storm or when the cloud look menacing but will pass. You often won't see that in charts, but in deeper statistical analysis and regime analysis in particular. Retail can use spreads to avoid a wipeout, but if you want to actually do it like pros, you need to think in terms of running a portfolio of short vol exposures and offsetting tails, not just leaning on one 0DTE put and hoping today isn’t the outlier.

sharpetwo

You basically just discovered what every PM learns the hard way: risk engines don’t make money, they keep you alive. None of those things you built (VaR, CVaR, PCA stress tests) were ever meant to tell you what stock to buy. They’re brakes, not accelerators. They’re there to stop you from doing something dumb like loading into one correlated bet, ignoring factor exposure, or blowing up on a liquidity crunch. That’s why big funds have risk managers sitting across from PMs, not to pick trades, but to make sure the PM doesn’t get carried out. Where quants add value is on two ends of the spectrum: * Alpha side: actually modeling inefficiencies (VRP, skew, flow-driven anomalies, microstructure). That’s hard, edge-decay is fast, and it requires a research process that’s miles away from “risk reporting.” * Risk/portfolio side: making sure the alpha that does exist isn’t wiped out by unintended exposures. That means position sizing, correlation shocks, scenario analysis, and capital efficiency. So yes, if you expected your risk engine to spit out money making trades, you set yourself up to be disappointed. It’s not useless, but it’s a defensive tool. Making money is about edge or having a model of why something is mispriced, and a way to monetize it. Risk engines won’t give you that. They’ll just help you keep the lights on once you find it.

sharpetwo

People do make a living selling options, but the ones who survive aren’t just “writing covered calls and cash-secured puts.” They’re effectively running an options desk: doing the math, modeling realized vs implied, monetizing VRP, skew, term structure. They know when vol is overpriced, when downside protection is rich, when the curve is distorted. That’s the edge. Most retail traders don’t have that. They sell premium blind, hope theta pays them, and inevitably get run over when the regime shifts. Trading is already ruthless if you do have the tools; going in without them is basically volunteering to donate to people who do. That’s why almost everyone who really lives off this has either a proper quant framework, institutional-grade risk tools, or at the very least diversified systematic rules. And even then, it’s best to have income elsewhere. Building a money machine that prints across cycles (low vol, high vol, crashes, melt-ups) is not trivial for pros, let alone for retails... If you think you’re going to do it with a handful of “income trades” off a broker app, you’re already beat.

sharpetwo

0DTE implied vol is often way higher than what the index actually realizes intraday and with such a strategy you are trying to harvest that fat VRP. On paper it looks great: keep laying down straddles as SPX walks up and down, you kind of morph into a strangle book and it even feels like you’re delta hedging yourself along the way. But here’s the tiny little problem: it’s path dependent as hell. The moment the index trends instead of mean-reverting, you’re suddenly leaning way too short or long, and you don’t have the balance you thought you did. Gamma flips on you, and your “income strategy” turns into being massively short convexity against the move. That’s why it blows up accounts. Stops on single legs are useless, stops on the straddle as a unit aren’t much better. The only real stop is at the strategy level: how much drawdown are you willing to tolerate when path dependency kicks you in the teeth. That’s why pros don’t run it naked: they define risk (spreads, flies, calendars) or hedge actively. Without that, you’re just selling insurance and hoping the storm doesn’t hit today.

onefactormodel

See my first comment - of course the implied vol level matters because that is the price you pay. My only point is that your tracking-error to VRP pnl is quite large. It’s empirically the case that an unhedged ATM option has 90% variance contribution from the delta piece. If you’re not hedging a call, you have far more chips in the delta bet than you do on the VRP bet.

sharpetwo

You don’t fix 0DTE pain with a magic SL % on the contracts. The reason you feel like you “need” one is structural: 1. Vega is tiny but not zero. Every 0DTE contract still embeds an implied vol. If you don’t know whether you’re paying too much (IV > realized intraday) or getting it cheap, you’re basically just spinning the wheel. The edge in options is understanding when you’re long/short fair vol, not where to slap a stop. 2. Gamma is off the charts. That’s the whole point of 0DTE where you are renting insane convexity for a few hours. It whips 50–200% on tiny spot moves, which makes any “–50% contract stop” meaningless. If you hate that feeling, the fix isn’t a better stop-loss, it’s trading 1–5 DTE where the gamma/vega profile is saner and the VRP is usually juicier. 3. If you insist on stops… tie them to the underlying or to your account, not the option price. For example: “if SPX moves 0.5% against my strikes, I’m out” or “this trade will never cost me more than 1% of my account.” That way your stop matches the risk you’re actually running, not some arbitrary % of premium. Bottom line: 0DTE is like trading raw gamma concentrate. If you don’t size it properly and know where vol is mispriced, you’ll keep having the “one bad day wipes my week” problem, no matter what stop you pick. Good luck

sharpetwo

Let's admit that is true - how do you then explain that selling a 5 dte 0.15 delta pays more than an 0.40 delta at 40 dte? I guess we can agree on the fact that the implied vol embedded in the 0.15 dte (hold to expiration by the way) grossly overestimate the terminal distribution of the stock path. So if you were to monte carlo this, you would end up saying that IV in the market is far superior .... than vol realized? Of course if you are extremely precise you will say that VRP is just the monetization of implied versus realized, you need to delta hedge etc etc. But what do you call a short options trade profitable, with 0 delta hedging? Isn't it the pure expression of IV so much bigger than RV than stock path doesn't even bother you? At least that is how I view it. If you have another view of it, I'm happy to hear and potentially learn from it.

onefactormodel

Frankly the comparison the VRP is unwarranted for a buy-and-hold portfolio. Monetizarion of VRP requires active delta-management. For buy and hold all that matters is final payoff

onefactormodel

The dynamic equity piece contributes far more in risk/vol space than the VRP piece, almost rendering the VRP piece irrelevant. Just because x = y + z you can’t claim oh yeah y is driving returns too, if var(z) >>> var(y). Your tracking error to VRP is massive in a covered call

thatstheharshtruth

There is edge in harvesting VRP. (There is no edge in chart reading LMAO, no offense.? But the drawdowns will be brutal and the tail risk makes this not viable for reasonable individuals.

sharpetwo

Sure, a covered call is long stock + short call, so if you never delta-hedge, your PnL is dominated by the stock leg. But the call leg still has a delta-hedged PnL (that’s the VRP...) and in the PLTR case that VRP was abnormally fat in the front of the surface. The AQR paper you linked decomposes CC returns into passive equity, short volatility, and dynamic equity exposure. That last term is the ‘opposite of delta hedge’ you mention. In a choppy, mean-reverting market, that dynamic equity piece is a drag and can swamp the VRP. In a slow-grind bull like PLTR’s past year, it does not and the short-vol component shows through in total returns. That’s why talking about VRP here is not irrelevant: it is one of the three levers driving the backtest’s outperformance, and in this regime it happened to be unusually favorable.

onefactormodel

Covered calls are not delta-hedged routinely so VRP or impl-rlzd vol spreads are actually irrelevant in overall pnl. For a covered call what matters is if the premium collected compensates you for the potential run-up in the stock. Of course, the premium is a function of the market’s forecast of vol, but the actual realization of cc pnl does not care for VRP. If you really want to tie cc pnl to VRP, you can decompose cc by paper-trading the delta-hedge: cc= long stock + short delta hedged option + opposite of delta hedge. The “opposite of delta hedge” piece is actually huge in pnl risk and materially adds to tracking error to VRP. See https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2444999 for details

sharpetwo

The good old risk reversal! One of my favourite position. You short one or multiple OTM puts to finance a longer-dated OTM call. On an index, this works beautifully because: 1. The downside tail is fatter in theory but smaller in practice: broad indices rarely gap -30% overnight. 2. Skew is steep: OTM puts are expensive relative to calls, so the “put sales fund call buys” trade has built-in positive carry from the vol surface itself. You actually have a paper of Euan Sinclair [on the subject](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3968542). On single names, that second point can still be true, but the first is where you get hurt. A stock can blow through your short strikes in one earnings print, M&A flop, fraud headline, etc. The vol surface may look just as attractive as the index, but the left tail is far more dangerous because the jump risk is real. This is where reading the surface matters. You want to pick the slice where implied vol is overpriced vs what is likely to realize. You don’t need to be super fancy here and make sure that the tenor you pick has some VRP baked into it. So on the short puts, choose the steep part of the skew where demand for downside protection makes them expensive. And for the long call, look for a point where upside IV is relatively cheap but still has enough gamma to pay off if you get the move. I personally do this almost all the time on SP500 where I usually sell put at around delta 30 and buy calls are delta 20. You do not want to do that if the vol regime is currently stressed: again, a risk reversal is still a bet on volatility and VRP tends to be better when the markets are calm (like right now). On an index, that sweet spot often exists and holds for months. On a stock, you need to watch for events that can nuke the short side overnight. Good luck

sharpetwo

What your backtest is really showing is a favorable volatility risk premium in the front of PLTR’s surface over that period. The 5 dte 15 delta calls were priced at an IV well above what the stock actually realized over those short windows. You harvested that gap over and over without eating big drawdown, because realized stayed below what the market implied and was ready to pay and the stock’s drift was steady enough not to crush the short leg. If you have to think in odds, the market were giving you repeatedly too expensive odds of the market to move by a lot over a small amount of time. Two mechanics make it work: * The vol surface shape: PLTR short dated OTM calls were trading rich relative to both longer-dated and higher-delta strikes. That is the kind of local skew/kink in the surface that pros are very happy to exploit. That meant more premium per unit of gamma risk than normal. Go further ITM or further out in expiry and you slide down the surface into cheaper vol. * Gamma control: At 0.15 delta and 5 DTE, your short option gamma was small enough that you did not get whipsawed daily. Pair that with the slow (yet powerful), directional grind in the underlying, and you effectively ran a high-delta stock position with a constant short-vol overlay. The reason longer dte or higher delta calls underperformed is that they picked up less VRP and carried more opportunity cost: you were capping upside for less edge. Caveat: this is a regime thing. If realized vol spikes, or the surface flattens (short-dated IV collapses relative to long-dated), the edge disappears. The backtest is basically showing a year-long window where front-week skew + low realized + steady drift made short OTM calls the sweet spot. This is indeed extremely intresting because it perfectly shows that at the end of the day, success in options do not happen without a thin understanding of implied volatility and how cheap or expensive it is. One last point: who buys 15 delta on 5 dte? Very often … the people of Reddit.

sharpetwo

If you have been DCA’ing for four years and compounding 35–40%, you already know the hardest part of investing: patience. Options are a different game. They are not a magic lever for “more gain”; they are leverage + timing + volatility. Most of the big screenshots you see are people short-term correct and oversized. That works… until it does not, and the drawdown erases months or years of work. The average retail path starts with long calls/puts and they discover time decay is brutal. So they move to selling premium (a la thetagang, wheeling covered call etc) and then up discover risk is real when vol spikes. In the end, they find one or two structures that fit their temperament and capital. But to make money consistently you need an edge and often it lays in the variance risk premium: why options are often overpriced vs realized moves. That is where most consistent option strategies live. In any case: * Start tiny, with money you can lose without caring. * Focus on understanding VRP * Avoid naked leverage until you know how theta is the opposite twin of vega and gamma. If your goal is to “increase gains” for the future, options can be a tool, but they are a tool that punishes rushing. Think in years, not weeks, and your edge will come from structuring trades where the math works in your favour.

sharpetwo

IV Rank and IV percentile tell you where implied vol sits compared to its own history. That is useful: you want to sell options when they are relatively expensive. But staring only at IV30 Rank or “52-week IV position” is like looking at a price tag without asking what you are buying. Two things you are missing: 1. Vol vs. realized vol (the VRP)If IV30 is high but the stock has been whipping around even more, you are not selling “rich” vol — you are selling it cheap. Always check realized vol (20d/30d) against the implied. If the gap is wide and stable, that is your actual edge. 2. Term structureFront-month IV can be high because of a single event (earnings, FDA decision) while the rest of the curve is dead calm. If you blindly sell puts in that front expiry, you are just selling event risk but not collecting a steady premium. Sometimes, going a little further out gives you better carry and less headline risk. So the sequence is: * Check VRP (IV minus RV) first — this is where the money is. * Then use IV Rank/Percentile to see if vol is historically elevated. * Finally, check term structure to avoid being steamrolled by one-date risks. The best put sales happen when all three line up. High IV relative to history, high IV relative to realized vol, and clean term structure. That is when you are getting paid for risk you actually want.

iron_condor34

It's one of many that you can look at. You can look at ranks, percentiles, VRP, Skew, shape of the vol term structure. You can compare each to one another. There's a lot of ways to try and measure if something is rich or cheap and probably more ways that I don't even know about.

RicksDev

I think something useful to you would be to look at how historical earnings for whatever stock you're trading have played out in terms of implied vs actual move, as well as what the VRP has been over time.

VegaStoleYourTendies

>However, if you buy a protective put without analyzing if the IV is worth it, you are just making a naive financial decision and should not be managing $10m Hate to break it to you, but this is how many people with accounts this size and bigger use options. Also, for them, even if they're overpaying *slightly* on their long legs, the reduction in variance can still be worth it for them. Where do you think VRP comes from..? People are willing to overpay for a reduction in variance because total return is not their only goal >Call it whatever you want, what I'm saying is that there's too much focus on concepts like covered calls, cash secured puts, etc. and not enough focus on the real stuff that makes options useful. 100% agree. And this is a way better take than "it's a tool, not a strategy"

thatstheharshtruth

Daily reminder that IV does not matter. Never has never will. Only thing that matters is VRP>0. And as a matter of fact the best time to go short vol is when vol is already low.

Fun-Sundae4060

Don’t buy puts or calls. Sell them. Collecting VRP is a highly profitable strategy but it takes management and quantitative analysis and backtesting.

Sea-Account-5771

you're really arrogant. I am doing exactly what's listed here and I know MANY others. They're basically harvesting the VRP from 0 dte options selling iron condors as often as every 15 minutes AT THOSE TIME INTERVALS mentioned in the post. You can look up "Tammy Chambless MEIC" on youtube. Just make sure when you do you come back and apologize okay? There's proof everywhere, you seem really stupid from your comment.

eusebius13

I misstated a concept from above. that DH - C = 0 is independent of the presence of VRP. It is a statement of the effectiveness of the hedge, and only a statement on the effectiveness of the hedge. VRP is the difference between implied volatility and realized volatility. The paper you cited states: >Figure 4 reports the paper s key results for long-run average option risk premia. It includes results for three different periods: the full sample available for synthetic returns (1926-2022), the full sample available for both synthetic and traded returns (1987-2022), and the 1987-2005 sample used by Broadie, Chernov, and Johannes (BCJ; 2009), who report an extensive analysis of the performance of traded options. In all cases, the figure gives results for put options. This is the Broadie, Chernov and Johannes paper: [https://papers.ssrn.com/sol3/Delivery.cfm/SSRN\_ID1946412\_code1671431.pdf?abstractid=1946412&mirid=1](https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1946412_code1671431.pdf?abstractid=1946412&mirid=1) It states: >Straddle returns are related to the wedge between expected volatility under the Q measure and realized volatility under the P measure. In our sample, realized monthly volatility is approximately 15% (annualized) and ATM implied volatility 17%. They have clearly found 2% VRP over the time period. They also show consistent negative returns for long puts. Finally directly to your point: >This article examines the profitability of volatility trading on S&P 500 equity index options in time-varying market conditions, with a particular focus on evaluating the authenticity of risk-adjusted returns. While significant profits are available on strategies that involve writing put options, our findings cast doubt on whether these profits can be genuinely attained in practice. After bid-ask spreads are included, we find that the profitability is significantly reduced. Furthermore, the implementation of the trades is generally difficult owing to margin requirements as investors have to set aside a large proportion of their [wealth](https://www.sciencedirect.com/topics/economics-econometrics-and-finance/wealth) into margin accounts and also [face](https://www.sciencedirect.com/topics/agricultural-and-biological-sciences/face) a high likelihood of margin calls. Overall, the profitability of volatility trading tends to hinge on the capability of investors to capture the volatility risk premium and to wisely time its trades. [https://www.sciencedirect.com/science/article/abs/pii/S1059056017305191](https://www.sciencedirect.com/science/article/abs/pii/S1059056017305191) I agree with these authors. There are profits, they are difficult to capture, and they cannot be captured through randomly selling options. They must be captured with a robust analysis of market conditions as is described here: [https://papers.ssrn.com/sol3/papers.cfm?Abstract\_id=889947](https://papers.ssrn.com/sol3/papers.cfm?Abstract_id=889947)

eusebius13

>I understand that you then agree with my conclusions regarding the futility of options writing strategies and the misinformation regarding "income strategies" promulgated in forums and in the financial media. Randomly entering into short options positions will underperform being long the index. Randomly entering into income strategies, like covered calls will underperform the index. The key word here is randomly. There are times where writing options is a great idea. There times where having directional exposure is a great idea. Notwithstanding the vast majority of the time, short options will outperform long options. Being net short volatility earns positive raw but not geometric returns. >The long straddle strategy per one of the charts that I posted would have made money in the last ca. 20 years, and more money than selling the straddle (which lost money), but like you say, that may be idiosyncratic to the time period chosen, and to argue anything specific we would need to specify the setup and how we measure returns and risk-adjusted returns. This is completely false. There is no extended period of time where long straddles outperform short straddles. The butterfly index is evidence. A butterfly is simply a hedged short straddle. If straddles were printing butterflies would not have positive returns. Because I'm not getting across in words I will use equations **let DH = a replicating portfolio for Option C.** **Let P = the cost or premium for an instrument.** **DH - C = 0** We should agree on this. The equation says, if you are short an option and long delta hedging you should expect 0 return. Your return actually comes from the cost difference between DH and C. So let the cost be X and: X = P(DH) - P(C) if X > DH - C than the transaction is profitable because X > DH - C Now let's be very clear, the paper you are referencing is saying that DH - C is converging to 0. That is the claim your paper makes. With no VRP DH - C = 0 >Over the last 15 years, returns on traded options have converged to those on synthetic options -- with the variance risk premium shrinking towards zero Your paper is saying synthetic options (DH) are earning returns that are converging to zero. This is not to say there is no volatility risk premium. This is to say that volatility risk premium for option writers using a replicating portfolio (which is a synthetic option, and is also DH) is shrinking. And it isn't earning a return competitive with other things that can be done with the capital. But we don't expect it to earn a return as high as the index, because a delta hedged portfolio has less risk than the index. The return on a short option should be the equivalent of a bond, because it's essentially the lending of capital. This means if you are short an option, and you delta hedge it, you will make a small positive return, which CONFIRMS the presence of VRP. The paper repeats this on p. 17: >In the periods of overlap between synthetic and traded options, traded options always have lower average returns than synthetic. It couldn't be more clear. -- continuing in another post because of character limits.

Natural-Antelope8328

But why? August and September are generally considered the bearish months of the year. What’s the worst that could happen? Losing couple k tomorrow for the chance of seeing it play out? If I’m not mistaken, the holding put leaps strategy is considered to be a bad idea due to the VRP.

cometocalifornia

Sorry almost all your latest post is terminology and semantics again. We had agreed already before to not use VPR in and by itself in the argument for or against options writing. I didn't refer to VRP in my last post. You are not defining "superior" in your second last sentence. The charts on page 17 support little to nothing to that effect. If you read the text in the paper around that chart, the charts reflect the aforementioned anomaly during that period, which the paper argues was limited to that period (ca. 1987-2010). In your second last paragraph you don't say if you refer to the options overlay, a delta-hedged overlay, or an actual options writing portfolio, so it's hard to pinpoint what you are arguing; it's bits and pieces that may be true in isolation depending on the semantics, but don't support nor refute my thesis. Setting terminology and semantics aside, no, options writing was not a loser's game for the entire history of listed options when compared to a benchmark. Options writing strategies had superior risk-adjusted returns during much of 1987-2010, which probably resulted in the options writing frenzy of the last 1-2 decades. After ca. 2008/2010, the fortunes reversed, and if I interpret it right, the paper argues that we should not expect portfolio level benefits from options writing in the future. (I am avoiding technical jargon here so we don't get lost.) I think I stated the utility function correctly and meaningfully in my previous posts. Options selling resulting in losses by all conceivable metrics. **Systematic option writing strategies a.k.a. "selling volatility" have been a loser's game for at least the past ca. 17 years**. This is contrary to what the majority of participants in the options and the theta gang subreddits seem to assume. I'm still not sure if you agree or disagree, but I invite anybody to challenge my conclusion. You can get to any technical depth needed for your argument, but throwing out bits and pieces from a textbook or knowledge from your job in isolation and in a different context, does not support or refute and not challenge my thesis.

eusebius13

Ok let's start here. Everything you said about delta is correct, but you are discussing the implications of Delta and I am discussing the origination of delta. I am reducing delta to where it is derived. I am not talking about the uses of delta, I am talking about what delta is. Delta is a variable in option pricing models. It represents the total number of shares that you must purchase to exactly replicate the payout of a call or put. That is a indisputable fact. Delta hedging is buying delta shares, dynamic delta hedging is adjusting the number of shares one has given changes in the price of the underlying. The terms are used interchangeably, the only difference is whether you are looking at a discrete snapshot in time, or multiple steps in time with price changes. It is simpler to discuss these issues at single discrete steps because it reduces unnecessary complication. The only difference between a single step and multiple time steps is that there may be hedging activity in the interim. This is completely irrelevant to Volatility Risk Premium. At any given moment, there is an ATM price of a straddle that is purely extrinsic value. That represents the expected Mean Absolute Deviation of the underlying, given an estimate for volatility. It is not relevant whether the price exceeds the MAD by 100% or the MAD is 10,000% of the actual movement. Hedging does not change the IV at step 1, or realized volatility at step 2. Those are the only variables you need to calculate Volatility Risk Premium. >The general definition of "replicating portfolio" depends on what it is supposed to replicate in any given context. The definition is the same every time. A replicating portfolio is a set of instruments that is the equivalent of another instrument or set of instruments. It does not change. For a dynamically delta hedged option, a replicating portfolio will be Delta shares of the underlying and the net present value of the money used to purchase Delta shares at a Rho interest rate. This is a fact that isn't disputable. You really should watch Lo's lectures Options I, Options II and Options III. He goes over all of this material. >What matters to that effect is mostly the geometric return (a.k.a. CAGR) of an options strategy Geometric returns are negative for any option strategy, short or long, if repeated continuously without some discriminatory logic that reduces some of the losses. That's just a fact. Long option strategies have lower geometric returns than short option strategies because of VRP. >**Systematic option writing strategies a.k.a. "selling volatility" have been a loser's game for at least the past ca. 17 years, almost half of the history of listed options.** Where we disagree is that you single out option writing strategies, a complete answer would be systematic option strategies have been a loser's game for the entire history of listed options if you compare them to a benchmark. But short straddles will make a much higher return than long straddles. Short straddles have positive raw returns, which necessarily means that long straddles have negative raw returns. They both have negative geometric returns. That's not terminology. That is a fact caused by VRP. I have NEVER claimed you can perform a non-discriminatory systematic option strategy and get positive geometric returns over time. I have asserted that option writing strategies are superior to long option strategies. It's on full display on the charts of p 17 of your paper.

eusebius13

Delta hedged options hedge the volatility of options not The delta of the options. Synthetic options are a “Replicating Portfolio,” that has the exact return as a written option. Delta, in Black Scholes, and binary options pricing models, is actually just the number of shares that must be bought to hedge an option. Lo goes over this in his options lectures beginning here: https://youtu.be/IwA7nVEwqto?si=SW2NCMSTUj2XmIA8 The concept of a replicating portfolio is important because it provides a price for a difficult to price product. As an example, SPX can be replicated exactly, by buying a share of each of the S&P 500 constituent companies. Consequently, if I charged you more than the price of a share of each of the constituent companies, you would be better off rejecting my price and buying the replicating portfolio. The same thing happens with options. The return of an option is replicated with an amount of capital, lent at rho, to purchase or short delta shares. Market makers absolutely use delta hedging on a portfolio basis, they also hedge using options themselves and numerous other methods. They also wear risk when it suits them. Whether VRP deserves a premium or not, doesn’t matter because the premium is there. VRP again is simply a comparison of the extrinsic value of an option priced at time T and the actual value of the option, minus the strike at expiration. This is why straddles accurately capture VRP. Both ATM options (theoretically) are 100% extrinsic value. Their Expected Value is the Mean Absolute Deviation of volatility. In other words, the straddle is the average expected change in price or volatility. And VRP can be measured by how profitable a straddle is. Delta hedging is not in the VRP equation.

cometocalifornia

\- I think the conclusion of the paper is that the VRP has no positive expected return both theoretically and empirically. The 1987-2010 period is an anomaly due to trading frictions at that time, which has been remedied in the 2010-2022 period as markets are now more efficient. \- I have yet to fully understand the construction of the "synthetic" options in the paper, along with some of the charts in the paper other than those that I posted. You too said you have to read it again. So we can reconvene and discuss this part when we understand it better. \- I may be wrong, but I don't think that market makers' profit depends on accurate delta hedging; I think delta hedging is easy and assumed. From what I read, volatility (vega) hedging is more difficult if not impossible, and getting the vol surface accurate is the real edge. But even then, my understanding is that market makers can make a profit on average in the long run (despite periodic losses) even when their vol model is slightly suboptimal, as long as they make enough money from short-term trades (via their bid/ask spread forecasting or balancing short-term supply and demand), in other words they can "adapt" to supply and demand. Again I might be wrong, but I thought market makers don't depend on long-run expected returns of one side of the market. Similarly in equity markets, market makers make profits in both bull and bear markets, or not? \- I re-read your last sentence in your previous post, and I agree that the entire story is more difficult: arithmetic vs. geometric returns, how to measure risk-adjusted returns, etc. Regardless whether VRP, if defined as realized vs. implied vol, is on average positive or negative, the real question for practical purposes ("should I engage in a passive options writing strategy") would then have to be measured in terms of risk and return, probably in conjunction with or as an overlay to an equities-centric portfolio. But setting technical jargon and definitions aside, perhaps we can agree that based on the backtests cited above other than the paper, short vol / options writing strategies had flat to negative excess returns i.e. were a loser's game since ca. 2010 by all conceivable metrics. (I hope we also agree that for evaluation of an options strategy, the excess risk and return of the delta-hedged overlay is what matters, and/or the non-hedged strategy benchmarked against the equity index, even if we define "VRP" differently.) I hope we can investigate further, and get to the grounds of it, or dispel any doubts.

eusebius13

So taking a look at the paper, it actually confirms the presence of volatility risk premium. The paper is suggesting that replicating portfolios for option writing no longer hedge the full option risk (which I do not believe as it would suggest that market makers like Citadel have negative returns and they do not). This is not evidence that options are risk neutral based on HV. Page 17 shows the value of traded options relative to synthetic options. The value of traded options is negative as you can see from the charts. This is confirming evident of volatility risk premium. The problem stated by the paper is that synthetic options (delta hedging), which is a portfolio of delta shares and cash intended to replicate the exact return of a sold “traded option” no longer fully hedges the sale of the traded option. The variance between the returns of option written and the hedge for the written option is the risk of the market maker, not the risk of someone taking a short option position that does not use the replicating portfolio to hedge their exposure. There are numerous reasons why this authors may have drawn these conclusions and I’ll go through the paper to figure out if it’s what I suspect. But Citadel, Jane Street and other market makers are highly profitable in market making activities, and part of their hedges are replicating portfolios so I’ll try to figure out the discrepancy. Finally I want to be really clear about what I have asserted. I have asserted that there is VRP and that biases higher returns for short options relative to long options. I have not asserted that VRP results in a specific return, only that IV is persistently higher than HV. I also suggested in the last comment that delta hedging wasn’t appropriate for determining VRP. VRP is literally the simple difference between volatility as priced and realized. If you attempt to run a portfolio of options through CAPM or take into account time value of money, you’re measuring returns not volatility.

eusebius13

Fair value is a specific term used to denote a market price. Expected value is the probability weighted return of an asset over all possible values. You meant EV, which is zero for all options given a volatility assumption. You appear to have a firm grasp of math, so your unfamiliarity with EV is likely because you haven't been exposed to a lot of probability and statistics. >Stock returns are not i.i.d.  And this is counter-evidence that you are familiar with statistics. Clearly you know something about statistics to raise iid. Stock returns are not iid, but residuals of returns are. Volatility is, by definition, the residual of the return. I disagree that one needs more than a year of data to draw statistical conclusions, and actually you can do so with much less. >Coincidentally or not, options writing seems to be prevalent only among retail investors and mostly proliferated in Reddit and similar discussion forums, promoted by brokers for whom options trading is a major profit center, and via retail oriented securitized products . . . This is empirically false. virtually all institutions hold short options. MIT Professor Andrew Lo's Alpha Simplex Fund, specifically shorts volatility through butterflies. That an institution doesn't exclusively trade VRP, isn't evidence that there isn't VRP. In this case, it's evidence that VRP alone is not the best way to earn returns. >I am well aware of the empirical evidence, but I also saw some studies that this reversed during the last ca. 10 years, i.e. a fully delta-hedged options portfolio had negative returns during that period, or in other words, the volatility risk premium has been negative for quite some time, or in yet other words, realized vol was higher than implied vol. This is empirically false. CBOE's butterfly index is up 374% over 10 years: [https://www.cboe.com/us/indices/dashboard/bfly/](https://www.cboe.com/us/indices/dashboard/bfly/) CBOE's buy/write index has similar results: [https://www.cboe.com/us/indices/dashboard/bxm/](https://www.cboe.com/us/indices/dashboard/bxm/) Finally here is a short straddle index: [https://www.spglobal.com/spdji/en/indices/multi-asset/sp-500-delta-hedged-straddle/#overview](https://www.spglobal.com/spdji/en/indices/multi-asset/sp-500-delta-hedged-straddle/#overview) It's a 3 month, delta hedged short straddle. The fund was launched right before the covid 19 and saw a huge drop in returns, notwithstanding hedging charges it has positive returns. I'd suggest the real test for VRP isn't a 3 month delta hedged short straddle. The real test would be a 1559 0dte short straddle, which avoids hedging charges and delta effects. It's literally IV at T1 - RV at T2. I have a CBOE Datashop subscription to SPX and virtually every short straddle over 30+ days is positive including at 1559. There are large drawdowns. These examples are evidence that VRP exists, and also that index returns outperform VRP, as I suggested above. Both of these things can be, and empirically are, true. None of the indexes have significant periods of non-positive performance, but they are consistently perform worse than the index. All the evidence suggests the distribution of returns is biased. Short volatility strategies, Instead of being risk neutral with a zero EV, have a broad, persistent, slightly positive bias. On the flipside, they have large drawdowns, and do not have positive log returns because of extremely high return variance. But that's a different discussion than whether VRP exists.

cometocalifornia

I meant what I said, "fair value". Fair value in the sense of expected return equal to the underlying in a delta-hedged scenario under a given volatility assumption. But that is probably just semantics. Most of what you said in your previous comment becomes true under the assumption that (generally) implied vol > realized vol. I am well aware of the empirical evidence, but I also saw some studies that this reversed during the last ca. 10 years, i.e. a fully delta-hedged options portfolio had negative returns during that period, or in other words, the volatility risk premium has been negative for quite some time, or in yet other words, realized vol was higher than implied vol. I can't located the backtest or study at the moment, but I'll try to find it again. My presumption is that nobody knows if the VRP will be positive or negative in the future. I did some research and reading, and I was not able to find any theoretical explanation or justification for a positive VRP. I think the VRP is not usually considered an independent source of return or (positive) risk premium in the literature - it could theoretically be positive or negative based on supply and demand of hedgers, speculators, and other options market participants. There is also a common misconception that the VRP should be positive because options writers "deserve" a premium because they write insurance. I don't think this analogy is true. An option can be perfectly delta-hedged (setting aside jump risk), and as such would not deserve a premium for providing "insurance" against market downturns; the value of an option should rather be derived by studying a delta-hedged option. Fact is that the writer of an option incurs the risk of the realized vol being higher than the implied vol, but she does not incur directional market risk as the latter can be hedged. Stock returns are not i.i.d. and Black-Scholes is just an approximation not reflecting jump processes and other artifacts, but the specific choice of model is irrelevant to the question and to the argument. Figuratively speaking, options effect a re-distribution of the distribution of returns into another distribution of returns, which without evidence to the contrary I would assume has the same expected return as the former over the entire range or probabilistic outcomes. The history of listed options is not that long (ca. 40 years which is shorter than many cycles of equity and other factors e.g. interest rate cycles), so extrapolation of the past should be taken with a grain of salt. Rare events and tail risk does often not show in backtests, which doesn't mean that they don't exist. Coincidentally or not, options writing seems to be prevalent only among retail investors and mostly proliferated in Reddit and similar discussion forums, and via retail oriented securitized products (usually with high fees), but I have not come across any institutional investor using options writing as a strategy or gaining exposure to the VRP. If the VRP was considered an independent or noncorrelated (meaning less than perfectly correlated) source of return with positive expected return, I would presume it would have made it into institutional portfolios and asset allocation / portfolio theory, as have equity factors, trend following, and most other assets and anomalies. I would be happy to hear if you can cite a paper or other substantiated evidence that the VPR should be positive, or evidence that any institutional investors are exposed to the VRP i.e. have an options writing program. I am not trying to dispute the validity of options writing, but I would rather be genuinely interest in getting to the grounds of this.

eusebius13

I’m not sure what you’re disagreeing with. I absolutely stand by the statement: >Additionally, even when you look at return on risk, there will be spreads and strategies that are superior on both return on risk, and greater than the overall return than a single leg option. Said differently, looking back at any expiration, the absolute maximal return will never be a single leg option. I’m not sure it needs context. It’s implied that you want to minimize risk and maximize return. It’s implied that this is a standalone trade not a portfolio because it discusses a single option vs a basket. A portfolio is a basket. Even with respect to Greeks, I can maximize or minimize any Greek on a $/greek basis with more options rather than with a single leg. There is a distribution of risk, reward, and greeks that is available with long options. The distribution of risk, reward and Greeks with multiple legs is much broader than the distribution of a single leg. (For example with a single leg, delta ranges from -.50 to .50. With multiple options it ranges from -1.0 to 1.0). >Without context and risk/return/skew etc. assumptions, we must assume that the ex ante risk-adjusted return of every option is the same, as its fair value is calculated using Black-Scholes (or similar model and/or variations) which is precisely based on a delta-neutral hedge. I agree with your sentiment, except here you ignore volatility risk premium. I would modify your statement by using “expected value,” not fair value but I think we mean the same thing. It’s important because EV implies that the value is probabilistic and therefore requires multiple trials to achieve. This is important because VRP suggests that market prices of option premia, developed by binomial options pricing models are biased and persistently overprice volatility. With multiple trials, it implies the availability of a statistical arbitrage. Consequently, any time you are net long volatility, in an options position, black scholes/binomial models persistently overprice premium compared with ex post results. This means the ex post EV of an options position that is long volatility, is statistically negative. And long single legs are always long volatility.

esInvests

awesome question. risk management to me is the guiding principle to determine exposure that strikes the balance between potential return and risk control. your instinct is correct, the majority of what you see is random shit that sounds good. the reality is, risk management is HIGHLY specific to the profit mechanism a trader is targeting and the subsequent strategy being used. for example, if I'm trading a short strangle to capture VRP I MUST have a different management plan than if I were trading a wide Iron Condor that inherently caps my risk. both of those will look different than a directional breakout strategy that im running using long options, etc. I view risk management at (2) levels, portfolio and trade. so i build controls that address each. I actually think Euan Sinclair's work is pretty solid on using things like fractional kelly for sizing after adapting for continuous outcome systems.

Fun-Sundae4060

Quantitative model-based options VRP selling. Leveraged and hedged ETFs with 200SMA switching strategy. These are different strategies but you can run both at the same time. Almost nobody here knows about these strategies.

doddpronter

Interesting approach. A couple thoughts beyond just entry/exit timing 1. Whether people want to admit it or not, we’re in a frothy bull market, tariff panic or not, we’ve erased most of the drawdowns. So with this strategy, you’re essentially betting that by either i. your exit, or ii. the expiry, SPX will be materially higher. Not a terrible bet historically, but definitely not bulletproof. If we get a prolonged drawdown or flat chop like 2000-2010, these long dated OTM calls can easily expire worthless. 2. The bigger question imo is edge: this isn’t really exploiting inefficiencies or taking advantage of speed, vol modeling, or structural dislocations. You’re making a directional bet, and DCAing on red days feels intuitive, but there’s randomness to it. It’s worth testing variants: maybe the 3rd and 4th red day outperform, or maybe spacing it out over volatility clusters matters more. If anything, maybe the more interesting angle is to optimize the strike/expiry pair dynamically using vol surface data to tilt the position toward better skew or VRP. Seems you have some nice backtesting skills, but in case you wanted something out of the box and free, shameless plug of optionterminal where you can scan these things quickly [https://optionterminal.com/strategy/long-naked-call](https://optionterminal.com/strategy/long-naked-call)

eusebius13

I’ve yet to model a TA indicator that robustly tells you much of anything. On the other hand, over a material set of data, Random Walk is virtually impossible to beat. It’s not a secret. You can look at the literature and every paper will tell you that consistently finding less error than a Martingale, is extremely difficult if not impossible. So you can model a martingale that shows consistent profit. But all you’ve done is prove the presence of volatility risk premium. And the problem with VRP is it’s too small to overcome it’s variance in returns. So your strategy will converge to zero over time, if you invest a percentage of portfolio. If I was asked to describe SPX as accurately as possible I would say its a combination that’s mostly a Martingale with a small drift, but sometimes is a Markov Process.

Luxferro

My employer did it a few years ago. VRP - voluntary retirement package. It went out to those over 55. A decent amount of long term engineers close to retirement age took them. Supposedly they might do it again this year. Since then there are young new college grads everywhere at work. No age discrimination with my employer... They even built a Google like play room for the kids...

ZjY5MjFk

> If this is true, how do you pick your direction on an underlying? * **Don't** You have to assume you are wrong or don't know the direction of stock. If the underlying crashes or rallies, what will your position do and are you ok with those risks? * You can always take [contrary positions](https://media.tenor.com/bk8QMH02QOcAAAAe/im-playing-both-sides-both-sides.png) to help dampen any big move in either direction. * You can also dynamically hedge, either per product or beta weighted across entire portfolio to lock in your edge while offsetting delta/gamma risk. * Arguably, as an options trader, volatility is more important than price. Volatility (in most regimes) tends to be more mean reverting than price. That is, sell vol high, buy vol low (or generally, more often than not, stay flat if vol is low) * Selling option is more like running an insurance business than "get rich fast action trading" these youtubers do. Your are getting a small premium for market to unload risk on you. You should only sell insurance policies that you think have probabilities tilted in your favor. Once in awhile you'll get bad luck and have to pay out, but hopefully all the premiums you collected offset that payout and are still profitable. * How do you tilt probabilities in your favor? The relationship between IV and RV. If you are selling contracts that are priced with higher vol than the vol realized, then with enough trades you'll be profitable. That is, you are getting paid for risk that never materializes. This is the tricky part though, because obviously you don't know RV till after the fact, but this is also why option sellers earn the big bucks, to figure out that hard problem. * Look up VRP (volatility risk premium)

esInvests

yeah gold has been super interesting here, silver just cracked highs as well. in the current markets commodities can really come alive - others like Oil have actually been really solid from a VRP lens.

genztrader123

Buy high, sell low ahh movement 😭 Bro had to buy in when the RSI cleared showed an overbought market. Worse part, the VRP was tight on Tesla showing that the market hadn’t priced in that Tesla was going to move drastically (the -14% drop we just witnessed today). Bro def cooked, just hope and pray Elon prints calls tomorrow buddy

Fun-Sundae4060

Yes please send me a list of whatever you’re reading so I can stay away... It feels like you bought The Intelligent Investor, read the first 20 pages, and now it’s your personality. Arbitrageurs who are taking advantage of these inefficiencies are making money as long as the market is not saturated! I sell some options VRP to make consistent returns in addition to investing… it’s just like how insurance companies sell insurance and make money off the risk people don’t want. However this inefficiency is small and doesn’t always exist for every stock or ETF at all times. The money made is not always worthwhile for larger funds because while the edge is there, not everyone wants to take a potential outsized loss as an insurance underwriter. Buffett is an arbitrageur of value… HFT traders with microsecond latency order placements are arbitrageurs of order timing and they all make consistent amazing money. And I don’t know how but you only manage to be correct on the risk premium concept but fail to be able to apply it in any meaningful way… growth investors are paying the risk premium which is reflected in the price as future growth rate when buying into a growth stock as modeled under the CAPM model as (risk-free rate) + (Beta)*(risk premium). Growth investors are taking higher risk and are compensated for it, plain and simple. There is no incentive to invest in growth if there is no reward.

pfthrowaway5130

Sure if you sell (buy) indiscriminately you’ll win (lose) average variance risk premium. As you’re correct that VRP is positive for sellers and negative for buyers. I’d hope that anyone attempting to make a go at volatility trading is making an effort to do better than essentially collecting market beta.

eusebius13

you mean all the people that underperformed the index? >Also why do you think long spy calls is negative ev ??? Ahha because long calls are long volatility and volatility, on average, is overstated resulting in VRP.

RussellUresti

Nothing great, for sure. International markets are performing better than US ones, and they're up YTD while US is down quite a lot. So that's an option. I like developed markets, so something like VEA or VGK for just European markets. In the US, some sectors haven't fallen quite as much as others. Consumer defensive is up a bit and utilities are flat. XLP and XLU are funds that cover those sectors. International fixed income is also doing pretty well right now. Funds like EMLC, WIP, BWZ, and that cohort of funds. And preferred shares haven't been hit as hard. VRP is a fund in this class that I like. Preferred shares are definitely more of an income investment, though. Not a growth opportunity. But they tend to do a good job at holding value. But everything is subject to sudden reversals, so nothing is particularly safe.

thatstheharshtruth

Maybe you can make some money in this environment since the market moves around a lot. On the other hand VRP and daily reminder that there is no edge in a structure.

iron_condor34

You're leaving out realized vol. If IV is high, RV is also probably high, which helps a buyer. This is also assuming the trade is structured in a non-directional way, so delta neutral as best as possible. Low vol actually helps sellers of vol. As much as premiums won't be "high" in a low vol environment, VRP is usually decently high. Meaning that realized vol is trading pretty low relative to IV, which is how you make money on those trades in theory.

duqduqgo

In general, credit put spreads will perform best in upward trending markets where the "wall of worry" sentiment dominates. In my experience only then will the VRP be worth harvesting. On top of this, sectors matter. Some will be in favor and more amenable to this strategy, others will grind you up even though the mechanical profile of the trade seems favorable. Said another way, actual vol matters, not just relative vol, due to the 3 risk to 1 reward ratio. You can easily have a run of 10 or more consecutive full losses... what will that do to your capital position? Fundamentally this strategy's risks over a reasonable sample size is in your 1:1 stop. Option SL orders don't work like stock stops where stop limits are possible. Option stops are at market and you will eat the spread when triggered every time (plus risk more slippage) and it will mutilate your actual R:R performance. The only way to manage a stop strategy like this in real markets is to manually monitor losses and manually execute your lossy exits religiously, or automate it and let the bot manage your exits actively. Manually monitoring trades such as these is mentally exhausting, even if there are only a few at any one time. Plus you have to factor in your psychology when you are on consecutive loss number 10. Will you maintain this discipline or will you start gambling? We are in a worried-with-cause market, as opposed to a hypochondriac market (what you want with this strategy), and this regime change is recent. This is not an easy environment to back test because we haven't been here in a while. You might try back testing on the SPX/SPY during the Oct 2014 - Feb 2016 period to see how the strategy performs, This is the closest analog in recent memory to how the market appears to be setting up. for the next few months.

loremipsum106

No. That is not what IV means. It actually means the market is less certain about the direction the stock will go than prior to earnings. Options go up in value the more volatile a stock is, and the way options pricing work, we can say that an increase in option price is therefore a sign that the market is pricing in more volatility. Looking at DPZ, there isn’t a ton of information in the options anyway, so they’re not a great source of information. Open interest and volume are low, and eyeballing the prices, it looks to me like there is symmetrical betting around the Friday close. There is the usual elevated price for far OTM puts, indicating a bit of VRP to be had, and that there are some insurance policies against a big drop being purchased, but that’s normal, and the open interest is so low I’m not sure that says much of anything about market sentiment for a stock with a 16B market cap and plenty of daily volume. I’m just guessing though. I haven’t spent much time with DPZ and I am not a professional or experienced trader, I just read a lot lol.

loremipsum106

Ok I just have to disagree with you here. I could be wrong, but here is my explanation. In a calendar spread, you want the IV crush to be assymetrical across the front and back months. Fundamentally, I am selling into VRP on the front month contract, and betting that the back month IV will not crush or at least less. This is the textbook rationale for why a calendar spread makes money close to earnings, so it could be nonsense, but they are delta neutral by design. In fact, I make a point of hedging out the delta with shares or closing the position prior to earnings if delta exceeds abs(20). There is a theta component too, which you can see in another comment that I am not executing on properly. The real problem is that I am only working in highly liquid positions using a scanner to find these spreads, which is not sophisticated, and so the IV crush ends up being symmetrical across the front and back months as a lot of these positions are closed, driving down the price of the spread overall.

iron_condor34

Well, if you skip ahead to 18 minutes you miss out all of what was talked about on META and META VRP and the covered calls they talk about on META. I know a lot in here trade CC's, so that's one reason why I posted this here. Options that have higher vega are much further out into the curve. The highest DTE they went into the video is 90 days, so 3 months. It's not that higher vega equates to muted moves in IV. It's that changes in IV are more sensitive in shorter dated vs longer dated due to how much time is left in those contracts. [A Professionals Guide To Calendar Spreads : r/VegaGang](https://www.reddit.com/r/VegaGang/comments/pe7t0h/a_professionals_guide_to_calendar_spreads/) This post touches a little on how shorter vs longer dated IV changes.

esInvests

Just to make sure you’re aware, there isn’t any inherent edge to theta. This is a pretty common misconception, Euan Sinclair has some good discussion points around that topic. Traders often confuse theta with extrinsic value with has two key components, theta (time) and volatility. Time is perfectly predictable, there is no edge in something with that profile. I know you didn’t mention this next part but I’m adding for general discussion for other people: There is a generalized edge in short volatility simply due to the persistence of variance risk premiums, but this also does not equate to default to selling. There are periods where VRP is lucrative relative to risk and periods where it’s not (and it’s not primarily based on IV levels). Meaning if a seller chooses to indiscriminately sell, they are likely to experience issues.

ValuesHappening

> I sold covered calls on SOUND regrettable mistake sold the $7 calls and that shit popped in December Selling CC's makes a lot of sense if you're talking about some kind of large+ cap stock that tends to move up and down over time. They can help secure premium against downturns, capture VRP when the stock goes horizontal longer than IV would suggest, and even just secure good exit points if the stock moves to a level where you would have been okay with selling anyway. When you're buying into a meme stock though where the entire thesis is "This is going to 1000bag rockets to the moon at some point when the market catches on" then _why_ would you sell CC's? 99% chance the thesis is wrong and you lose money. 1% chance the thesis is correct but you've capped your gains. It's like playing the powerball, which costs $1 per ticket, but then signing a contract saying that you will only pay $0.80 per ticket but limit your upside to $10 instead of the full ~billions you'd win for winning the powerball. If you're literally playing a moonshot stock, don't sell CCs.

Fade_Dance

>This is how I was taught by Tastytrade when I started trading. I don't agree with everything they say but it provides a good foundation for how to think about options Yes, I started on that broker in the options world many years ago. Tom Sosnoff is a character. They are good for your early-intermediate stage, but then it's time to move on, and even to realize how some of what they're saying is not at the final stage of trader development. But when you look around at the quality of the social media trader education, they're almost a godsend. That says more about the online trading environment than Tastyworks though. "Trade small, trade often" is outright predatory. Focusing on how positions evolve through time, and promoting active trade management and closing positions "early" captures the key difference between option trading and delta1 trading though. >trying to collect premium Ultimately there's only so much you can glean from looking at IVRank in Tasty's software. At the end of the day it's still *trading*, and you need a thesis about why the option pricing surface is shaped the way it is that directly interfaces with the *real world*, like special situations, macro, spec positioning, crowd narratives, etc, rather than derivations quantized in a broker screen. Otherwise you're just overcomplicating capturing VRP (which is what tastyworks does). Their option structure graphics are pretty though. Nice to post up on a secondary screen. Too bad they clear through Apex, and the fills have gotten too terrible to even justify having a small aux account with at this point.

neolytics

Eh, it depends on skew, there are conditions where upside skew is more favorable to the CC while downside skew makes the CSP less favorable. Market conditions dictate this, not absolute rules, though generally use the VRP will tend to favor the CSP. Other than that yes, unhedged CSP's and unhedged CC's are basically identical. In short: They both suck, I'd never do either. But I do write puts and calls all the time.

eusebius13

>Thanks for the reply, and I appreciate your pushback. I enjoy being challenged on this. Agreed, debate is how we learn. >In my opinion, it’s a narrow take because you are only looking at the payout at expiry. What I’m saying is that you need to consider the path dependency as well. With LEAPs, you have the option to monetize an implied volatility spike during a crash. Yes, you will lose some of your capital, but much less than with a delta-1 position. Your specific example was going from delta ~1 to delta .50. That’s a pretty big capital loss, regardless of a boost you might get from Vega. >If you think dynamically: during a crash & depending on your conviction in the stock, you can decide to either sell your ATM call at a high IV or sell a put ATM to create a synthetic position with 100% delta. Creating a synthetic at that point is accepting a significant loss. You’d be better off starting with a synthetic, and adding a stoploss at the cost of the LEAPS, or whatever you were willing to lose in the LEAPS. A synthetic with a stoploss at the cost of the LEAPS you were going to buy, outperforms LEAPS everywhere on the price curve, except the left tail, instantaneously and at expiration. If LEAPS, were preferable to a synthetic, why would you consider a synthetic at that point? Why wouldn’t you roll down to ~1 delta and create another LEAPS? >So yes, it’s a hedge on the left tail, and if the skew was mispriced before the crash, then it’s also an edge (without an “h”). I’d consider it neither. I’ll explain below. >Your ratio spread is interesting, but again, there’s no magic—you magnify the loss on small pullbacks. You can structure ratio and back ratio spreads in numerous ways, many of them outperform LEAPS on rangebound price moves. Others get hurt when rangebound but outperform LEAPS on the right tail. I think I said it in the original post, if not I said it elsewhere, show me the LEAPS you want and I’ll show you a better position for the majority of plausible price moves. >While you reduce your left-tail risk, you amplify the average-down scenario and miss out on the upside. The risk-reward isn’t that favorable; you need a higher win ratio to make money in the long run. The win rate on a synthetic is 50/50. The win rate on any LEAPS is less than 50/50. Win rates on ratio spreads can be much higher than 50/50. >Moreover, you’re introducing significant gamma risk as you get closer to expiry. While you could smooth this by rolling your position, it adds substantial transaction costs. There’s zero gamma/theta or vega risk with a synthetic. You can construct the risk you’re willing to take on ratios and back ratios. >Could it work better than a LEAP? In some situations, of course, it will—especially if you have a strategy with a higher win rate. It might also be more suitable for very speculative stocks. My point is, for the plausible outcomes, LEAPS are never the optimal structure. Long OOM calls destroy them on the right side of the chart. Synthetics beat them from the center of the chart forward, and ratio spreads can be constructed to beat them anywhere. The best LEAPS scenario is bullish price action and it gets trounced by 50 other structures on that. It outperforms OOM calls if the price action isn’t immediate. So arguably it’s a structure that gives you some time for the bullish price action to develop. Synthetics Ratios, Back Ratios and ZEBRAS give you MORE time to let the bullish action develop. And with LEAPS you pay VRP, with the other structures you sell VRP. And that’s exactly why it’s not a hedge or an edge. But you’re overpaying for volatility, so it’s never an edge, depending on execution and wide B/A spreads, you start off way in the hole. I guess you can make the argument that it’s a hedge compared to OOM calls. But OOM calls are a completely speculative position. Everything is a hedge compared to OOM calls.

scotty9090

This is grossly incorrect. VRP can exist at any DTE, and generally does. It can also be absent - which is when you lose. 45DTE may, or may not be the level where VRP is largest. Depends on the underlying and the point that IV is most overpriced is going to shift around over time. What holds true for the S&P 500 (which is where most of the studies happen) isn’t necessarily true for the RUT, GME or whatever else you may be trading.

dabay7788

Who's VRP?

thatstheharshtruth

None of what you say matters at all whatsoever. The only thing that matters and has ever mattered and will ever matter is if VRP is positive or negative.

thatstheharshtruth

How do you lose money on a stock that has only gone up in the past two years?! VRP is even negative most of the time. My friend no offense but if you needed proof that options aren't for you, this is it. Good luck on your financial independence journey and let me recommend (unlevered) index and bonds ETFs to you.

variantdesign

I don't think VRP is commonly available in many scanners or data sources sadly.

Such-Paramedic1004

I haven’t used other scanners. Do you know if they allow you to add a column for VRP? I could just as easily add it in my code if it’s not possible. It may be cool studying each model and adding it as a column and maybe adding a “confidence weight” to each column and quantifying a score for each option.

thatstheharshtruth

Why would you want to sell covered calls if VRP is negative? I mean it's your money but like....

thatstheharshtruth

Technically incorrect. VRP is positive or negative at all IV levels, it just depends on the underlying. What OP did wrong is a classic newbie mistake. Volatility clusters but also tends to mean revert. If you buy any option right after a vol expansion you're going to have a bad time when vol compresses again.

shailene9

Bro, for me, the first and most important thing in defining or exploiting an edge is understanding the margin requirements. I need to know how much money I have to bring to the table for this. That’s why I asked this question, but so far, I haven’t gotten an answer to this. Instead, people are jumping in with their assumptions and giving advice like, “Don’t do it, don’t do it.” Man, just let me know this one thing if you have a broker account. Then I can take the next step and quantify whether the VRP is worth it or not. Or if any other edge seems feasible based on the margin required and the VAR on the trade.