My high IV observation and strategies (Elite+)

We all knew that we had high volatile market for the last 2 months (Sep-Oct 2018). Learnt many things and came up with some strategies that can work in high IV. Here are my observations.

Trending

  • In high Volatile period, market is highly volatile in both sides. However eventually market will mostly go down
  • Short term time frame and momentum trading works really works well as there is so much violence.
  • Trend-following with high time frame will have wide SL and MTM profit & loss. Since ATR is high, we need to reduce the volume accordingly. Learn position size according to your capital

 

Delta Hedging and Adjustments

 

  1. Usual delta hedging (Selling in opposite side) will not work in high volatile because premium value will not come down easily due to high IV.
  2. Buying option is also very costly hence buying plain option will not work, but it can be replaced with back spread
  3. The only instrument which can hedge high IV is future
  4. Since market is generally bearish in high IV hence it is better to do Elite+ (Let me coin this name for this strategy) to capture bearishness with controlled MTM swing.
  5. Selling option in next month for hedging is even pathetic. It may have higher IV which is not affectively hedging current month options

 

IV and option pricing

 

  1. Option price is very high due to very high IV. Especially in OTM, premium is very costly. If it is cheap, option sellers will buy OTM option for hedging.
  2. In normal market, there will be volatility skew if you look at premiums from ATM to far OTM, but it is tending towards volatility smile where there is less premium difference between two strike prices.
  3. In such a cases, using future we need to form to exploit volatility smile (Or less skew).
  4. Use Elite+ Strategy

Strategy for high IV

  1. To be honest, there is not popular strategy for high IV.
  2. Bookish high IV strategies (Strangle & Straddle) will have MTM swing
  3. The idea behind any strategy in any market for option seller is that it should have less MTM swing so that psychology will not get affected.
  4. If you define any strategy using option buy, there will be less profit or loss in high IV range-bound market. Example: All typical option buy strategies including backspread.
  5. Use Elite+ Strategy for bearish to range-bound view
  6. Use ITM put calendar for bullish view.

 

Elite+ Strategy

  1. First of all there is no bookish name for this strategy.
  2. Hence let me coin this strategy name as Elite+
  3. It will work for range-bound and bearish in high IV.
  4. It would not work in low IV.
  5. It works in Banknifty than Nifty because premium is high.
  6. Use monthly expiry options. If you do not get enough premiums, go to next month.
  7. It works really well for trend-follower

How to form Elite+ strategy

  1. Go short in future in Banknifty
  2. Sell two PEs collect huge premium around 800-1000 points, but do not sell ATM PE Which will limit the profit and break-even.
  3. Buy CE at Banknifty future + (Premium collected in PE side)
  4. Sell far multiple OTM CEs to finance call option buy. No need to finance full.
  5. Make sure that break-even in downside is at least 10% from spot
  6. It gives break-even point from 10 % <- Spot -> 10%
  7. Only one lot is naked in downside

Elite+ Example

  1. Short Banknifty Future at 25100
  2. Sell 24500 PE and 23500 PE and collect 900 premium
  3. Buy CE at 26000 (25100 + 900) (Ex: 200)
  4. Sell 27000 and 26500 CEs multiple lots to finance CE option buy (Ex 2 lots sell 27000 CE at 75). You do not need to finance it full here. It may be less.
  5. The break-even will come to 22500 in downside.

Elite+ adjustments

  1. If market stays in sideways, you will get profit.
  2. If market goes up, bought CE option will be SL for your future. Future loss will be compensated by PE premium. Need to do roll up PEs and those additional profit to defend sold CE.
  3. Generally when market goes up, IV will come. Sold CE will not get spike. If suppose, market moves up faster, have ITM put calendar.
  4. Big profit will come when market comes down. When Banknifty comes down, roll down sold CE.
  5. If it comes down 1000 points, create one Elite+ (Pyramiding) which will defend 22500 break-even point.
  6. No issue if market reverses back after it came down, you can cut future cost-to-cost, but PE premium would have been in profit.

 

Conclusion

  1. This is my research for education purpose for others.
  2. If you like it, please share to many as I have shared to you
  3. In my initial days, I did strangle and straddle. Later I did ratio spreads. Recently I had moved to risk defined strategies.
  4. Hence these strategies may be optimized in future. If I find any such thing, will update you all.

 

Thanks for reading and sharing with friends

  • JEGAN

Jegathesan Durairaj, a mathematician by qualification, an Ex-software professional and now a full time Risk Defined Option Writer. With his Open Book Strategies, he is the most known identity in twitter as itjegan, with huge followers. He had won Zerodha 60 Day Challenge – 10 Times round-the-clock. He is one of the prime Option Writing Trainer and tutored close to 1000 members till now.

He is the Mastermind of CapitalZone – Active Option Trading where Traders can avail Trading Chart with customised indicators, FNO tools and Payoff analysis. His keynote is to provide whole FNO deets to be handy for Traders in a sole place.

Now he is taking more heed on hedging portfolio in Option Writing where we might subject to more market risk. He is streamlining his strategies often and improving perpetually. At this time unfolding ways to measure good-quality Trend Following System.

Conducting workshop in all Metro Cities (Delhi, Mumbai, Bangalore, Chennai and Coimbatore) often based on queries from Traders.

 

 

8 comments found

  1. Thanks a lot Jegan for sharing this Strategy. I will go depth on it and try to implement if it suited to me.

  2. I am sure this will definitely work in high volatility. Will definitely test this to gauge the performance.

    Thanks,

  3. Great read Jegan. I have found front ratio spreads to work the best in this high IV environment. With a ratio of 1:10 or more and a larger spread.

  4. Can you please tell how to create ITM put calendar when BN hit the upper side of Elite+
    What will be the spread that time?

  5. you said to capture 800-1000 points.How will we capture such huge point with OTM PE. you meant per lot or per quantity?

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