It seems that there is very little volatility expected(?) in the weekly options area and I am struggling to get my normal returns. (This is on the ai/data center/quantum stocks that have been darlings and super volatile over last few months.)
I went to google to see if I could find any info so that I could work that into my longer term plan. Then Google spit out words that have no meaning to me. Can anyone here explain, in layman’s terms…
“Dealer Positioning: Dominant options-gamma positioning and dealer hedging flows have suppressed near-term price fluctuations.”
How do those words above mean that there is magically no volatility in the current stock bubble section of the market?
First you should understand how gamma works… then consider the following:
Short-term volatility has collapsed whereas long-term volatility is holding up, creating contango
Post SA sell-off, hedge funds are establishing positions again, that would result in dealers taking the opposite position
Now,
The above statement talks about you, the trader’s, character and skill set. As a trader, you need to have more tools, approaches, so that you can trade on various market. Secondly, more importantly, if the market setup is not conducive to your style, then you should have the discipline to step back and be patient.
When you force a trade, the likelihood of loss increases.
Totally agree with not forcing a trade. The issue is that at start of year I could get decent returns and be running like 12-15 positions. Then in last couple months I practically doubled my returns but with only about 6 positions each week. My hope is to analyze what is changing so that I can adapt when I need to. To me, it is obviously volatility that changed…but not sure how/why because this bucket of stocks is still in rarified/risky valuations. Why did the fear index drop when it seems the news of world and these stocks has not…hmm.
Your desire to understand market behavior is somewhat misplaced. A trader should understand which way market is moving, which way sentiment is trending, flow, etc. Trying to understand why is a fool’s errand. There are many factors at play, there is no single factor/ force.
Also, from your post, while you have not explicitly stated, your primary challenge is due to the fact that you are a seller of volatility. You keep complaining volatility is low, why you are not considering taking advantage and buy options?
Next week, you have jackson hole, NVDA earnings two events which could create volatility. If volatility is low, why are you not taking advantage and buying options? I am not asking you to go and buy, but ponder that… that should tell you something.
Never understood buying options, I have no idea how they really work or what my expectations would be. (I also have no ability to use margin, and I believe all the more advanced trades - spreads, condors, etc [heard from Fool’s option service] require having margin and advanced trading rights.)
You are not getting free money, you are writing insurance. You are collecting a very small premium and insure bigger loss for the buyer. Don’t fool yourself that selling option is giving you money.
You have a lot to learn about options. At this level of understanding, you should not be worrying about gamma…
Not fighting with you at all, and your comment about ‘you have a lot to learn’ seems a bit antagonistic to me. I am cash based and cannot do spreads. I make additional money with the process I have and I am trying to figure out if it can be steady’ish as part of a retirement income strategy. My questions might be basic but being judged with lines like “you are not getting free money” doesn’t help educate anyone anywhere. I literally never said ‘free money’. I have been trading options for over 10yrs and I spent three of those in the options service paying for that education. Try not to judge from a distance.
Instead of getting upset about my comment, think about this statement… why you cannot do spreads? This is lot less riskier compared to naked put selling.
My answer is going to upset you more… but so be it. Selling put is not an income strategy. Many services, many well meaning folks, have done a great disservice to investing public, by saying selling put’s as an income strategy. Whether you like it or not, no it is not.
Selling puts is like picking pennies in front of road roller. You will be lucky until you are not. A single event like 2020 or 2022 Oct can wipe you out or cause you significant loss.
Here is my real life example, a single option trade on FDX during 2020, going bad…
Here are some basics, not in any specific order
Selling options is not an income strategy.
Selling options is selling insurance.
I am not going to talk you out of selling options, but consider doing spreads.
Spreads will limit your loss.
Managing risk is your #1 priority, not return or the amount of premium you collect
Protecting your capital is the most important job
When selling options, spread the risk, by having contracts on many names.
Indexes are relatively less risky compared to Individual stocks.
Individual stocks, even companies with 100 year histories can drop 25%, check IBM after earnings.
Don’t trade around earnings, or other major news.
Be well capitalized
Lastly don’t fool yourself, saying I am selling cash secured put… that doesn’t change the nature of the risk or return.
Two years of this strategy has been working so far. Sell the put at reasonable downside risk, then if assigned sell the call at, or above, current price point with ultimate goal of finishing in positive.
Selling options is selling insurance.
Agree
I am not going to talk you out of selling options, but consider doing spreads.
Spreads require margin, I am trading with about 1/8th of my retirement funds and these are in a Roth IRA…so no margin and no advanced trading
Spreads will limit your loss.
Probably, no idea if that is really true
Managing risk is your #1 priority, not return or the amount of premium you collect
Agree
Protecting your capital is the most important job
Agree
When selling options, spread the risk, by having contracts on many names.
Fully agree
Indexes are relatively less risky compared to Individual stocks.
Indexes are less risky and therefore inherently less worthwhile from return standpoint.
Individual stocks, even companies with 100 year histories can drop 25%, check IBM after earnings.
Agree, and highly volatile darling stocks can do well over 50% swings…see Soundhound, Serve Robotics, etc etc.
Don’t trade around earnings, or other major news.
Eh… I have been dipping my toes in here and so far has worked out
Be well capitalized
As capitalized as I need to be for this teeny portion of my funds. And yes capitalized enough to cover my Puts.
Lastly don’t fool yourself, saying I am selling cash secured put… that doesn’t change the nature of the risk or return.
Never said it did, but the risk is that your money “could” be making more money if not tied up in an option, hence my much shorter time horizons.
but it is not a straight line of smooth returns… I had multiple days of 5% drawdown, and one 10% drawdown and on obliterations day suffered a drawdown of 20%!!!
Not that anyone asked me, selling covered calls has been a great source of income for me, it’s the least risky option trade. But as with everything in the market, it has its ups and downs. I find that much of the conventional wisdom about covered calls is wrong. Much of the conventional wisdom is based on theory, not on market reality. So, please, don’t lecture me on covered calls based on conventional wisdom.
Covered calls are not based on stock valuation but on market sentiment. Charts are the record of the sentiment.
Everything works … until it stops working. I began trading options in the 1980s, and I got progressively bolder as the 80s progressed .. because it was working. Then suddenly in the fall of 1987, while I was very long NYA options (an old NYSE index that is hardly used anymore), I got wiped out in one day.
Spreads do not require margin, they require a margin account or they require sufficient cash to cover them (that’s why you can trade spreads in an IRA). Two very different things. I trade spreads regularly in my margin account and my margin balance has never gone negative since my first spread trade. I also trade spreads in my various IRA accounts (that can’t be margin accounts).
For example, right now I have an order in to buy a spread on Berkshire Hathaway. As I’ve written in other posts, my thesis is that now that Berkshire is back to buying back shares, there is a certain price (really price to book, but still price) at which I think they will begin purchases below that level. So it acts as a kind of floor on the stock price. I try to buy spreads at or just below what I perceive as that “floor”. I’ve done the trade for a few months now. It is an extremely conservative trade, it earns a relatively small amount for me, but it is a nice IRR and it’s a very small part of my portfolio. Mostly done for fun, and for some small gains.
Not only will spreads limit your risk, they are the ultimate in choosing a risk level. You can choose almost ANY level of risk (and commensurate potential return of course) you want by using spreads. It’s a very powerful tool.
I didn’t trade spreads for the first 10+ years of trading options. One, because I didn’t know enough about it. And two, because back then option commissions were VERY expensive, and I was trading very small numbers, so two trades each time would double those high commissions and severely reduce my potential gain. Trading was also much slower, and much, MUCH more difficult, always on the phone speaking to an actual broker. And good quotes were hard to come by. It was chock full of difficulties.
The error is going long on options! I’m not going to vouch for puts but buying calls is a gamble that pays off once in a while, while sellers collect an income stream and occasionally have to let the calls get assigned.
Simple example, you sell 1 AMZN Sep 18 $250 Put for $4.05, for annualized yield of 18%. Now for some reason $AMZN drops to $200, your $4.05 is not going cover the $45 loss. You can sell calls, but unless $AMZN recovers, it will be difficult to recoup that loss. In a bull market, and in recent years we have seen consistently V shape recoveries and don’t let that fool you.
OTOH, You sell $250 put and buy $245 put, you risk $5, and collect $1.22; but for an annualized return of 270%, and if your thesis is wrong and $AMZN goes below $245, you lose at the most $5.
Selling puts, or covered call is basically you are accepting larger risk for a small % of premium. The risk/ return are same. So spreads allow you to limit the risk and generally over time provide much higher annualized return. Focus on annualized return vs initial premium.
Higher returns or asymmetric returns are earned by owning options. Of course, it requires the stock to make a strong move.
So, this is exactly why I am asking for information. What has changed since last three/four weeks where I making 2% on each option and today where I am only seeing .3-1% on same companies. I am trying to learn, not be told how wrong I am.
In economics, “animal spirits” refers to the human emotions, instincts, and psychological factors that drive financial decisions during times of economic uncertainty. Coined by famous British economist John Maynard Keynes in his seminal 1936 book, The General Theory of Employment, Interest and Money, the term describes the emotional “urge to action” that mathematical models and pure logic cannot predict. [1, 2, 3]
Instead of acting purely like cold, calculating robots, everyday investors and consumers are heavily swayed by gut feelings, confidence, fear, and hope. [1]
How Animal Spirits Influence the Economy
The economic landscape changes dramatically depending on whether collective human emotions are positive or negative. [1, 2]
High Animal Spirits (Optimism & Greed): When people feel confident about the future, they spend money freely and take bigger financial risks. Businesses build new factories, hire workers, and expand. This collective wave of hope can drive economic growth, but it can also mutate into “irrational exuberance”—creating massive market bubbles where asset prices skyrocket way past their actual worth. [1, 2, 3, 4]
Low Animal Spirits (Pessimism & Fear): If fear takes over, confidence plummets. Consumers hoard cash, firms freeze hiring, and investors panic-sell their assets. Even if an economy’s core fundamentals are perfectly healthy, a widespread dip in “spirits” can stall progress and trigger a harsh recession. [1, 2, 3]
Famous Examples in Action
You can see animal spirits at play during almost every major economic boom and bust cycle throughout history: [1, 2, 3, 4]
The Dot-Com Bubble (Late 1990s): Investors were so consumed by the fear of missing out (FOMO) that they poured millions of dollars into brand-new tech startups that had never made a single dollar in profit. Pure excitement drove the market up until it inevitably crashed in 2000. [1, 2]
The 2008 Financial Crisis: A massive wave of overconfidence led banks and homebuyers to take on dangerous amounts of debt, assuming home prices would go up forever. When the reality set in, the emotional pendulum swung sharply to absolute panic, freezing global lending systems. [1]
The Modern View: Behavioral Economics
Keynes’s early insights essentially predicted the rise of behavioral economics, a field of study combining psychology and finance. Famous modern economists like George Akerlof and Robert Shiller expanded heavily on this concept in their popular book, Animal Spirits. They argue that because human psychology naturally disrupts the idea of perfectly “efficient markets,” government policies and central banks sometimes need to step in to calm panics or stimulate spending when consumer confidence completely bottoms out. [1, 2, 3, 4, 5]
I’m sorry to inform that there is no magic bullet.
To get a better understanding of how the world really works I suggest getting acquainted with the Science of Complexity. I started by reading Complexity by Mitchell Waldrop which is quite entertaining.
That led to The Santa Fe Institute created by the Los Alamos scientist and to Stuart Kauffman, my favorite Complexity scientist. I loved his book
Kauffman has lots of very interesting podcasts. I wrote about some of it.
To understand why technology outperforms most other businesses bone up on Increasing Returns:
