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Hi,
I was wondering if traders should step away from buying calls and switch to sell puts on the days with significant VIX change.
To be specific, on Thursday, the market had a selloff in the morning and then recovered from the selloff in the afternoon. The VIX change were about 0.25 per dollar decrease during the selloff and -0.285 per dollar increase during the recovery.
However, the market had the same price action today but with a more significant VIX change. The VIX change were about 0.587 per dollar decrease during the selloff and -0.74 per dollar increase during the recovery. That means, even if traders catch the 50% pullback move by buying calls, the options IV crush will probably eat out most of the profits.
In this case, is it better for traders to sell the puts rather than buying the calls? Or if there is any good way to hedge the options IV crush for this type of market?
Thank you for any responses.
Selling puts (or calls) offers an entirely different risk profile from buying. Being long options is a defined risk position limited to the premium paid. Selling naked options is an undefined risk position which will require significant margins and be excluded from most, if not all, US retirement accounts because the ability to replenish lost funds in those accounts has legal limits. Changes in volatility should not interfere with the profits in a long option position if you are picking options with high enough Delta to offer a large portion of the movement in the underlying. If you really want to sell options then doing it with a credit spread will create a defined risk position with less volatility exposure but with the tradeoff of smaller profit potential.
