#18 - Should Your Trading Strategy Change With Implied Volatility?
Hey everyone, Kirk here again. On today’s daily call, we’re going to answer the question, “Should your trading strategy change with implied volatility?” The quick answer to this is no, your overall strategy should not change, meaning the game plan should generally be the same. Sell options, collect income, keep your position size small, make lots of trades. But the tactics in which you go about it should change. It should adjust and move based upon where you are on the field. To go back to any general sports analogy, your strategy might change if you’re down by 10 points or up by 20 points. The game plan is still the same. You want to win the game, but the tactics might change if you are on the two yard line, about the store or if you’re on the 50 yard line at the middle of the field. The tactics might change. Strategy is still the same. You still want to score. You still want to win. That’s the thought process that I have when it comes to this and how I think about it. To use some more concrete examples of trading, we still want to sell options, collect income and generate some cash in our portfolio. When implied volatility is high, we just want to be more aggressive. That’s really all it comes down to. More positions, meaning that when implied volatility is high, there’s probably more trades that we could get into. That generally means bigger position sizes. There’s probably more tickers we can trade, we probably want to start inching up towards that 4% or 5% per trade threshold if you can get there and then that also means leaving positions on just a little bit longer and riding out the volatility in the market. What we know for sure from the back-testing we’ve done not only with our software, but also with our profit matrix report is that during high implied volatility, that is the best opportunity for options traders and more importantly, during high implied volatility while waiting for profits is also the best. That’s not easy to do because think about the market scenario that you’ll be in during that time. If it’s high implied volatility, that generally means stocks are going down. It doesn’t always mean stocks are going down, but generally means that stocks are going down and you’ll have to hold positions much longer which means that as stocks are going down and as maybe there’s a lot of ups and downs, bigger magnitude moves per day, that’s going to really challenge some positions. One day you might have a paper loss, the next day a paper profit and the next day a paper loss. But if you hold out, if you’re steadfast and you keep with it, that’s when we see the biggest returns and the least overall drawdowns in volatility in the account. On the other hand, with implied volatility low, what we want to do is the opposite. We still want to sell some options, but we want to do smaller position sizes, we maybe want to start focusing and honing in on just ETFs and forego some stocks. We want to try to pair things back and prepare ourselves for higher implied volatility market scenarios. Overall portfolio is maybe less allocated. Generally, during times of low volatility, I’ll have anywhere between 10% and 25% of my account allocated, so a lot more cash available, smaller position sizes, mainly trading ETFs and that’s just because I want to adapt and change with what the market is leaving us. Hopefully that helps out. Hopefully it answers the question for you guys today. As always, if you have any comments, let me know. Until next time, happy trading!
