Is this a different environment which will permanently affect option trading performance?

Discussion in 'General Discussion' started by Dan M, Jul 27, 2018.

  1. Dan M

    Dan M Member

    I was reviewing the performance charts of the various trade alerts offered and have noticed that obviously 2018 has been a tough year thus far with many more losing months than has been previously seen. I know we've seen the return of volatility (or at least vol of vol) and larger ATRs which combined can be difficult. What is the general view on whether we are entering a new market phase which will make it more difficult for income trading or a just a short term adjustment we have to deal with every so often? Interested in how traders are adjusting? I recently took some time off due to personal reasons and want to enter back to trading but am seeing a different environment. Thanks.
     
  2. Trader G

    Trader G Well-Known Member

    I have the same question. There always seem to be periods where specific trades have a rough time but this one seems to be impacting the trade structures we like to trade themselves. Having to go out further from expiration, taking smaller returns, hedging, etc. I don't have anything but observation to back it up but I truly think that the number of large funds/institutional traders who are in the volatility trading space have impacted are edge in trading structures below/near the market to benefit from IV and the persistent vol smirk in indices. My solution is to add in other "systems" to help smooth out returns. Something that takes advantage of trending markets: married puts/naked puts/long term diagonals/ credit spreds/etc. That plus some type of hedge that kicks in when we get the vol shocks. It is still a work in progress and I imagine other people have different opinions of what is happening in the market.
     
  3. ACS

    ACS Well-Known Member

    Prior to February IV was above HV the vast majority of the time and that was I feel a big edge in the positive Theta, negative Gamma trades seen here and elsewhere. Since February the reverse situation has been in effect and to my mind has created an almost hostile environment for those trades. It's still possible to make money but it seems like you have to be a much better trader who carefully chooses entry points and adjusts according to market conditions while exiting when the market offers a high value day. This new volatility regime shows no sign of reverting and it may become the new normal.
     
  4. Kevin Lee

    Kevin Lee Well-Known Member

    My take is that every trading strategy has its pros and cons. They are designed with certain market environment in mind. No strategy works in every single type of market environment. There are always trade offs. Therefore as the market environment changes, strategies that worked before might not work anymore but on the other hand, strategies that didn't work before might work now. I wouldn't say this issue is permanent because if market reverts back to conditions that fit the strategies, then they will work again.

    I remember when I first started trading options, simple high probability condors with some simple hedges were good enough to make money. Markets were much more dual directional and IVs were much higher. Now market goes in one direction, especially upside for a long time before reverting. In the past, market usually took 3-5 steps up and 2-3 steps down. Now, we get 10 steps up and then 3 steps down. To make it worse, IVs stay at extremely low levels for a long period of time. Hence, the upside movements weren't accompanied with the necessary IV reduction to compensate for the delta losses that many strategies rely on.

    So, it's important that we understand the strategies that we trade. What market environment were the strategies designed for? If it's not working in current environment, it's important that we morph our strategies to cater to the current environment.
     

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