Newsletter Subject

The Silent Killer of Options Traders' Profits Revealed

From

theotrade.com

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don-kaufman@mail.beehiiv.com

Sent On

Thu, Aug 22, 2024 08:00 PM

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(start trading this way)                                                                                                                                                                                                                                                                                                                                                                                                                 August 22, 2024 | [Read Online]( [fb]( [fb]( [fb]( [fb](mailto:?subject=Post%20from%20Don%27s%20Trading%20Desk&body=%20The%20Silent%20Killer%20of%20Options%20Traders%27%20Profits%20Revealed%3A%20%28start%20trading%20this%20way%29%0A%0Ahttps%3A%2F%2Fdon-kaufman.beehiiv.com%2Fp%2Fsilent-killer-options-traders-profits-revealed) Don Kaufman here. I've got a burning question for you… Ever wondered why so many options traders end up losing money? It's a harsh reality, but studies show that up to 90% of options traders fail to turn a consistent profit. That's right - 9 out of 10 traders are leaving money on the table or worse, blowing up their accounts. But why? Is it because the market is rigged? Are retail traders just destined to lose? Absolutely not. The real culprit? A fundamental misunderstanding of how options are priced and how they behave. And at the heart of this misunderstanding lies a concept that's often overlooked but incredibly powerful: Implied Volatility. Now, I know what some of you are thinking: "Ugh, Don, not more math!" But stick with me here, because understanding and leveraging implied volatility can be the difference between consistent profits and constant frustration. So, what exactly is implied volatility? In simple terms, it's the market's expectation of how much a stock's price might move in the future. It's "implied" because we derive it from current option prices, rather than historical price movements. Here's where it gets juicy… Implied volatility isn't just some abstract concept. It directly impacts option prices, and therefore, the profitability of my[In/Out Spreads Strategy.]( Let's break it down: - Volatility Skew: This is where things get interesting. In most stocks, out-of-the-money puts tend to have higher implied volatility than out-of-the-money calls. This creates a "skew" in the volatility curve. Understanding this skew can help us choose more favorable strike prices for our spreads. - Volatility Mean Reversion: Implied volatility tends to move back towards its average over time. If IV is unusually high, it's likely to decrease, and vice versa. This mean reversion can significantly impact our spread's profitability. We saw mean reversion works recently in the VIX. - Volatility Crush: After major events like earnings reports, implied volatility often drops dramatically. This "volatility crush" can be a goldmine if we position our spreads correctly. For example, tonight the options market is implying a nearly 12% move in due to earnings. After tomorrow, options will be considerably cheaper because many of the unknowns about the company will be answered. Implied volatility on the CAVA options expiring tomorrow are 242%! So, how do we use this knowledge to supercharge In/Out Spreads? First, let's talk about volatility skew. When we're setting up a bullish In/Out Spread, we can often get a better risk-reward ratio by choosing a slightly out-of-the-money call spread rather than an in-the-money one. Why? Because the lower implied volatility of OTM calls can make them relatively cheaper. Next, volatility mean reversion. If we're looking at a stock with unusually high IV, we might consider setting up our spread with a shorter time frame. As volatility reverts to its mean, the spread can benefit from both our directional view and the overall decrease in option prices. Lastly, let's talk about the volatility crush. [This is where In/Out Spreads really shine.]( By setting up our spread before a high-volatility event like earnings, we can potentially profit from both price movement and the subsequent drop in IV. The defined risk nature of our spread protects us if the stock moves against us, while still allowing us to benefit from the volatility crush. Here's an example: Let's say XYZ stock is trading at $100, with earnings coming up in two weeks. IV is sky-high at 80%. We could set up a bullish 95/105 In/Out Spread expiring just after earnings. If the stock moves up and IV drops post-earnings, we profit from both the price movement and the volatility crush. If the stock drops, our loss is still limited. Now, I'm not saying to blindly trade earnings with this strategy. The key is to combine our understanding of probabilities, and implied volatility to find high-probability setups. Remember, successful options trading isn't just about predicting price movement. It's about understanding and exploiting the complex interplay of all factors that affect option prices. By mastering implied volatility, you're adding another powerful tool to your trading arsenal. So, here's your homework: Start paying attention to the implied volatility of the options you're trading. Look for situations where IV is unusually high or low compared to its historical average. And most importantly, think about how you can structure your In/Out Spreads to take advantage of expected changes in volatility. If you’d like to learn more about the In/Out Strategy [click here to get started.Â]( To your success, Don Kaufman [fb]( [tw]( [ig]( [yt]( Update your [email preferences]( or unsubscribe [here]( © 2024 Don Kaufman - TheoTrade PO Box 24790 Christiansted, Virgin Islands 00824, Virgin Islands, U.S. [Terms of Service](

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