Volatility based strategy

In this post, I will share one of my most commonly used strategy that’s implemented on various different time frame.

I like to use the first two strategy whenever there’s either one of the three things happening or when some of them are happening at the same time.

1. Whenever there’s a significant event coming up and the volatility is priced in in the term structure of the index options. One great example of such event is FOMC.
2. Whenever there’s an intense market sell off combined with index options implied volatility spikes.
3. There’s a sudden market-moving macro news, such as geopolitical tension.

And my strategies for this is fairly simple. I will list them out as below.

Calendar Spread:

The way I implement this strategy are typically on two instruments. SPXW options and VIX futures.

For SPXW options, I would sell the closest date from now at-the-money options that has the highest implied volatility priced in the options ( usually it’s the day of the event or the day before), and buy a longer dated put that has the same strike price. The way i choose the date for the long leg options depends on the total debit amount i need to pay and my risk tolerance level.

You might be wondering how i calculate the implied volatility. Well there’re three ways to calculate it which can be found here ( hyperlink will be updated soon).

For VIX futures, the timing is very important, you need to time the market “right” (which is impossible i know, i’m just trying to explain my point). The positions are entered when market selling is coming to its end and options dealers have done adjusting their book. Then you can sell the high and buy it back at the low, hoping the market will calm down as time passes on. Other than that, it’s just a very simple and basic futures spread by shorting the front end of the term structure and longing the backend of the term structure.

Term structure can be found using “XXXXXX” (will update soon) <GO> on Bloomberg terminal or in the options analysis tool in Interactive Broker Trader Workstation

Long Skew

To implement this strategy, i will first look at the 25D Risk Reversal to gauge the relative “expensiveness” of the SPXW options and adjust the strike price based on the premium i need to pay. This is essentially a modification of covered call strategy. I sell call spread on the upside(to reduce margin requirement and hedge my upside exposure), and buy a naked put/put spread depends on the net premium i am paying/receiving. This strategy is relatively flexible and it varies a lot depends on different volatility environment and different market gamma environment( more on this later in another post )

Finally, when the market gamma environment is relatively low, index has been calm, and realized volatility is staying in the “risk on!” zone or even in a downtrend. I would simply sell a –>

Iron Condor

The iron condor i sell is usually at the money strike, the condor width varies on the premium/max loss ratio. To hedge this strategy, i use 0DTE long naked options, options spread or ES/NQ futures

THIS POST ISN’T FINISHED YET AND IT WILL BE UPDATED SOON!!!