hi sun,
sorry one question here. based on your number 7 point, wouldnt volatility goes up also when the stock advances? i thought volatility is a measure of how volatile a stock is? pls advise, thank you. :)

rgds
ky

7. Many traders caught off-guard by Tuesday opening gap-down, Most underlyings dropped out of the strike price. That is why we always like to adopt a more bearish view, even though we are trading non-directionally. We always sell the call further away from the underlying than the short put. For example, if SPY is at $125, we will sell 118 call and sell 128 put. As the stock drops, the delta increase in 128 put is not as menacing, but the delta improvement from 118 call is a welcome gift. But you may argue, if the stock goes up, the 118 call call is stronger than the 128 put, and we have a loss in delta again. Yes, you are right. But as the stock or market goes up, volatility drops. The loss in delta is compensated by lower volatility.

Good day KY,

If you use VIX (broad market volatility), you will notice VIX is decreasing as the market goes up. You could key in ^VIX in Yahoo Finance and check on its pattern.

As the market moves up, they are not many sellers. Only sellers are panicked, not buyers. They are no panicked buyers, only 'kiasu' buyers.

As the market tanks, all sellers are running wild with or without their pants. This drives up the volatility.

In general, volatility drops as the market goes up, especially on ETF and most single stocks.

Only for some stocks, especially those have just started their bull run, or just after the good IPO price, volatility goes up as the the stock moves up. For example, when Visa (V) was just listed, volatility was rising as the stock moved up. When the stock dropped slightly several months ago, volatility decreased rapidly. That happened when it was newly listed. We do not know whether it is still the same now.

Thanks for the question. Keep collecting time value, don't give up.

Etradehome

thanx sun for your clarification. :) sure! we'll just keep selling... :)

wow this is very informative, even with my expertise in options it still take me sometimes to digest and I still blur at some parts. Maybe time for recourse again. Haha but what is important, just make money.

I do not sell front month also, front month time decay is at the maximum so it is good for options seller but what is missing from this is that when you sell front month options, the time decay has already kick in and you have to sell closer / nearer to the market which in term is increasing your risk.

Here is 1 suggestion if you are planning to sell front month for $1. Look for a next month $2 and see how far off you can sell. Your income remain the same you are still collecting $1 a month except this time u collect $2 at the end of 2 month instead of $1 every month.

I normally sell a options 30 - 90 days. I try not to go beyond 90 days probably because I am trading futures options and it is more volatile and also futures options you can sell really far off so there is no need to sell so far away.

Good luck everyone

Hi Mr. Sun,

very enlightening email. Been trying to get you through your old email. Its been a while since I posted. Been 2-3 yrs since I took the course but no good progress yet. Have not even earn back what was lost still.

I have only been using short guts too. Guess must have miss out some of these important points that you stated.

HAve a quest: For the position not rolled over, when there is assignment at the end of the month, I construct a new position which should be 2-3 months away?

Thanks.