164: The 2 Major Problems With Buying Options During Low IV Markets
The Option Alpha Podcast
Kirk Du Plessis
4.8 • 1.2K Ratings
🗓️ 30 September 2019
⏱️ 24 minutes
🧾️ Download transcript
Summary
Show notes: http://optionalpha.com/show164
Since we are option sellers and our edge comes from selling overpriced options out into maturity it's natural to assume that if we want to sell options when IV is high that buying options during low IV markets is a way to make money in the other direction. We get it and understand the rationale argument. When IV is low, and option premiums are cheap, you can and should buy options because they are cheap right? Not so fast bargain-buyer.
This type of thought process and strategy, low IV option buying, has two major problems. And we don't use the word "major" lightly here. Each problem with option buying systems is so important that the probability of getting both problems right or solved is for all intensive purposes, impossible on a long timeline. Curious to know what these major issues are? Let's dive into today's show and find out.
Transcript
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| 0:00.0 | You're listening to the Option Alpha Podcast from Option Alpha.com where we show you how to |
| 0:06.2 | make smarter trades learn how the stock market really works and generate consistent |
| 0:10.8 | monthly income. Now your host and head trader at |
| 0:15.0 | option alpha.com Kirk depluses. |
| 0:19.0 | Hey everyone, this Kirk here again from option alpha.com working every single |
| 0:22.4 | week to make this the most popular |
| 0:24.0 | investing podcast offered online because it's based on one thing and one thing only and that's |
| 0:28.8 | helping you guys make smarter trades because again your life should have options. So thank you so much for |
| 0:34.0 | tuning into today on today show number 164 we're going to cover the two major |
| 0:38.0 | problems with buying options during low implied volatility markets. So I feel like there's this complex that's out there right now |
| 0:44.8 | and even though we've talked about this before, we're going to hit this subject again, |
| 0:48.4 | maybe from potentially a different angle and give you guys a different resource |
| 0:51.6 | to kind of get over this hurdle. |
| 0:53.2 | But right now there's this complex out there that when implied volatility is high we should |
| 0:58.0 | be selling options which is understood. |
| 1:00.2 | And a lot of people think well when implied volatility is low then, you should always do the alternative, which is to be buying options. |
| 1:06.0 | Now, our thought process on this has changed over the years. |
| 1:09.0 | Originally, we thought, look, we only sell during high implied volatility markets and about five or |
| 1:14.3 | six years ago we looked at all the research that we had done and other people had done |
| 1:18.1 | and said look there's still probably an edge to be gained or there is still an edge to be gained the implied volatility risk premium is still there and |
| 1:26.3 | available to be captured as an option seller during low implied volatility |
| 1:30.5 | markets. And in some cases the edge is just as great or the same as during |
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