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Options Myth #9

There's a Volatility Edge Selling Options

OPTIONS MYTH #9

There's a Volatility Edge Selling Options

This is one of those statements repeatedly made by fake experts. It's not true, nor will it ever be. I understand the argument made, but it lacks a fundamental understanding of the risk factor inherent in options.

TRANSCRIPT BELOW

TRANSCRIPT

There's a Volatility Edge Selling Options

"Volatility Edge" is one of those phrases that the fake experts say over and over again hoping that if they say it enough times it will be true.

It’s not true. Nor will it ever be.

Yes, I know the argument.

Implied Volatility has been greater than Historical Volatility for 4,000 years (or something like that). Guess what?

That still doesn’t make it true. 

Here’s a better way to think about it.

The Risk Premium

Options are a product that offer the Buyer of that product – “limited-liability.”

Limited liability means you can only lose a limited amount. In the case of options, it's the premium you put in.

For all intents and purposes the seller of an option takes on unlimited risk (with Puts the options are limited to the stock going to $0). The market clearly understands this and that’s why it prices in a risk premium.  

Is that an edge?

No. 

The market has historically and will eventually make a sharp move that can create substantial losses. The risk premium is attached to options to alleviate those potential future losses.

No Volatility Edge

Look, there is nothing wrong with selling options. People can and do make money selling options. Warren Buffet sells options, but he does it in a very specific way.

Please don’t be that person who sells options and thinks you have a Volatility Edge just because it ranks high on some IV ranking screen.

To a real expert, you sound like you don’t know what you’re doing.

I’ll leave you with this to think about…

If you sell an option with an 80 IV and it trades to a 20 IV just like you were hoping for, then did you make money?

The exact answer is “I don’t know.”

In fact, it’s very possible you lost a lot of money, which should make you wonder: "What about the Volatility Edge?"

So unless you’re actually trading the Volatility, which I would bet that you aren’t (See Options Myth #3), then Sell Options by focusing more on the future direction of the stock.

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Options Myth #9

There's a Volatility Edge Selling Options

OPTIONS MYTH #9

There's a Volatility Edge Selling Options

This is one of those statements repeatedly made by fake experts. It's not true, nor will it ever be. I understand the argument made, but it lacks a fundamental understanding of the risk factor inherent in options. 

TRANSCRIPT BELOW

TRANSCRIPT

There's a Volatility Edge Selling Options

"Volatility Edge" is one of those phrases that the fake experts say over and over again hoping that if they say it enough times it will be true.

It’s not true. Nor will it ever be.

Yes, I know the argument.

Implied Volatility has been greater than Historical Volatility for 4,000 years (or something like that). Guess what?

That still doesn’t make it true. 

Here’s a better way to think about it.

The Risk Premium

Options are a product that offer the Buyer of that product – “limited-liability.”

Limited liability means you can only lose a limited amount. In the case of options, it's the premium you put in.

For all intents and purposes the seller of an option takes on unlimited risk (with Puts the options are limited to the stock going to $0). The market clearly understands this and that’s why it prices in a risk premium.  

Is that an edge?

No.

The market has historically and will eventually make a sharp move that can create substantial losses. The risk premium is attached to options to alleviate those potential future losses.

No Volatility Edge

Look, there is nothing wrong with selling options. People can and do make money selling options. Warren Buffet sells options, but he does it in a very specific way.

Please don’t be that person who sells options and thinks you have a Volatility Edge just because it ranks high on some IV ranking screen.

To a real expert, you sound like you don’t know what you’re doing.

I’ll leave you with this to think about…

If you sell an option with an 80 IV and it trades to a 20 IV just like you were hoping for, then did you make money?

The exact answer is “I don’t know.”

In fact, it’s very possible you lost a lot of money, which should make you wonder: "What about the Volatility Edge?"

So unless you’re actually trading the Volatility, which I would bet that you aren’t (See Options Myth #3), then Sell Options by focusing more on the future direction of the stock.

BACK TO MAIN MENU

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