High Volatility = Time to Sell Options?

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Are you waiting for the moment to exploit volatility?

I decided to temporarily stop my systems in these days of crazy volatility to do some analysis:

In this video we make an excursus on the outbreak of volatility that just happened, we talk about the advantages/disadvantages, but above all about the control of risk, which is essential to not burn yourself.

We then continue with the evaluation of different systems that have always performed in the last 10 years, even in times of crisis.

I, therefore, invite you to reflect on the opportunity to live in a post-volatility period where, if exploited with the right approach, you can achieve remarkable results.


Hi guys, hi from Andrea Unger.

Volatility is one of the issues today also on other occasions and when volatility goes to high levels, we start hearing people wondering: "It's time to sell volatility?" or "Should we sell volatility?"

Yes? No? How?

"How?" It is the most important question because we want to do things in a proper way and it's good to clarify what could be done eventually if you really want to take advantage of the high levels of volatility out there in the market.

It's not me, but Francesco Placci again, he is the real expert about these topics at Unger Academy.

I learned a lot from him and I am still learning from him and I am very happy to leave him to tell you about volatility trading and what you could do, what he is doing and what eventually you would do if you will follow his advice.

Hi guys, I'm Francesco Placci, I deal with the research and development of systematic trading strategies for the Unger Academy, mainly on options and volatility products.

Markets and volatility

We are here together today to take stock of the situation on the markets and in particular on volatility.

As you know the markets are in a strong bearish trend, in the chart you can see the miniSP500 future, and currently, from high to low the market has fallen by over 35%.

In my opinion, it is a downturn that has no precedent for violence and speed.

This is the point on American markets, but for the European markets, the situation is even worse.

As you know when markets collapse so violently, volatility explodes.

What do I analyze to understand the volatility?

So, for this reason, we can take a look at the VIX index chart to understand on what level of volatility we are at the moment.

And from minimum to maximum the VIX index has grown by over 500%, a very huge spike.

If we compare the current level of volatility with the previous highs, we know that we are well above them.

So the current level of volatility is extremely rare.

In fact, if we take a look at the VIX index chart on a longer time frame we can see that we have almost reached the levels of the 2008 crisis and all happened in a little more than a month.

This to make you understand the peculiarity of the situation in which we are.

We are therefore in an extremely negative situation for the equity markets, but at the same time, I believe that there may be important opportunities to be seized on other markets, in particular on volatility markets.

Selling volatility? Let's consider the risks

These days we have received many requests regarding the strategies of selling naked options.

Obviously it is more profitable to sell options if the implied volatility is high, so this is a potentially favorable time for this kind of strategy, I couldn't say otherwise, also because volatility has already risen so much, but some considerations.

Too often when traders sell naked options they look at the margin but don't consider the notional value of the instrument and how much leverage they are using.

It is very easy to be fooled by the low margins required by brokers and to underestimate the real risk.

So my advice is always to consider the notional value you are using and don't use too much leverage.

I am not a big fan of this strategy, but recently due to the high volatility level, I sold the one put at 600 strike on the SPX index.

I collected $2400 and my notional risk is $60.000, maybe I was overly cautious, I don't think we will never see the SPX index getting close up to 600, but I certainly didn't use leverage.

So yes, selling naked options may be a valid strategy in this market phase, but I recommend paying attention to leverage.

Are there other ways to take advantage of this situation?

Definitely yes!

We could trade directly volatility!

We could use derivatives of volatility, for example, the VXX ETN.

You can think about that as if it were an ETF even if it is formally a debt security and it allows us to take exposure to volatility with a constant maturity of one month.

So this is an excellent instrument for taking a short position on volatility.

Why do I tell you this?

Let's change the timeframe to better understand.

As you can see volatility usually rises very fast, while it comes back more slowly.

Here we can see the same and also in February 2018 and personally I don't think what will happen in the near future will be different.

Those who already use short volatility strategies know that, after a volatility explosion, like the current one, these strategies are even more effective.

Personally, I think we may have a very favorable 6 or 9 months window for this kind of strategies.

Are there other ways to take advantage of this particular market situation?


Long on stocks or short on volatility?

For example, we could buy stocks.

But what's the difference?

To make money from stocks, we have to see the market going up while shorting volatility it is enough that the market stops going down and that fear goes away.

So even if the markets move sideways we can make money.

If we take a closer look at the situation, we can see that in the last days when the market fell, volatility stopped rising.

This could be a sign that we are close to a reversal at least as regards the trend of volatility.

Do we know it for sure?

Absolutely not?

Could volatility still rise?

Of course, but it must be reminded that volatility has already risen by over 500%.

Most of the damage has already been done.

So if I wasn't worried about working short volatility two months ago, I certainly am not now.

What is my advice?

The main point is how to short volatility.

We cannot open a short position on volatility just because it is generally high.

We must have rules, we must have a trading strategy.

So, my advice is to study this asset class and try to develop some systematic trading strategies on volatility, you will see that is simpler than you could imagine.

For this reason, I want to show you some simple trading systems that they personally use for trading volatility.

Most of the strategies I use, take a short position on volatility, but over the years I've also developed systems that buy volatility.

The most important aspect in the development of trading systems on volatility is not the entry setup, but rather the position management and risk management.

An overview of my Trading Systems

So let's see the first trading system and its performance.

To be able to make a long term backtest, I had to use $100,000 as a single trade capital.

Due to the 5 reverse splits that have been made on this instrument over the years, the initial price of the VXX is $120.000.

So, to relate the results of the trading systems to a capital of $10.000, it is sufficient to remove a 0 from the results of the backtest.

Here we are, this is the equity line of the first trading system, as you can see it is quite regular it opens long and short positions on volatility, we can see here the long equity line, this one not so bad, and the short equity line.

Obviously, it is more regular, the net profit is $458.000, that using a $10.000 capital per trade corresponds to $45.000.

We have a good ratio between net profit and drawdown and also a good profit factor.

Here we have the second trading system, it is very simple, it uses only a moving average to take a position on the market and it opens only short positions on volatility.

You can see here the equity line, which is a nice equity line, it is quite regular and here you can see the performance of 2019 after the volatility spike that we had in 2018.

As you can see the system did very well, after a volatility spike these strategies are more effective.

The system has been able to stay also out of the market during the current rise in volatility.

We can see some trades and we can notice that when prices are above the moving average, the system stopped any trading activity.

Here we have another trading system which opens only short positions on volatility, this one is the equity line, which is quite nice as you can see.

The net profit is $359.000, the ratio between net profit and drawdown is about 14, also this system has been able to stay out of the market during the current explosion of volatility, we have some losing trades here.

This one is another trading system, it's a new one, it works only on intraday, it closes all the position at the close of the day.

These are the performance we have the short equity line.

Obviously, by being in the market for less time it has also lower gains and the logic behind this system is a very simple breakout logic.

This system was born because I wanted to have a system that was able to close all the trade at the end of the day.

Here we have one of the first trading systems I made on VXX.

It uses a sort of filter or indicator to take a short position and this indicator is based on the VIX, on the ratio between the VIX and the VIX three months.

So it is a very simple trading system and it is made up of a few lines of code.

Let's take a look at the equity line this one is the equity line short, of the short trades, and as you can see the system had a small drawdown during 2018, these are the long trades, very few, but recently the system made a super trade, as you can see, and this one is the long/short equity line.

This is the VRP trading system it is one of the most aggressive, it works intraday on a 15 minutes time frame, and I've been using it for over 5 years.

It trades a lot so it's easier for the system to suffer during the negative market phases as in 2018 and also more recently.

Anyway, it is a system that has never had a losing year.

Finally, we have another short trading system, which works with a different logic, and it trades much less than the previous trading systems, but it is extremely consistent.

What do all these systems have in common?

They are all very simple!

You don't have to be a professional programmer to build profitable trading systems on volatility and this is a very important aspect related to the problem of overfitting.

The main aspect is the correct risk management and not the enter setup.

Why am I showing you these systems?

Because all these systems have been very profitable during 2018, a year following an important explosion of volatility.

Right now we are in a phase of very high volatility and we have, in front of us, a period of time in which these strategies have the possibility to do very well.

So my advice is if you have never deepened the trading on volatility, do it now!

Because I believe that in the near future there will be many good opportunities.

I strongly recommend you study this subject.

So, that's all, bye.

See you in the next video.

Hey guys, that was it, you've seen the whole narration of Francesco was mostly about two things: risk control, you want to do it?
Okay, do it where you can control the risk.

That was the hidden message during the whole video and second, the last but not the least, automated trading!

Automated algorithmic trading!

Let numbers give you the advice to trade, let numbers give you the idea of what you are doing, let numbers show you the scenario so that you can make the right decisions.

Don't decide out of your feelings, which could be right, of course, but it's hard, it's hard to decide and it's hard to even when you are under stress like this period with high volatility.

So guys, automated trading, algorithmic trading, everything about this is what you can learn in Unger Academy.

You can register to the link here below if you want to know something more.

In any case, keep on following us here on the YouTube channel, on Facebook and we keep in touch.

See you next time, ciao from Andrea Unger and also from Francesco who helped us in this topic.

Ciao, see you next time.

Need More Help? Book Your FREE Strategy Session With Our Team Today!

We'll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.

Francesco Placci

Francesco Placci

Hi, I'm Francesco Placci, a professional trader since 2005 thanks to the systematic approach to the markets.

My skills range from trading on index futures to bonds, from stocks to commodities, with a particular focus on volatility and options, which I consider to be among the most versatile and fascinating instruments available to traders.

After an experience with leading Italian credit institutions where I learned the basics of institutional finance, I became a successful independent trader, with great personal satisfaction.

Founder of Algoritmica.pro, in 2019 I joined Unger Academy as head of Research and Development.