Derek Moore and Jay Pestrichelli team up once again to discuss how probabilities are used to understand where to sell short options to generate premium. Discussed in this episode are who is on the other side of the short volatility trade, how changes in implied volatility impact expected multiple standard deviations of expected movement, and how value at risk VAR impacts option premiums. Plus, they discuss how professional management adds value especially when option spreads widen and volatility increases.

Using probabilities to generate short high probability option positions

Expected underlying index moves based on varied levels of implied volatility

How large investment banks take the opposite side of the trade looking to reduce Value at Risk (VAR)

Difference between being patient for opportunities versus and always in the market strategy

What happens to option spreads when markets sell off?

Value at Risk VAR impact on institutional hedging as dynamic volatility hedging increases

Why sell options on large diverse indexes as opposed to individual stocks

Netflix example of implied volatility right before earnings and expected moves

Single stock risk using Netflix and Disney examples of over 10% moves down after announcements

Mentioned in this Episode:

Jay Pestrichelli and Derek Moore talk myths of the 60/40 portfolio

https://razorwealth.com/discussing-myths-around-the-classic-60-40-portfolio-part-i/

How are options priced and what is short volatility?

https://razorwealth.com/how-are-options-priced-and-what-is-short-volatility-podcast/

What implied volatility on options tells us about stock earnings expectations?

https://razorwealth.com/what-the-options-market-tells-us-about-expected-stock-moves-around-earnings/

Razor Wealth Management www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547