Option implied volatility and 95% losing trades?

With options, time is not on your side because they depreciate. They are a race against time. Investing is hard enough but making money with options is even harder. I only trade options a few times per year only to make an extra 3-5% alpha per year.

Options are priced so you only make money if the stock price moves MORE than the expected return. This means 2 things:

1) You won’t make money consistently unless your stock picks OUTPERFORM the expected return.

2) It’s really bad to buy options unless you have a proven strategy.

My father used to trade options in his IRA. 5 years ago he would lose 10% of his account in a year. I told him not to trade and he traded less. His losses dropped to 7% per year then 3% and now he doesn’t buy options and loses nothing. In fact, he is making money slow and steady like it should be.

What draws people to stocks in the first place is that it's not a zero sum game. Stocks grow when the economy grows. When someone buys a $900 iPhone, the profits add to the value of AAPL stock.

It's like a reverse casino. In a normal casino if you play the slots 10,000 times spending $10,000, you will gave gotten back an average of $9700. With the stock market you get back an average of $10,600.

But this only applies to simple holding of stock.

Once you get into derivatives, it actually is a zero sum game. For you to win, someone else must lose.

The problem is, you are playing against the smartest professionals in the world, and all the research and technology their money can buy. They have well-honed computer algorithms that, all due respect, know more about options trading than you. They are better connected to the trading floor, so they are much faster.

Why are they there? Why does it make sense to play this zero sum game? Because they are able to harvest profits from others who are not as good at the game. Mostly they are targeting other professional investors, but you find yourself in the crossfire.

There's a reason the options are priced as they are: they set the price. THEY set the price.

You are holding yourself out as smarter than them -- or luckier.

I would let go of that.

When I read your initial question, my first guess was that this might be about buying options before earnings announcements and the losses due to implied volatility contraction after the EA.

My second guess was that this might be about how put premium inflates before a pending dividend. With the data that you posted in your comment, these were bad guesses since (1) there's no dividend on AMD and (2) you posted the Greeks so it's clear that you have more than a noob's understanding of options.

There are three variables in play here:

  • Time decay
  • AMD's price change
  • Change in implied volatility

Modeled, the expectation would be that there would be a loss of 20 cents of premium over 15 days. This is almost borne out by your stats. With a an actual theta of -0.103 (your number is high, perhaps because it was rounded up), you'd expect to get 20 cents of time decay which matches the modeling.

With an average delta of ~ 0.455 across the price range, with a price drop of 45 cents, you'd expect the put to appreciate by the same 20 cents so premium should be unchanged.

But because IV contracted by ~8% (the actual IV declined 4.1), the net effect was a premium decline to $3.70

Here's an online calculator that you can play with. Isolate one variable at a time to measure the effect of the change in premium:


The results of program that I use was pretty close to those of this calculator. Either way, the IV numbers should be in the vicinity of .53 and 49. The IV numbers that you provided appear way too high (72.9 and 63).

Hope this all makes sense.