| Morning brings volatility and inflated option premiums, and afternoons bring clarity to long term trends. A look at the pros and cons of both strategies
I trade primarily options, occasionally Forex, and rarely crypto. In crypto, I’m more into finding passive income opportunities with Yield Farms. This particular article is for option traders.
I’ve noticed something about my personal trading history — I lose the MOST money in the mornings. For a while there, I wasn’t sure why, but recently, it occurred to me that I am overpaying for volatility premium, and holding the option too long where that vega component drains out, and I’m left with some losses.
Then, in the afternoon, once I see 15-minute and 1-hour trends stabilize, I usually have more success with 0 DTE spreads like verticals, iron condors, and butterflies, as theta drains the premium, and close the trade for profits near end of day.
In this article, I’d like to talk about:
- “Trading The Open”
- Trend and Momentum Trading
- Success Trading Breakouts
When I need some guidance on what option strike and expiration to buy, I defer to InsiderFinance option flow platform to show me where institutions think price will go for the day. Why not piggy back on the massive resources that institututional analysts have, and just take the trades they take, so long as we agree on the trade? That’s what I do. If you want to give it a go, here is my affiliate referral link (banner). You can cancel any time and all plans include everything — the price tiers are just how frequent you want to be billed. They also just sell the technical indicators alone, if people don’t want the option flow dashboard. I use both though.
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Author’s Disclaimer: This is not trade or financial advice. This information is being presented for entertainment purposes and represents the OPINION of the author. All trading and investing, whether real estate, stocks, or crypto, involves the risk of loss, sometimes greater than 100% loss. Do not trade or invest with funds you are not willing to lose. Please do your own research and verify information for yourself. We recommend paper trading to practice trading principles. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.
“Trading The Open”
To achieve unreal profits, you MUST commit this options formula to memory:
Just kidding! I have no idea what that means either!! LOL
The gist of this demonstration is that the premium we are trying to profit from, in various ways, consists of the underlying stock price (intrinsic value) and extrinsic factors like volatility, time value, among other things.
The Black-Scholes model is a special way to figure out how much an options contract should cost. An options contract is like a special type of deal where you can buy or sell something at a certain price in the future.
To use the Black-Scholes model, we need to know a few things. First, we need to know the current price of the thing we want to buy or sell in the future, like a stock or a piece of land. Then, we need to know the price that we agreed on for the deal, which is called the strike price. We also need to know when the deal will happen, which is called the expiration date.
After that, we need to know two more things. We need to know how much money we could borrow or lend without any risk, and we need to know how much the price of the thing we want to buy or sell is expected to change in the future.
Once we have all this information, we can use the Black-Scholes model to calculate the fair price, or the theoretical value, of the options contract. This helps us know if the contract is a good deal or not.
So basically, the Black-Scholes model helps us figure out how much a special type of deal should cost based on a few important things.
By knowing that option premiums consist of volatility and time value, it is possible to manipulate these factors to our advantage.
For volatility, you can either buy at times of low volatility, and sell when volatility surges. Or, you can initiate a short position when volatility is already high, and buy to close when the volatility wanes.
Similarly, time value decreases exponentially on the day of expiration (0 DTE), so you can buy/sell quickly to avoid any time decay, you can buy a week away from expiration to have negligible time decay, or you can take a short position (0 DTE) to purposely allow time value to drain out of the premium, then buy to close when the position is worth less.
So, if a trader wants to profit from market open’s volatility burst, you would need to buy and sell single leg options very quickly — within seconds or minutes!
Otherwise, if you buy at open and hold, in the absence of an underlying price move, that the volatility and time value will drain out of your super-charged position, and you will end up with a loss.
The only way I have seen buy-and-hold (B/H) day trades work is if the underlying price has significant moves in the desired direction, like with a breakout. As time decay increases exponentially towards expiration, I would not hold a B/H 0 DTE position within 3 hours of market close.
Trend and Momentum Trading
Another way of trading is to avoid that unpredictable market open volatility, and wait until the markets take a break. A lot of times, I will see trends start to become more obvious. So, what I like to do is check multiple time frames to make sure the short term trend matches the longer trends, and is not just a quick fake reversal or “liquidity search.”
I referenced the InsiderFinance platform in my introduction. Let me now show you the POWER of these indicators!
The more I use these custom indicators, the better my trading gets. Look at the chart below:
I felt pretty confident taking a bearish trade. At the time of this article, we were nearing monthly expiration. Typically, we get a lot of selling pressure around that time, so the “confluence” of factors supported a bearish trade.
I’ ve been burned before on some reversals, so I thought I’d do a SPX butterfly for good risk:reward (RR). If you know anything about butterfly spreads, they are a credit spread and a debit spread in one trade, that share the same short strike in the center.
Since the butterfly spread has doubled up on short strikes, the position, though considered a ‘long’ position that you buy, actually benefits from time decay. Therefore, 0 DTE butterflies are one of my favorite trades on the SPX cash settling.
The trade I set up was:
BTO 9/15/23 SPX 4425/4435/4435 Put Butterfly @ 0.55 per spread x 2 spreads
The max loss on this was $55 x 2 = $110
The max profit on this is the (width of the wing — cost) * # shares
(10–0.55) * 200 = $1,890
The reason I chose a PUT fly was because price was already above my center strike, so if price had to come DOWN to my strike, then it stands to reason that I could profit from the downward move into my strike zone. The bearish trend had a very HIGH CONVICTION due to the confluence of InsiderFinance technicals.
Going back to our options premium formula, taking short positions in the afternoon are great because the volatility drops around noon, and the time decay accelerates towards the end of the day.
There are times where traders can use other short strategies to take advantage of time decay, such as vertical credit spreads or iron condors.
Success Trading Breakouts
I’ve had the most consistency and success trading breakouts. Trading breakouts works best when buying single leg positions, due to increasing volatility. But, it is possible to profit from these same levels help even when trading those 0 DTE positions short positions, if done right. So, I will run through both scenarios.
First, let’s just get things set up for success.
Obviously, you’ll need at least the InsiderFinance technical indicators. You don’t have to purchase the dashboard if you don’t want that yet, although I use it to see which strike prices institutions think price will go on a given day.
Next, after installing these to Trading View (they have a tutorial), mark the premarket high and low on the Hourly time frame. You can market either the body or the wick — in this example, I’ve marked the wicks of the pre-market high and low. These will serve as our immediate levels of support or resistance.
Any candle with a confirmed full candle close out side of these lines, on a 2-minutes or 5- minute chart, will represent a potential breakout!
After marking your hourly highs and lows, drop to a 2- or 5-minute chart and wait for a full candle to close outside of this range before considering entering a trade.
Here’s a previous article I wrote about the difference between Volatility Crush and Volatility Rush:
Trading Volatility — IV Crush and IV Rush?
Did you know you can still make money in the stock market even if the price of a stock doesn’t move? It’s called “IV…
Now, THIS is where the strategies diverge.
- You can take single leg or debit spread. Best with single leg to take advantage of “volatility rush”. Debit spreads ‘cap’ your profits. On the single leg call or put, you want to “sell into strength” — this means you want to sell with the price is surging, not on a pullback. Oscillators work well for this. I try to sell on the 4th or 5th candle, if not sooner.
- You can try a credit spread that will profit as underlying price bursts further and further away from your short strike. You profit too from “volatility crush”, so you can buy to close on a pullback, typically 6–7 candles from the breakout.
- You will often see a 2–3 candle pullback to support/resistance, before the trend continues. However, if price falls back into your support/resistance range, consider taking a stop loss.
If you happen to see this fast reversal, you can consider staying in the trade, so long as price is still above your resistance. Look for a bounce on your support line:
- These indicators use calculations of previous S/R levels and give you Take Profit levels for you.
- Don’t forget your stops — looks easy on paper, but losses can and do happen. I set my stops tighter than the indicators recommend — the line is my stop.
- I recommend paper trading if any of this is new. Measure your success in successful trades and percent profits — not in dollars. Everyone’s accounts are relative — larger accounts can trade more volume, but still have a poor win rate.
- So, it’s more important to have a consistently positive trading philosophy than a large account.
Whether your a Volatility Rush market open trader or a Volatility Crush end of day trader, there are ways to learn consistency and conviction. By knowing value drains from volatility and time decay, traders can use these to their advantage to maximize their trading success!
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Thanks for reading!!
~Ryan @ BlockStoxx
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