Positioning for Tremendous Upside Opportunity

January 14, 2018

[originally published on medium]

I’ve been reviewing my journal entries so far this year since I made a strategic decision to shift my options trading in 2018 from short premium & short volatility to long premium & long gamma, and I thought this recent journal entry from January 9th delving into my thought process might be instructional to others as well so I decided to share:

As I venture further down the path of long gamma trading, I was reminded of the fact that so many options traders are being drilled about the need to “sell premium.” There is an entire army of neophyte options traders being taught the “church of short volatility”, thanks to outfits like {redacted}, {redacted}, and others.

But the most successful options trader I know — {redacted} — rarely puts on a trade for the purposes of selling premium. He puts trades on with a directional bias and is rarely short volatility (as far as I know).

When the whole crowd is doing one thing (selling premium), then it pays to go your own way and be on the other side for the turn.

{redacted} had a great conversation thread on twitter today about how Traders are doing it all wrong: We shouldn’t be trading to “make money”, we should be trying to GET RICH! Instead, to “make money” we should be doingsomething else — a job, or building a business (preferably both). Trading should be focused on delivering the home runs. The Alpha.

While this plays nicely into a long gamma portfolio that theoretically has the potential for “unlimited” gains, I have to be careful not to be trying too aggressively for home runs. Let them come and let me be ready for them, but in the meantime, be aggressive in managing the drag during the sideways and declining volatility environments.

At least one great thing about being long vol and long gamma is: I don’t have to have that nagging fear in the back of my head of sudden overnight gap risk. There’s no reason to fret about where futures might open the next morning or to nervously make it through a weekend when some crazy news hits the market. All of those things will likely be beneficial to my portfolio.

Volatility has been at historically low levels for a historically long period of time. I’m not predicting that volatility is likely to expand any time soon or that the market is going to crash. Not at all. I just know that if volatility continues to remain low (or go lower), the risk to my portfolio pales in comparison to the upside potential when volatility finally reverses its trend. And of course, any sudden volatility spike will be tremendously beneficial to my equity. I like that risk versus reward scenario.