Rick Selvala, CEO of Harvest Volatility Management, discusses the historic low volatility regime of 2017.
Insight
Selvala: Selling OTM naked puts is less risky than owning stock
“Anybody who buys a stock, it's the same as being long a call and short a put, you know, at current level. And so if you decouple those things you can be a naked put seller and that's less risky than owning, owning the stock because the puts are out of the mone…”
Assertion Supported
Selvala: Inverse VIX ETNs exacerbated the February 2018 volatility spike
“In this case, the VIX spike that we saw on the, you know, towards the close of the fifth and the opening on February six was exacerbated by these inverse VIX ETNs that a lot of people were sort of getting into because they looked really good for a long period …”
Insight
Selvala: Selling covered calls provides income, not portfolio downside protection
“Obviously, you sell a covered call.
It's not a hedge.
It's not protection, but it is additional income, which can, you know, help dampen things a little bit.”
Insight
Selvala: Selling 25-delta covered calls realistically adds 2-3% in portfolio yield
“Generally speaking, you know, I think you can adding two to three percent, sort of doubling the yield is, is a reasonable expectation. If you're trying to do more than that, either you're selling calls on a really volatile stock, which in effect is giving you …”
Insight
Selvala: One-to-three-month expiries are optimal for covered call decay
“The time decay doesn't really kick in until three months and in, and so that doesn't make a lot of sense. You know, and markets can move and change so much in a year. So I personally think sort of that one to three month window, you know, is really the optimal”
Insight
Selvala: Options act like insurance where buyers systematically overpay
“Options provide a risk transference mechanism, like insurance. And buyers of insurance, over time, typically overbuy, but they sleep well at night. And sellers of insurance make a lot of money, but they better know how to manage their risk.”