Selvala: Shift delta from put spreads to call options when volatility drops
Rick Selvala · Rick Selvala - Harvesting Volatility (Capital Allocators, EP.41) · Feb 26, 2018 · at 48:36
Rick Selvala, CEO of Harvest Volatility Management, outlines how to dynamically rebalance synthetic equity delta across shifting volatility regimes.
0:00 / 0:35exact quote · 35.7s
720p mp4 · rendered on demand · StarZero watermark
“As vol gets richer, you want to sell more and get more of your delta from the short put spread side. By the way, the market's collapsed, and we're okay selling some more put spreads lower strikes, and selling more vol when vol's really high. And we'll buy less calls in that instance, And you know, and rebalance that way. And conversely, when vol gets cheap like it did for much of last year, we'll migrate towards a stock replacement strategy. We'll sell fewer put spreads in that environment, and we'll get our longs from long calls.”
quote is from the automated transcript, cleaned for reading: filler sounds and stutters are removed, nothing is rephrased. names can be misheard (the analysis reads context, assessments check outside sources). how →
More from Rick Selvala
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…”
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 …”
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.”
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 …”
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”
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.”