The Ledger
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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.”
Selvala: Implied volatility spread over realized has averaged 3-4% since 1987
“And you can see it, you know, numerically by looking at the spread of implied volatility over realized volatility. And since the 87 crash, it's been pretty persistent in that, you know, three to four percent range.”
Selvala: Catastrophic losses happen when shorting volatility without guardrails
“So, I think where people really get hurt is when A, they're short, Val and B they don't have guardrails in place. And the simplest way to think about a guardrail is, is, is if you sell options to sell spreads or if you sell an option to own the underlying.”
Selvala: Buying volatility when VIX is at 9 to 11 is historically attractive
“Well, what I would say is if your view is that volatility is cheap and arguably when the VIX is around 11, 10, nine, it is cheap. You look at any, You know, it's a mean reverting asset and you look at over time that tends to be pretty, pretty attractive level …”
Selvala: Covered calls generate yield when valuations are high and upside is muted
“One is a manager that uses covered calls, and even though, sort of to our earlier point, even if volatility isn't high, stock prices are high, and so adding some yield on top when the risk of a continued run is more muted and the potential of more of a decline…”
Selvala: Combine bottom-up stock picking with S&P index options as macro hedges
“Generally how I would want that to work would be, Finding someone who's really good at stock picking, you know, bottom up research, et cetera, and then use S&P index options as more of the macro bet around, you know, macro hedge around.”
Selvala: Derivative blow-ups stem from leverage, shorting, and absent guardrails
“Spectacular blow-ups that we've heard over time are usually on that side. They've been short, they've been levered, they don't have guardrails, and probably a little arrogant, and not being able to You know, put in a stop loss and manage risk and thinking, you…”
Selvala: VIX spikes let systematic volatility sellers collect higher premiums
“When there is a storm, it's not good for the policies you've already written, but it's very good for the policies you you're about to write. And if you are sort of a systematic volatility seller with guardrails, like the iron condor strategy, then those VIX sp…”
Selvala: The VIX spikes to 30 or higher roughly every 24 months
“When you look at a graph of the VIX over the last, you know, 20 plus years, It's about every 24 months or so that you see one of these spikes where the, you know, the VIX will get up to, you know, certainly 30 plus, if not, not touch 40.”
Selvala: Complex instruments attracting capital without understanding lead to heartache
“When you see, you know, an instrument that most people who are in it don't understand, and you see it attracting capital, and it's usually a recipe for heartache at some point.”
Selvala: Sell shorter-dated options for theta decay, buy longer-dated options
“When we do sell options, let's stay shorter dated to take advantage of time decay, and when we buy options, let's buy a little longer dated so that we're not hurt by that fate of lead.”
Selvala: Shift delta from put spreads to call options when volatility drops
“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…”
Selvala: Volatility serves three basic functions: yield, risk reduction, and leverage
“We sort of think about volatility as a way to do three basic things.
One is to add yield, and two would be to reduce risk, and three would be to add leverage.”
Selvala: Option buyers risk gradual capital bleed rather than sudden ruin
“You're less likely to be hurt buying an option. You might bleed to death over a long period of time, but you're not going to be, you know, taken out tomorrow on a stretcher if you're, you know, buying options.”
Selvala: S&P 500 saw its longest streak without 5% pullback since 1950s
“We've had a market, the S&P, which, you know, hadn't had a five percent pullback in 400 trading that, you know, call it two years, which is the longest streak in since the fifties.”
Selvala: In 2017, the VIX averaged around 11, lowest since 1990
“The VIX averaged about 11, which was its lowest level, I think, since 1990.”
Selvala: CBOE provides benchmark indexes across core options strategies
“The CBOE has certain, come up with many new indexes, which are helpful benchmarks. So if you're looking at covered call strategies, for example along the market with short calls against it, you know, you can look at BXM or BXY, for example. If you're managing …”