Bill Looney from CBOE and Oleg Lugovkin who is a volatility portfolio manager at Argentiere Capital AG led the second session of the day at CBOE’s European Risk Management conference. The title of their discussion was Directional Options Trading Strategy and Position Management.
One of the interesting comments at the beginning of the presentation was that the range of customers using derivative strategies has never been greater. Many of these managers are using options to implement a directional outlook.
Any directional trade is a three step process –
- Define View
- Structure Trade
- Risk Management
The view or objective may be either hedging, speculating, or enhancing yield. The goal of a trade should be defined in advance – this means that structuring and managing the trade will be easier as the trade develops. For targeted price moves around events short dated or weekly options have definitely changed the game a bit.
Some reasons to consider using options for directional trades include leverage, limiting downside moves, and to express vies on timing or trading ranges. An interesting point was that the lower the volatility the higher the leverage using options to trade your outlook.
There were several directional trading examples given over the course of the presentation that covered relative equity market trades, directional trades on silver, and directional VIX trades. The VIX trade was one of my favorite structures which is selling an out of the money VIX put and also buying an out of the money call spread which may usually be done at a low cost or maybe even a credit. Recently a VIX Sep 12 put could be sold for 0.30 and a VIX Sep 17 / 23 call spread could be purchased for 0.30 which comes to even money. The payout diagram at expiration for this trade appears below –
The risk to this trade is VIX below 12.00 at September expiration. A spike in volatility to 23.00 could result in a profit of 6.00. This sort of approach to trading demonstrates both the flexibility of options along with the great insight that can be gained from attending the CBOE Risk Management conference.