What is Volatility Carry? | Options Education
Understanding Volatility Carry
In this video, the speaker explains the concept of volatility carry and how it is used in trading. The speaker compares implied volatility with realized volatility to determine whether to buy or sell options.
What is Volatility Carry?
- Volatility carry refers to the Theta associated with options.
- Time decay affects options, meaning that if you buy options, you lose time decay, and if you sell options, you earn time decay.
- If you sell options, you are earning carry. If you buy options, you are paying carry.
How to Determine Whether to Buy or Sell Options
- Compare implied volatility with realized volatility of an asset.
- Calculate the difference between the average one week and one month implied volatility and realized volatility to get the volatility carry.
- Use historical context to understand whether a positive or negative volatility carry is average or extreme.
- A positive volatility carry suggests selling options may be profitable while a negative one suggests buying them may be more profitable.
Applying Volatility Carry in Trading
- Screen for assets with positive or negative carry every day before deciding whether to be long or short gamma based on positive or negative carry.
- Extreme color coding shows when we're in extreme circumstances (90th percentile and above = bright green; zero to Tenth percentile = yellow).
Overall, understanding volatility carry can help traders make informed decisions about buying and selling options based on their expected profitability.