As a trader, I often look for different ways to gain an edge in the markets. Option traders view the trade through a very short time window, looking to capitalize on moments where we can take advantage. Find a trend and ride it out, this works well. But there is this little thing called ‘time’, an element present in option values. Time decay in option prices is the enemy of the buyer, and when there is no price movement such as on the weekends they kill the value.
Even more, when holidays are upon us there are fewer days and hours to trade. The buyer of option premium is at a disadvantage. But how about the seller? Options are a zero sum game, a winner and loser. The seller of premium is on the opposite spectrum and uses time as his/her friend. The best time to do this is when volatility is declining, which often happens during holidays.
Next week we have markets closed for Monday for the Christmas holiday, and the next Monday trading will be closed for New Year’s observation. This is ideal for selling premium, taking the other side of the trade. For me, I will often sell option premium to create income or as a protective measure against a portfolio. If bullish, I will sell puts or put spreads, with the idea of letting those values decline as volatility falls or the market rises (or both).
The VIX presents a tough condition though, as it is in the low teens. Effectively, premiums have been smashed while the market trend takes shape.
For protection, I will often sell call spreads on indices or individual stocks. This is insurance against bullish plays just in case the volatility crush which normally occurs does not happen (not a guarantee). With the recent lower trend in volatility over the past few weeks, this approach is feasible and sensible.