Vol Sell (Equity Options)
Sell volatility (e.g. covered calls or put spreads) when implied vol is rich vs realized; manage tail with defined risk.
Thesis (edge)
Equity implied vol often exceeds realized. Selling premium (e.g. put spreads) when IV is rich can capture the spread, with defined risk and strict size limits.
Where it works (regimes)
Works in low-vol, grinding-up regimes. Fails in sharp selloffs (VIX spike). Must have defined risk and tail plan.
Signals
- IV (e.g. VIX or ATM 30d) vs 20d realized vol. Sell when IV/RV > 1.2 (or similar). Avoid selling into low IV.
Portfolio construction
Define risk per trade (e.g. 1% max loss). Use spreads to cap loss. Diversify expiry and strike. Rebalance monthly or at target P&L.
Risk model
Tail: 1987, 2008, 2020: short vol loses. Use small size, defined risk, and possibly long vol hedge. Stress test.
Costs & implementation
Options spread and commission. Liquidity in SPX/SPY good. Roll before expiry.
Failure modes
Selling too much vol; no stop; ignoring skew and tail. Overconfidence after calm periods.
Our Notes & Suggestions
For experienced only. Never sell naked. Use defined-risk structures. Allocate small % of book. “What would change our mind?” VIX term structure inverts; realized spikes; correlation spike.
Our Notes & Suggestions
See the "Our Notes" subsection in the body above for practical guidance, gotchas, and best practices. Always validate regime assumptions and transaction cost assumptions before scaling.
Implementation Checklist
- Compute IV (e.g. ATM) vs 20d realized
- Define sell rule (e.g. IV > 1.2 * RV)
- Structure: put spread or iron condor; define max loss
- Position size and stop; stress test 2008/2020