how high implied vol works for and against you
when high implied vols is a gift or a curse
Here’s how high vol works against you
It’s too expensive to buy puts to trade directionally once an asset has already made a giant move higher.
When you are 100+ vol, it’s not surprising the market puts your odds of getting cut in half at 1 in 3 proposition.
It’s hard to make money in a reasonable risk-adjusted away once an asset is already high vol since it’s hard to size it without risking your neck.
It is well within the meat of the distribution for SNDK to get cut in half this year. That’s just a good baseball player’s chance of getting a hit or a typical NBA player hitting a 3 in a game (or missing a 3 in practice).
How high vol works for you
The high vol is a gift to the natural holders. Millennial employees can lock in their unborn grandkids’ inheritance.
A non-technical way to appreciate how high vol creates this opportunity in upside call vs downside put differentials:
Imagine a stock starts at $100. It gets to $125. From $125 to $150 is only 20%
But if the stock fell to $75 the distance from $75 to $50 is 33%
Both $50 and $150 are 50% from the initial price, but in a compounding sense 150 is much “closer” to the starting value than $50. The higher the vol the less “distance” a fixed dollar move represents. As implied vol increases OTM calls grow faster in value than OTM puts. This is the source of the attractive pricing you see in the risk reversal (ie option collar).
That tweet comes from Dean Curnutt of The Alpha Exchange Podcast. He’s a partner in an option brokerage firm I’ve known for a long time. I told him he needs to buy an SF realty company, since risk reversal-financed $10mm SF Victorian pipeline is unmanned!
Speaking of, if you wanted to bet on AI without access to private shares, real estate on leverage would have worked. See Redfin economist Daryl Fairweather’s Is the Bay Area in an AI Housing Bubble?. I hear from locals who own a bunch of SF RE that the bid is mostly in single-family and multi-family rental units are not getting the hockey stick treatment. The rents have been exploding higher, however. And to think coming out of COVID, you couldn’t give away an SF condo. Super high vol asset. They need options!