The market is a strict teacher - and yet many short sellers seem to repeatedly ignore its lessons. This was particularly evident during the escalation of the trade conflict in April: April 7 marked the peak of uncertainty on the markets. Volatility skyrocketed and the VIX - the benchmark for expected fluctuations on the US stock market - climbed to over 60 points. This was a level last seen in the 2008 financial crisis or during the coronavirus crash. This was a real test for short sellers. But instead of seeing this extraordinary market phase as an opportunity, many got into serious difficulties. Why is that?
Two faces of volatility - risk and opportunity at the same time
When volatility rises sharply, option prices also skyrocket - especially for put options. For those who had sold puts en masse in calmer times (low VIX), this increase meant severe book losses. In many cases, this was followed by Margin calls and forced liquidations, often associated with painful losses.
At the same time, such an environment offers enormous earnings opportunities: those who are liquid and not overleveraged can sell puts at greatly increased premiums. Even on conservative buy-and-hold shares, premiums of over 20% were paid on the potential put amount during this phase - a dream come true for professionally positioned writers.
But instead of acting anti-cyclically, many retreated. Why were so few able to profit from this market phase?
The error chain: greed in calm times, fear in times of crisis
The typical cycle of many writers begins in phases of low volatility: the markets rise steadily, the VIX is below 15, and put options appear to be risk-free premium income. Month after month is successful - positions are expanded, hedges are neglected, the stake is leveraged. It feels safe, almost like a "secure income".
But this carelessness takes its revenge as soon as the market suddenly turns:
- the VIX explodes
- Options rise sharply in value
- Brokers increase margin requirements
- Overleveraged accounts get into difficulties
In this stressful situation, there is a lack of capacity to act. Instead of profiting from high premiums, positions have to be closed - often at a loss. And even more paradoxical: as soon as the markets calm down and volatility decreases, confidence increases again. Put options are again sold aggressively, often even in increased numbers of contracts - just at the moment when premiums have fallen significantly again. As a result, many writers miss out on precisely those market phases in which their strategy pays off the most.
What successful writers do differently
Professional option sellers know this: The key to long-term success is not maximizing revenue, but minimizing risk in extreme phases. This means:
1. disciplined risk management
Avoiding excessive leverage and consistent capital management are essential. Those who do not overleverage can remain capable of acting even in phases of increased volatility.
2. anti-cyclical thinking
In panic phases, such as when the VIX reaches 50 or more, it is particularly Attractive premiums. If you are prepared, you can sell options in these moments in a targeted manner and with a high risk/reward ratio. You should also choose ATM options (more on this in a moment!).
3. hedging as a basic principle
Hedging through spreads or the Use of volatility products can help to control risk in extreme market situations.
4. psychological strength
Not being guided by greed when everything is calm - and not by fear when the markets are raging: That's what distinguishes successful writers from those who fail in every crisis.
These four principles form the foundation for sustainable success as a short seller. Those who implement them consistently will not only survive volatile market phases, but also actively use them to their advantage. It is precisely in turbulent times that the wheat is separated from the chaff - and those who act in a prepared and disciplined manner can achieve a stable income from selling options in the long term.
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Alexander Eichhorn from Eichhorn Coaching takes a monthly look at the global futures and options markets at CapTrader and analyzes possible opportunities and risks for option writer strategies (options) in particular. Take the opportunity to look over the shoulder of an experienced options trader and see how he assesses the current market situation and what conclusions he draws from it. Log in here
Wrong options! Why at-the-money options are often the better choice
Many inexperienced writers tend to sell out-of-the-money (OTM) put options with a small delta - in the hope of "collecting" small premiums with as little risk as possible. However, this approach harbors considerable risks that are often underestimated at first glance. This is because options with a small delta react disproportionately strongly to jumps in volatility - an effect that can be minimized by the Normalized volatility can explain:
Example:
A ATM option costs $ 5 with a vega of 0.20. A 1 % change in the implied volatility thus causes a price change of $ 0.20, i.e. 4 % of the option price.
In contrast, an option that is far OTM may only cost $ 0.50 - but still has a vega of 0.05. The same 1 % change in volatility results in a price premium of $ 0.05, i.e. a whopping 10 % of the option price.
This means that during periods of stress, the relative losses for small deltas increase significantly more than for options with a higher delta. A real example: A delta 10 put on AMZN with a premium of $ 120 was at a loss of -441 %. If you had sold a delta 30 put with a premium of $ 480 instead, the loss would also be high, but "only" -250 %. The absolute loss would be lower - and above all more calculable.
The LearningInstead of entering into many small delta trades, it often makes more sense to selectively sell larger deltas. These options not only bring higher premiums, but are also more robust due to their lower percentage reaction to jumps in volatility.
Nevertheless, OTM options are justified in certain hedging strategies - especially if you are deliberately betting on a sharp rise in volatility. This is because the normalized vega can be used specifically in this context. However, for the classic writer who relies on time decay and controlled risk, the structured sale of ATM options remains the better choice: higher premiums, better risk/return ratio - and fewer surprises in the event of an emergency.
Taking responsibility - no excuses for losses
A central error in the thinking of many failed shutdown managers lies in the search for external culprits: "Who knew that a pandemic would break out?" or "Trump ruined everything with his tariffs!" - You often hear statements like these. But the truth is that such events are part of the nature of the market. Unforeseeable crises, political decisions, natural disasters - they are not exceptions, but part of the calculable overall risk. Anyone who trades options knows (or should know) that the market can react violently at any time.
Professional traders therefore take full responsibility for their strategies. They do not plan for the normal scenario, but for the extreme. Those who seek excuses when losses occur, on the other hand, ultimately only show a lack of preparation, discipline or risk awareness. The market does not forgive carelessness - but it rewards those who are prepared. Tough but honest sentences.
Conclusion: learning from volatility - or failing because of it
The market has recovered since April. Volatility has fallen and the VIX is well below the panic levels. These are fundamentally positive signals. But for the successful sale of Put options it is not the rest phase that is decisive - but the ability to remain active precisely in the phases of greatest uncertainty.
This is precisely when options are expensive - and precisely when option writers are best rewarded for their risk. Anyone who is unable to take advantage of this opportunity due to fear or poor preparation is missing out on the core of the business model.
The most important lesson is therefore: it is not collecting bonuses that determines success or failure - but surviving extreme situations.
