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  • Dani

The Whale's Right Tail

Professional traders are always concerned about the Left Tail Risk. This is because most downside moves are very aggressive and fast. Since most investors are usually long equities, the insurance for sharp declines, costs more.

This is also why the Skew of the options is a lot higher on the left side, meaning the implied volatility of the OTM puts is higher then the OTM calls. Another reason for OTM calls to have lower implied volatility is that many traders that sell covered calls are causing them to be cheaper.

So, what is the trading application of that?

Find cheap OTM calls that have enough time till expiration date, with a good story and momentum, and maybe you will be surprised into the fields of catastrophic success.

Here is an options right tail trade that I did in the PBW clean energy ETF this year:

  1. At the end of Feb I bought Call 48 to Sep for 0.3$. That was a cheap 7 months right tail opportunity.

  2. On Mar 6th, as the market went down and volatility exploded, I sold back some of the calls at 1$ and took out the risk. That was very strange to make 3X on your calls as the market goes down, and I explain about it more in my options course.

  3. On mar 11th bought back Calls for only 0.05. And more surprising even on Jun 5th as the market already rebounded to 40, I could still buy more calls for only 0.05$, that still had about 4 months to get ITM and in the relative strength leader sector.

  4. On July 6-8 sold some options to lock in some gains (1R).

5. On July 23, as the calls exploded over 3$, banked a nice profit (8R winner)

6. As the PBW continues to go up, I still have long options, locking in more gains, and managing my Delta exposure.

So what is the takeaway?

While I'm usually against buying OTM options as they are like buying lottery tickets (explained in my course), If you can find a cheap OTM calls that have a lot of time until expiration (and with proper position sizing) you could be surprise by the whale's right tail.

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