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Given the current high volatility situation I'd like to benefit by deploying my mostly conservative portfolio in making bets that are short volatility. In particular some stocks like GME and BB and EXPR are hitting 500%+ implied volatility. I would not like to be exposed to any of their (crazy) price movements, but I'd like to bank on the fact that IV will inevitably get back to normal levels and make money on it going down.

Is there some combinatorial options trade that allows me to short volatility without exposure to underlying?

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You want to short volatility without exposure to underlying and you don't like strategies like a Butterfly because it has a limited range of profit. Unfortunately, you're looking for a unicorn.

In situations like AMC, BB, GME where the implied volatility is extremely high, selling short options brings in a fat premium but it is a recipe for disaster since the directional risk is huge. Therefore, bounded strategies such as spreads are more logical since they prevent catastrophe. But unfortunately with these, you still have to get the direction right. And to make matters worse, 500% IV tends to come with very wide bid/ask spreads. The deck is really stacked against you.

There are no free lunches here.

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  • lol @ unicorn :-) thanks so much, yeah i was hoping for free money and had a bad mental model in my mind coming from the ability to short VIX which was independent of underlying, though that is a different kind of product and you can't recreate its effects with options on single stocks..
    – David Karam
    Jan 28, 2021 at 12:35
  • AFAIC, the closest thing to a unicorn with options is risk free arbitrages like conversions, reversals, etc. Unfortunately, retail is at the end of the line since the pros scoop these up and we rarely see them. BTW, I spent a number of years selling volatility and it's a tedious process, grinding out small gains. As I said, the deck is stacked against you with GME. It's like nuclear fission and is more of a binary situation that requires a set of stones :->)
    – Bob Baerker
    Jan 28, 2021 at 12:39
  • Basically, he expects to get free money by betting on something obvious? That's a nope.
    – user253751
    Jan 28, 2021 at 18:25
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    I'm hesitant to offer an answer because I don't want to encourage you to do this. If you bought a $20 wide bearish put spread for $10, you'd have that $1k R/R and GME wouldn't have to go to zero. The problem would be that it would have to be a short term expiration. So for example the Feb 5th $160/$140 vertical - and you'd make your $1k at $140. It's a very risky gamble. For the following week it would be $150/$130 with $130 as the maximum profit point. And maybe $100/$80 for the following week. More time to win requires a larger down move in GME.
    – Bob Baerker
    Jan 28, 2021 at 19:59
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    @David Karam - It's a tough bullet to bite but you can withstand a +300% move in a short position if you have about 3.7x the amount shorted in free cash or marginable securities. The problem with GME is that it moved up ~2,000%, an impossible amount of increase to stay short.
    – Bob Baerker
    Jan 29, 2021 at 18:01
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If you want to bet that future volatility will be below the current implied volatility, you can trade the following option strategies:

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    Thanks Nick, just checked those out! Straddles and strangles payoffs seem to be a function of stock price. And Butterfly requires setting a range out of which I'd not profit. I was hoping for something that is purely a function of IV like the inverse VIX ETFs. Maybe I'm asking for too much though and it's just not possible to take up individual stock positions that are purely a function of IV?
    – David Karam
    Jan 28, 2021 at 10:07
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    My bet roughly is that IV at 500% will eventually subside to IV at 100% for these stocks. At which point the price of the options would see around 70% meltdown purely to IV crush. Of course a stock price move in any direction would offset that gain so I was hoping to somehow neutralize that entirely via some clever combination of long and short positions.
    – David Karam
    Jan 28, 2021 at 10:09
  • The VIX is computed using options on the SP500, but the index itself cannot be bought or sold. You can trade the VIX, because futures and other financials products are available that use the VIX as index: en.wikipedia.org/wiki/VIX You could compute such an index for a single stock, but you won't be able to trade it.
    – Nick
    Jan 28, 2021 at 10:13
  • Open ended strategies like a short straddle or a short strangle have unlimited risk to the upside. So while they might capture an implied volatility contraction nicely, you could lose a lot of money. Imagine the damage from implementing either when GME was $20 or $50 or $100? A ratio spread is no better if the move is against you to the direction of the ratioed side which is comprised of naked options.
    – Bob Baerker
    Jan 28, 2021 at 11:46
  • Link-only answers are not a good fit for this site. Can you take a moment to describe the strategies? i.e. if the links should somehow break (as when the IRS decided to redesign their entire file structure) the answer would still have value.
    – JTP - Apologise to Monica ♦
    Feb 7, 2021 at 11:30

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