Volatility Surface Trade

Entry Logic

• Entry trigger: A distortion in the volatility surface.
• Confirmation: The distortion is at a historical extreme.
• Timeframe: Not applicable.
• Location context: Not applicable.
• Market condition: The market is mispricing the volatility of different options.

Exit Logic

• Profit target: When the volatility surface returns to its normal shape.
• Scaling out: Not applicable.
• Trailing stop: Not applicable.
• Signal failure exit: The distortion in the volatility surface worsens.
• Opposite signal exit: Not applicable.
• Time expiration: Exit before the options expire.
• Momentum loss: Not applicable.

Stop Loss Structure

• Hard stop: A predefined loss level on the options position.
• Soft stop: If the distortion does not start to correct.
• Max dollar loss: 2% of account capital.
• Max percent loss: 2% of account capital.
• Structural stop: Not applicable.

Risk Management Framework

• Risk per trade: 1% of account capital.
• Daily limit: Not applicable.
• Weekly limit: Not applicable.
• Max drawdown: 15% of account capital.
• R:R requirement: Minimum 2:1 risk-reward ratio.

Position Sizing Model

• Sizing approach: Position size based on the notional value of the options.
• Volatility adjustment: The strategy is based on the shape of the volatility surface.
• Conviction sizing: Not applicable.
• Scaling in: Not recommended.
• Scaling out: Not recommended.

Trade Filtering

• Market conditions to avoid: When the volatility surface is normal.
• Specific setups required: A clear distortion in the volatility surface.
• Instruments: Options on major indices and liquid stocks.
• Time restrictions: Not applicable.
• Chop/news avoidance: Not applicable.

Context Framework

• Trend direction: Not applicable.
• VWAP relationship: Not applicable.
• MA relationship: Not applicable.
• Range location: Not applicable.
• Higher TF alignment: Not applicable.

Trade Management Rules

• Breakeven: Not applicable.
• Scale out: Not applicable.
• Add size: Not applicable.
• Fast vs slow moves: This is a slow-moving trade.

Time Rules

• Optimal window: When there is a clear distortion in the volatility surface.
• Times to avoid: When the volatility surface is normal.
• Session notes: Not applicable.

Setup Classification

• A+ setup: A historically large distortion in the volatility surface.
• A setup: A significant distortion.
• B setup: A moderate distortion.
• C setup: A normal volatility surface.

Market Selection Criteria

• Instruments: Options on major indices and liquid stocks.
• Volume: High volume and open interest in the options.
• Volatility: The strategy is based on the shape of the volatility surface.

Statistical Edge Metrics

• Win rate: 60-70%.
• Avg win: 2R.
• Avg loss: 1R.
• Profit factor: 1.8.
• Expectancy: 0.6R per trade.

Failure Conditions

• When strategy fails: When the distortion in the volatility surface continues to worsen.
• Specific scenarios to avoid: Trading illiquid options.

Psychological Rules

• Mental discipline: A deep understanding of options pricing and volatility dynamics.
• Key mental discipline requirements: Patience to wait for the distortion to correct.

Advanced Components

• Regime detection: Not applicable.
• Filters: Use a liquidity filter for options.
• Correlation: Not applicable.
• MTF alignment: Not applicable.

Location

• Where strongest: When there is a large, statistically significant distortion in the volatility surface.
• Where weakest: When the volatility surface is normal.