Buying and Selling Volatility
We talk a lot here about implied volatility (IV). And by now, you know that it’s the key to building the perfect option trade.
But… how? What exactly am I looking for when I’m searching for an option trade?
Well, we want to find stocks where the IV is “too low.” If a stock’s IV is low, that means its options are relatively cheap.
And when a stock’s IV is too low, that means it’s only a matter of time before its options go up in price.
Buy low, sell high – right?
I look for historically low IV in a stock. And I do that by comparing a stock’s IV to its historical volatility (HV).
When HV is exceeding IV, and IV is near one to two-year lows, like it is here on DIS, that’s when we should step in to buy.
But it’s tough to find software like this that shows you that IV/HV comparison. Not unless you pay up to $400 a month.
That’s why I built my own.
This system allows you to see the IV and HV on any stock on the market.
When IV is low, we want to buy. When it’s high, we want to sell – and I’m looking at the IV on all three of these names, especially as earnings season gets underway.
- Walt Disney Co. (NYSE:DIS)
Remember – when IV is low, we want to be a buyer. Especially when its HV is eclipsing its IV, like you saw in the DIS chart above. And that’s why I’m targeting this media conglomerate today.
This name has been pounded. But it’s moving more than its IV is – and that means its IV is too low – and these options are about to get more expensive.
The November $180 calls should get a nice bounce here, even with earnings coming up.
- Walmart Inc. (NYSE:WMT)
When IV is low, like it is in DIS, we want to be a buyer. But when IV is high – like it is in WMT – we want to be a seller.
WMT is currently at a six-month low, threatening year lows. From here, I think it could test $130.
With WMT dropping so fast, IV is high. There’s a ton of premium built in – and I want some of it.
I’m looking to sell the November $130 puts in WMT to collect some of that premium. Even if WMT does drop below $130, I’m happy to own it there.
- Conagra Brands Inc. (NYSE:CAG)
CAG is headquartered in my old stomping grounds in Chicago – but that’s not the reason I like this stock.
I like it because I just found a really inexpensive play that’ll profit big-time if CAG reports decent earnings on Thursday.
Implied volatility in the near-dated weeks on CAG is pretty high, which makes sense considering its upcoming earnings. But just push out a little further to November – the November $35 calls, to be specific – and it’s only about $0.75.
That’s a cheap play on CAG getting a $1, $1.50, $2 pop – and earnings can bring it there.
Today’s Impact Money Trade
I’ve been bullish on International Game Technology PLC (NYSE:IGT) for months now – in fact, it’s been a member of my own option portfolio, and I’ve taken some pretty nice wins.
But it looks like I’m not the only one.
We saw a ton of paper on IGT yesterday – that’s right, this is all related to the same trade:
This big-money trader closed out the IGT $26-$33 call spread for a win. Then, they rolled their position higher, buying the $28 calls and selling the $35 calls, creating yet another call spread poised for a win.
When we’re looking at impact money, we love trades that are smart and correct – and that’s exactly what this is.
Let’s look at a chart of IGT – this thing has gone parabolic. It’s up 20% since September 21:
This morning, IGT opened around $28. I’m targeting $30 on this stock within the next few weeks – and to play that, you could buy the January $29 or $30 calls.
Or, if you want to get fancy, you could buy the January $30-$35 call spread for just about $1.25.
Four trade ideas in a single day? There’s profit opportunities everywhere in this market, folks.
And you’re in the right place to find it.
October 05 2021