How to Use Implied Volatility to Find a Cheap Option Trade
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.
See it in action – and learn how you can access it yourself – right here.
Mark’s Watchlist
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)
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.
Until tomorrow,
Mark Sebastian
Comments
October 05 2021
Leave a Reply