When it comes to volatility trading, opportunity is spelled E-X-T-R-E-M-E-S. While the eye of an option trader is trained to identify opportunity in all circumstances, it’s easiest to spot when volatility has deviated significantly from it’s mean. Volatility traders are like obsessive stalkers. They stealthily monitor volatility waiting for the ideal time to pounce. Most of the time volatility is careful and sticks close to home (its mean). But, on occasion it gets careless and travels a bit too far from the safety of its mean. And before you know it, those seedy volatility stalkers swoop in and exploit the situation.
Such a circumstance seems to be cropping up in the implied volatility of AAPL options. Following this week’s earnings announcement, 30 day IV has dropped to territory otherwise uncharted in recent years. Unless AAPL is entering a new regime of depressed volatility, this deviation to the downside might become an opportunity to scoop up options on the cheap. In this environment strategies like the stock replacement strategy become increasingly appealing to those looking to ring the register on profitable long stock positions while maintaining additional upside exposure through long call options.
One the other hand, with the compensation provided to option sellers quickly diminishing, short volatility strategies are losing their appeal.
Source: Livevol Pro
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Dear Tyler,
Could you explain what you mean by “with compensation provided to options sellers quickly diminishing, short volatility strategies are losing their appeal”?
Thanks,
Kip
Hey Kip.
Since implied volatility is so low AAPL options are relatively cheaper than they’ve been in a long time. This means that traders who sell options are receiving less compensation than they would if implied volatility were higher. For example, if I sold a covered call when IV was at, say, 40%, I may receive $500. In a low volatility environment when IV was 20%, I may only receive $300. So the appeal of a short volatility strategy like a covered call isn’t as appealing during times of extremely low implied vol.
By the way, option selling strategies and short volatility strategies are essentially the same thing.
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