Good morning, Power Profit Traders!
If you missed me LIVE at 11 a.m. ET yesterday, you missed a busy session — I broke down everything from the Fibonacci retracement level I’m watching on SPY to the Alibaba (BABA) trade I like to how I put in cryptocurrency orders.
Don’t worry, though – we’ll talk more about crypto here tomorrow, and you can catch Team Tom here at 11 a.m. ET EVERY DAY!
If it’s not me dishing out the red-hot stock and options education and trade analysis, it’ll be one of my trusted amigos, Jay or Mike.
I’ll also be going LIVE for some of my select premium members each afternoon – if you’re in one of those communities, you should receive separate communication with the private invites to those sessions.
That said, something else I talked about during Monday’s LIVE session was a particular commodities exchange-traded fund (ETF) on my radar this week.
Volatility expectations are sky-high on the white-hot ETF, meaning its option premiums are juicy right now…
Today, I’ll walk you through how I’m playing Expensive IV on the natural gas fund that’s more than doubled in three months.
Today’s Watchlist is based on the Morning Report’s Expensive IV tool.
This data compares current implied volatility (IV) against a set of near-the-money options’ IV over the last year. I don’t measure IV against historical volatility (HV), like many other experts – I measure IV against itself.
Expensive IV means the current IV is at the high end of this 52-week range, indicating volatility expectations for the underlying shares are elevated.
This typically means option premiums are running hotter than normal on the stock or ETF – often a ripe atmosphere for selling to open options or putting on credit spreads.
During Monday’s LIVE trading session, I noted that the ProShares Ultra Bloomberg Natural Gas (BOIL) ETF was on the Expensive IV list, coming in at No. 4.
I mentioned that I’d been watching BOIL for a couple of sessions, and noticed IV was running hot right along with the BOIL share price.
I mean, just since mid-July, BOIL has doubled in price to trade above $85.
And the resulting IV on ATM options has been insanity:
So I recently decided to bet on a short-term ceiling by selling to open October-dated call options.
By writing a call to open, the trader is betting the shares won’t move above the call strike before the options expiration.
In this best-case scenario, the call will expire worthless — bad news for the buyer, but that means the seller can pocket the initial credit received.
However, the seller can also buy the option back to close and pocket just some of the credit, if IV cools off and the options get cheaper.
Unfortunately, IV on BOIL options has only gotten hotter thus far, as the ETF slid into the No. 1 slot on our Expensive IV list, as of Monday’s close.
I’ll continue to keep an eye on this one, and might buy 100 shares for each call option I sold, in case the ETF crosses my line in the sand.
In closing, remember that while expensive IV is a definite draw for premium sellers, selling options “naked” (without owning the shares or having a hedge) can be dangerous.
If the shares go above the sold call strike, putting the options in the money (ITM), the call buyer on the other side of the trade can exercise the contract. As the seller out of the gate, that means you’re on the hook to deliver the underlying shares at that strike price.
That’s all for now, but make sure to catch Team Tom right here at 11 a.m. ET each day — or else you could miss the next BOIL-ing opportunity…