Buying Options When Volatility is Too Hot

Hey there, Power Profit Traders!

I hope everyone had a great Thanksgiving!

My next LIVE trading session starts at 9:30 a.m. ET right here, and it’s an important one for anyone who’s been toying with the idea of getting into the crypto game.

After the broad-market spanking we saw on Black Friday, several cryptocurrencies hit our longer-term support levels — meaning there are some VERY interesting buying opportunities right now.

Plus, I’ll be giving away another week at my house in New Zealand!

It all starts at 9:30 a.m. ET, so make sure you’re in the room and chatting (AND that you’ve updated your Profile name so it doesn’t start with “Member” — I wanna know who I’m talking to!).

In the meantime, and continuing our theme of options education, I want to break down a strategy I just went over at 8:30 a.m. ET on the Money Morning LIVE show…

It’s a strategy I often use when I want to be an option buyer, but prices are running a little too hot — perhaps like after the bout of volatility we just saw during Friday’s holiday-shortened session.

When Buying Options is Expensive

Last week, we discussed a way to exploit high option premiums by becoming a put seller.

Today, I want to dive into a way to be an options BUYER when premiums are running hotter than usual.

Of course, one place to start as an option buyer is my Cheap IV list from the Morning Report tool in the TG Suite app, which features stocks with near-term, near-the-money option premiums that are relatively low, based on the past year’s worth of implied volatility (IV) data.

But this morning on the Money Morning LIVE show, I went over a way I often purchase options when IV is higher than I’d like.

For instance, my Money Calendar and other proprietary tools are telling me now is a good time to be long Intel (INTC), but following Friday’s ugliness on Wall Street, IV is on the higher side.

The cost to buy to open INTC’s $49-strike call expiring Dec. 31 was about $1.56, or $156 (since each option represents 100 shares), at the time of this writing.

If I simply bought the call, that would mean I’d need INTC to rise above $50.56 ($49 strike + $1.56 premium) by the end of the year, in order to break even on the trade.

My risk would be the entire cost of the call options at initiation, while my profits would climb the higher INTC shares moved north of that breakeven level before expiration.

But I could get into a bullish INTC position at a lower cost — albeit by sacrificing some of that potential reward.

By simultaneously buying to open the $49-strike call AND selling to open the $50-strike call in the same series, I could enter what’s known as a bull call spread (aka – a long call spread, or a call debit spread).

The premium I receive from the sold call would help to offset some of the premium paid on the long side.

So in the example above, I might open the bull call spread for a net debit of $0.45, or $45, per pair of options — which also stands as my maximum risk. That’s less than ONE-THIRD of the risk I’d incur by only buying the $49-strike calls at $1.56.

In this case, I could also lower my breakeven to $49.45 (bought $49 strike + $0.45 debit).

But remember, the sold $50-strike call would also limit my maximum profit potential to $0.55, or $55, per pair of options, no matter how far INTC should surge above $50 before the options expire on Dec. 31.

Still, this is a strategy to keep in your back pocket when you expect a stock to make a moderate move higher, but don’t want to pay up for your options.

That’s all for now, but be sure to get in the room at 9:30 a.m. ET for more on the buying opportunities I’m seeing in crypto this week… not to mention my New Zealand trip giveaway!

See you there,

Tom Gentile
America’s #1 Pattern Trader

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