When a Wide ‘Wingspan’ Impacts Option Prices

Hey there, Power Profit Traders!

It’s a wild market out there — I hope you’ve been finding shelter with me during my regular 9:30 a.m. ET LIVE trading session right here.

Stocks have been volatile since the Black Friday bloodbath, to say the least. The Dow Jones Industrial Average (INDU) alone has explored a chart “wingspan” of more than 1,000 points in the past week.

It’s not JUST stocks, though.

Even the oil markets have been battered, with concerns about the latest Covid-19 strain weighing on expectations for oil demand.

In fact, the Organization of the Petroleum Exporting Countries (OPEC) and their allies are set to meet tomorrow, with some analysts now expecting the group to put a pin in plans to bolster output in January.

However, while many traders are heading for the hills amidst the Wall Street roller-coaster, there are opportunities in ANY kind of market environment…

IF you know where to look.

For instance, the recent drop has presented some very exciting opportunities in the crypto stratosphere… and my Microcurrency Traders know exactly where I’m doubling down on a few coins.

And today I want to review an options strategy to have in your back pocket when volatility is running hot and securities are spreading their chart wings.

Volatility’s Impact on Option Prices

When volatility is high, it means the underlying stock, ETF, or index has been making some big, fast moves to the up- or downside.

And when a security demonstrates that kind of broad wingspan on the charts, it means the option strikes within that wingspan have a higher-than-usual shot at moving into the money (ITM) and becoming profitable.

Because of that, traders are willing to pay up for near-term option prices.

That’s reflected in an option’s implied volatility (IV) — which is a fancy way of saying expected volatility — calculation.

IV goes up as realized volatility (or historical volatility) goes up, because the underlying asset is showing an ability to make those huge, quick moves.

Think about it — say there are two stocks both priced at $95.

Would you be more willing to buy a $100-strike call option on the stock that traded in a range between $85 and $115 in the past couple of weeks… or on the stock that traded in a much smaller range, between $94 and $101, say?

The stock with the 30-point wingspan is more likely to catch your attention, because it’s already proven it can get over $100 in a hurry (and then some).

And the further a stock moves in the right direction from an ITM option strike, the more the buyer stands to profit.

However, what if you don’t want to be an option buyer when premiums are high?

Well, you could limit risk with a spread strategy

Or take the flip side of the coin and be a premium seller, as we discussed last week.

In those instances, one good starting point for would-be premium sellers is my Expensive IV list from the TG Suite’s Morning Report tool, which is free to download and use.

Considering the aforementioned drop in oil prices of late, it’s no surprise to find a couple of crude-related ETFs on today’s Expensive IV Watchlist.

The United States Oil ETF (USO) is a fund that I follow closely — and often discuss in my 9:30 a.m. ET sessions — and amid the post-holiday volatility, option prices on the ETF are sky-high.

The fund’s current IV is at the highest end of its 52-week range, putting it No. 1 on our list, as USO shares explore territory not charted since early September.

Of course, you should never BLINDLY sell premium off a single list — it’s important to do your technical due diligence, too.

If you’re selling to open put options to bet on support, for example, you better have a clearly defined level you think will act as a foothold during the option’s lifetime… or sell puts on a name you wouldn’t mind owning.

In my Rocket Wealth Initiative trading program, which focuses on carefully selecting options to sell, I have a lot more tools and checks & balances in place to make sure I’m only focusing on the highest-probability trades (call our VIP Services Team at 866-698-4749 to hear the details).

Also, make sure you check the event calendar on these stocks, as they’ll often make the list due to the IV run-up heading into an earnings report..

If you sell a put option on a stock before earnings, you could capture some healthy premiums, sure — but you’re risking a big-league swing in the wrong direction, and steep possible risk.

That’s all for today, but hop in the room at 9:30 a.m. ET to hear more about how I might use volatility to my advantage.

See you in there!

Tom Gentile
America’s #1 Pattern Trader

Tom Gentile

Leave a Comment

View this page online: https://powerprofittrades.com/2021/12/when-a-wide-wingspan-impacts-option-prices/