Dear Reader.
June and December are reputed to be two of the calmer months when it comes to market volatility – followed by April and February, which are tied for the second calmest months out of the year.
Now “calmer” months simply means the S&P 500 could be expected to be within +/- 3% of where it closed the month before – which was 4017.77 in January, and, so far, this month seems to be holding true to form.
Additionally, it also means the following month, March, can easily experience more volatility – so you might think of February as the calm before the storm.
But there is some evidence that volatility may pick up sooner than anticipated.
Let me start by pointing out that option implied volatility (inflation of option premiums) can be a leading indicator for market volatility (intense price fluctuations in the index).
And, option implied volatility (IV) is already starting to heat up in some areas, which can lead to huge profits if you’re trading the right side of implied volatility.
Let’s talk about signs that IV is on the rise and how you can look to profit from my Morning Report’s Cheap IV Top Ten Watch List.
Breakout IV on Barclays Bank S&P 500 VIX STF ETN (VXX) Can Lead to Mega Profits
When investors get nervous they tend to load up on hedging strategies to protect their investment, which includes purchasing option contracts.
This can create a buying frenzy, which then tends to cause option market values to inflate.
Then, once the market begins to make its move, huge profits can be made from the directional movement in the market and bulging IV.
Take a look at the VXX chart below.
The horizontal resistance line on left illustrates that option premium inflation on VXX was fairly stable, but it then broke to the upside in a spike around mid-September last year.
As IV started to break upwards through its resistance level, so did the values on options (inflated option premiums kicked in), and here’s a look at what can happen in an options trade when price and IV favor you.
On September 12, 2022 the 14Oct22 Put option on SPDR S&P 500 ETF: (SPY) traded near $1,000 per contract.
By September 30,2022, the same put option traded at nearly $4,700 per contract – a $3,700 gain in just over two weeks.
This means the put trade generated a 370% return on investment thanks to the downward move in price, coupled with rising IV.
Now let’s look at the right side of the graph above.
IV on the chart is breaking out of the horizontal level once again.
So, this brings me to my Cheap IV top ten list of stocks.
Morning Report: Cheap IV Watch List
My Morning Report has six watch lists you can use, and these watchlists are updated after the market closes each trading day.
To access the free watchlists the Morning Report offers just simply search for Toms Option Tools in your Apple or Google App stores.
Once you’ve downloaded it, click on the Morning Report icon for the free watchlists.
Below you’ll see the list of Top 10 Cheapest IV stocks from Friday’s market close.
Now, I wanted to showcase this particular watchlist with purpose. The market has been in a fairly steady upswing since October, which means that implied volatility (option inflation) has been relatively low.
My software searches through thousands of stocks and finds those stocks whose options are on the low end of the IV range. This means that the option premiums on my watchlist are some of the most fairly valued ones out there.
So, let me summarize by saying this…
Some of the best option trades you will make are the ones where you have not only picked the right direction for the trade, but you’ve also purchased non-inflated options that become inflated while you’re in the trade.
The trade I illustrated for you above is such a scenario.
It’s one of the absolute best ways to get the maximum potential out of an option trade.
And it starts with selecting “cheap” options for your trade.
I’m routinely talking about the implications and patterns of IV during my Money Morning LIVE sessions, so I hope to see you there today at 12:00 ET where you can join the discussions about these very topics.
Until next time,
Tom Gentile
America’s #1 Pattern Trader
Learn About Trading with the Money Morning Live Professionals!
Did you miss the Live session? Watch Tom’s replays!
