Selling Options with an Implied Volatility Advantage
01/07/2016 8:00 am EST
Whenever trading options on Crude Oil or any stock or futures contract—as Fred Oltarsh at Options Strategy Network illustrates—it is essential for the trader to find the appropriate options strategy which meets his directional bias.
Searching for the appropriate trading idea is always a difficult task. Whether it is trading options in stocks or futures, developing a trading bias and finding the correct trading strategy is a creative process that involves options knowledge and trading skill. Without these skills, trading options and futures contracts can be a very costly proposition.
When trading options one must be mindful of liquidity, implied and historical volatility and the risk/reward of the strategy. Whether the strategy discussed below is appropriate for you, all traders should be aware of the aforementioned. The Crude Oil market provides an example which currently provides an options trading opportunity which should meet the needs of many options traders. First, there is liquidity, second, the implied volatility significantly exceeds the historical volatility, and thirdly, there is an opportunity to establish a position with a good risk/reward scenario.
The positions that should be considered are March Put Christmas Trees. The details of the trades are shown below. With Tuesday’s downside move, the Relative Strength Index at 4:00PM in March Crude Oil was about 36.00, which begins to indicate an oversold condition. March Crude Oil has a historical volatility of about 34% and the options strategy involves selling options with an implied volatility of greater than 50%. The Net Delta of the trade is almost nothing and the trade has a significant likelihood of profitability. By providing three different proposals, one has the opportunity to pick a strategy that most closely meets their risk/reward needs. Keep in mind that any short options trade involves unlimited risk.
Whenever trading options on Crude Oil or any stock or futures contract, it is essential to find the appropriate options strategy which meets your directional bias.
Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is no way guaranteed. Past results are not indicative of future results.
By Fred Oltarsh, Proprietary Trader and Editor, Options Strategy Network