Taking Advantage of Declining Option Implied Volatilities

01/14/2016 8:00 am EST

Focus: OPTIONS

Option premiums will remain elevated into earnings announcements, and since option trader Pete Stolcers, of OneOption.com, does not want to hold over the number, he outlines what he wants to take advantage of instead and recommends owners of put options take profits.

Posted 9:30 AM ET Wednesday—Tuesday the market opened strong and the early gains evaporated. It took the whole day to establish support and we rallied late in the day. We’ve seen this pattern two days in a row and it is bullish. With each passing day I expect the bid to strengthen.

China’s trade numbers were excellent. Exports increased 2.2% and that was the first gain since February 2015. This will boost confidence and their market should stabilize.

Earnings season is upon us and asset managers like to buy stocks ahead of the number. Valuations are attractive at this level and options expiration has the potential to fuel a short covering rally.

The downside will be tested early. We want this move to be very brief and shallow. If the market rebounds quickly and it makes a new high for the day we can buy with confidence. If we make a new high for the day after the first hour of trading, we can increase our size. If the market closes near the high of the day we can hold some positions overnight.

The SPY should easily reach $200 in the next couple of weeks. As it approaches the 100-Day MA we have to be more cautious.

Earnings season is front-loaded and the strongest companies announce early. Facebook, Amazon, Netflix, and Google will be unaffected by what is happening in China and they will post strong numbers.

Typically, I would sell out-of-the-money bullish put spreads. However, option premiums will remain elevated into earnings announcements and I do not want to hold over the number. I want to take advantage of declining option implied volatilities so I will short the VIX / VXX. To read the entire article click here…

By Pete Stolcers of OneOption.com

Related Articles on OPTIONS