" High " Implied Volatility and Buying Long Options .....

M

md2324

I had a quick question please, regarding what to do when ..... you get a great setup to ( go long ) in this example, BUT , the Implied Volatility is high on the stock that we just got one of are top entries to go long on ...... how would we play this via Options ?

I trade options off of the TorS platform, and they have an Indicator that plots what is called the " IV Rank " , and any stock of whose IV Rank is above 50 ( the IV Rank scale is from 0 - 100 ).

Any stock above 50, it is recommended to ONLY sell options ( credit spreads, selling naked )

My question is ..... if a stock has a high IV Rank ( say 70 + ) , how foolish would it be to buy an outright Long Call or Put ( Call in this example ) ?

I know that it is only recommended to Buy options long when the IV on that stock is low, and to sell credit spread or sell naked when the Implied volatility on a stock is high.

But when I get one of my top patterns / setups to place a trade, sometimes I just want to play the trade with options with just a regular Call or Put ..... whether the Implied volatility ( IV Rank ) is low or high

Just wanted to get other traders and those familiar with Options ( and TorS's IV Rank indicator ) , ideas and opinions

Thanks for any feedback,
I appreciate it
 
IV rank does not equal percentile. You also need to be careful on how you figure IV rank since it is different for different periods of time. Default is 52 weeks but for certain stocks that is impractical.
 
What he said. Also, just because it is high doesn't mean it can't go higher and vice versa. You trading extrinsic or banking it safe with intrinsic?

I'm assuming you are watching TTrades and they don't cover everything in detail. In fact, some of their Math by their resident "genius" Jacob is actually wrong but they never bothered to correct the mistake or inform their viewers. Their research team was notified and they argued with me for the longest time before admitting that I was right. Study that show with pen and paper and never take anyone's word for gospel.

Forget IV Rank as the end all be all. Look at the individual strikes and the month you want to trade. Each strike is in itself its own market and high vol in one month may not spill over to another (i.e. earnings). I'm assuming you are playing for direction and want to bank on the discount IV rank to buy... Remember your greeks and that just because it is cheap relative to previous times doesn't mean that it is a good time to buy. Market changes direction and you can become good enemies with delta and gamma real quick. (i.e. AAPL earnings 'shock' today dropped the stock 10pts. Some calls might be 'cheap' but with S dropping 10 that's quite the bummer).

BTW, talk to Xandaman. He is da bomb. I started a few months ago and he answered a lot of questions of various types.
 
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md2324 said:
I had a quick question please, regarding what to do when ..... you get a great setup to ( go long ) in this example, BUT , the Implied Volatility is high on the stock that we just got one of are top entries to go long on ...... how would we play this via Options ?

I trade options off of the TorS platform, and they have an Indicator that plots what is called the " IV Rank " , and any stock of whose IV Rank is above 50 ( the IV Rank scale is from 0 - 100 ).

Any stock above 50, it is recommended to ONLY sell options ( credit spreads, selling naked )

My question is ..... if a stock has a high IV Rank ( say 70 + ) , how foolish would it be to buy an outright Long Call or Put ( Call in this example ) ?

I know that it is only recommended to Buy options long when the IV on that stock is low, and to sell credit spread or sell naked when the Implied volatility on a stock is high.

But when I get one of my top patterns / setups to place a trade, sometimes I just want to play the trade with options with just a regular Call or Put ..... whether the Implied volatility ( IV Rank ) is low or high

Just wanted to get other traders and those familiar with Options ( and TorS's IV Rank indicator ) , ideas and opinions

Thanks for any feedback,
I appreciate it
More...

If you know for certain the stock is going south, you can buy a long put without fear of the vol crush. Depending on how much, and the speed on the descent, the vol may actually increase.
 
Jones75 said:
If you know for certain the stock is going south, you can buy a long put without fear of the vol crush. Depending on how much, and the speed on the descent, the vol may actually increase.
More...

If that gets a mean reversal you suffer the exact opposite fate... It's a dangerous game here! What's the backup plan? Write premium and wait for another dip?

I got myself stuck in 50 SPY's but learned a lot from legging in and out of calendars and diagonals to make a decent ROC. Right now it is generally bull so that was sort of okay. You have to have a good counter to the worst case scenarios so that you don't lose 100% of the premium. Rolling/scratching/ or otherwise.

Optioncoach is on the money as well. Be careful about the strikes and the a/b spread for liquidity purposes.
 
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What is your time frame for the expected move?

How much in general are you expecting the stock to move?

I think there is more to the story than simply following a blind general rule on IV-rank above 50% then do not buy options. What if volatility is in the 55%-tile.... 60%-tile.

I think a decision to buy DITM Leaps v. looking to trade a 3 week move would each have different IV considerations.

Just food for thought....
 
md2324 said:
I had a quick question please, regarding what to do when ..... you get a great setup to ( go long ) in this example, BUT , the Implied Volatility is high on the stock that we just got one of are top entries to go long on ...... how would we play this via Options ?

I trade options off of the TorS platform, and they have an Indicator that plots what is called the " IV Rank " , and any stock of whose IV Rank is above 50 ( the IV Rank scale is from 0 - 100 ).

Any stock above 50, it is recommended to ONLY sell options ( credit spreads, selling naked )

My question is ..... if a stock has a high IV Rank ( say 70 + ) , how foolish would it be to buy an outright Long Call or Put ( Call in this example ) ?

I know that it is only recommended to Buy options long when the IV on that stock is low, and to sell credit spread or sell naked when the Implied volatility on a stock is high.

But when I get one of my top patterns / setups to place a trade, sometimes I just want to play the trade with options with just a regular Call or Put ..... whether the Implied volatility ( IV Rank ) is low or high

Just wanted to get other traders and those familiar with Options ( and TorS's IV Rank indicator ) , ideas and opinions

Thanks for any feedback,
I appreciate it
More...
Usually when the underlying goes down IV goes up. When I went long on calls, IV was usually quite high compare to normal.

I don't know maybe I am doing it all wrong but it seemed to work for me.
 
Hi 2rosy,
I thought about just putting on a Bullcall ( debit spread ) , and then making sure that the strike that I " Sell " is within the expected price movement/range based on the month of the spread that I place ( 30 days till expiration, or whether its 45 days to expiration, etc. )
TorS shows the IV attached with each months options , and posts next to that.... an " expected " move for the stock up until that options contract month expires




Hi ebolamonkey ,

Yeah, I am looking to play a pure Directional play, as well as a Swing type trade approach.
So given this, I will be looking in the 45 - 90 days till expiration range.

Now.... If I get one of my trade entry setups on a high dollar stock like GOOG, CMG, AMZN, NFLX, etc .
Then on these type of stocks, I will for sure do a Debit spread , as the Options on these high dollar stocks, and with 45 - 90 days till expiration , costs to much for my trading account, to just trade regular long Calls and Puts

One other thing about doing Debit Spreads that I wanted to get other's opinions on is ..... I'd be in favor of Always placing a Debit Spread ( no matter the price of the stock that I was wanting to trade ) , be it a $10 stock or a $1,000 stock.

The only thing with the debit spreads, is that my Profit is capped.

When I get certain setups, I am expecting an immediate move in my favor, and a nice size move at that, so I want to leave myself with unlimited Profit potential.
And the Debit spreads put a cap on that unlimited profit.

If I could buy to close the sold option in these debit spreads for cheap and or Breakeven , and thus just be long the option I bought in the spread , AND still had 30 - 45 days till expiration, then buying spreads would definitely be the way that I would go with this strategy , each and every time.

The problem I've seen , is that ......... even if the very next day after you put the debit spread trade on, and the stock moves say 5% in price that very next day .... you still can't buy to close that sold option for a credit and or a breakeven.... it will actually cost you even more money to buy to close that sold option, because no time has hardly passed.

I am expecting the stock to move soon after I place the trade, and to make big moves in price ( 5% - 10% moves in the stocks that I buy ), so I am looking for an options strategy(s) that allow for this.

Help, input and comments please :)

Thanks for everyone's help
 
md2324 said:
TorS shows the IV attached with each months options , and posts next to that.... an " expected " move for the stock up until that options contract month expires
More...

The 'expected move' sounds like a 1 standard deviation move. That is useful information (as is the visual representation in a probability cone) but if you're going to use it, be sure you understand whether they're using at-the-money IV or the IV of a specific option. Significant skew can alter the results - you guessed it - significantly.

P.S. You're getting some good advice above on IV ranking. We've discussed this before. It's OK as a starting point, but depending on the security, you may want to look at multiple time periods and percentiles. Example: If you sold crude oil options in early Nov 2014 when ATM IV was 30% (a one year high) you would have had many sleepless night as they soared to 55-65% over the next couple of months, plus steep skew to make it even worse. The same thing can happen with stocks, so study more than one year's history.
 
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