I’ve experienced IV Crush this year due to the VIX dropping significantly, and remaining below 15 points. As an IBD resource user I keep a trained eye on
the IV of options associated with the IBD-50, and do all I can do to avoid being crushed by IV dropping after an earnings event. Yet, I’ve discovered a
very good way to earn good money due to High IV! That’s a good thing when you choose to trade leaders of the market.
I’m reminded that we should be a Seller when the IV is high, and a Buyer when IV is low….. of options, that is! I was watching LNKD (Linked-In) carefully
for the past year, while applying what I learned from the Can Slim training to be “right” in buying the stock at the period of the break-out. By applying
the position-size understanding to my portfolio I would be feeling good about my risk/reward possibilities. That left me encouraged about selling short
puts (cash secured) from my two portfolio accounts. I sold a smaller size contract in my margin portfolio, and a larger size contact in my IRA portfolio.
How did I view this plan of action? I’ll explain it right here.
I enjoy using the free IV site [www.ivolatility.com] to capture the IV index lows and highs for all of my watch-list candidates. Then I spend a minute or
two on the math to split the IV into three equal bands: High, Medium and Low. As an example, LNKD had a range of 29.30% – 83.87% for its IV Index Mean.
When I subtract 29.30 from 83.87, I get 54.57. Then I divide that number by 3 (High, Medium, and Low) to get 18.19 per band. That gives me the following
High: 65.68% – 83.87%
Medium: 47.48% – 65.68%
Low: 29.30% – 47.49%
Next, I watch the options chain to see the individual IV amounts per monthly expiration. On Thursday, August 1st, I saw that LNKD August 220.00
Puts IV was 67.18% (see below.) Having learned what I learned about these growth stocks options dropping IV significantly after the Earnings event lead me
to Sell Short Puts at August 220 for $16.15.
This credit gave me a Cost Basis of $203.85 (almost right on the buy point) if the equity is assigned to me on Saturday, August 20th. If the
$220.00 strike price is out of the money, then I just get to keep the credit I’ve earned. And, I’ve earned this in a very short period of time!
I find this an easy way to earn some money on the market leaders. And, especially if I am comfortable holding this market leader upon assignment. After
all, I’d be capable of adding insurance to the position (Long Put, which would give me the Right to Sell the equity at a price I chose) after I was
assigned the equity. What makes this different? The IV drops quickly after the earnings event. (See below) Just one day later the IV had dropped to 38.68%!
A 29% loss of IV in one day is a good secret of options. Take that 29% loss of IV and multiply it by the VEGA (Greek associated with options.) That is
proof that the option value declines by that amount with a heavy decline in the implied volatility associated with the options.
Not a bad way to earn money!… Especially when you wouldn’t mind owning the stock at a discounted price!
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