Five Option Strategies for High-Volatility Trading En Ticker Tape

Higher lower on options

In practice, however, choosing a bear put spread instead of buying only the higher strike put is a subjective decision.

Limitations on capital. Stronger or weaker directional biases. Of course given the risks, which are frequently greater and more complex, options are not for everyone.

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By sorting each strategy into buckets covering each potential combination of these three variables, you can create a handy reference guide. You could even print it out and tape it to your wall.

Five Option Strategies for High-Volatility Markets

As you review them, keep in mind that there are no guarantees with these strategies. A volatility vol spike is a reflection of heightened uncertainty and typically higher lower on options fluctuations. Five Option Strategies for High-Volatility Markets Typically, high vol means higher options prices, which you can try to take advantage of with short premium strategies. High vol lets you find options strikes that are higher lower on options out of the money OTMwhich may offer high probabilities of expiring worthless and potentially higher returns on capital.

Bullish Strategy No. 1: Short Naked Put

Pushing short options further OTM also means that strategies have more room for the stock price to move against them before they begin to lose money.

Here are a few bullish, bearish, and neutral strategies designed for high-volatility scenarios.

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For illustrative purposes only. Bullish Strategy No.

Implied Volatility: Buy Low and Sell High

But even though risk is defined, zero can be a long way down. See figure 1.

Those with an interest in this strategy could consider looking for OTM options that have a high probability of expiring worthless and high return on capital.

Capital requirements are higher for high-priced stocks and lower for low-priced stocks.

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Your account size may determine whether you can do the trade or not. In fact, some accounts require enough capital in the account to purchase the stock if the seller is assigned.

Mark Wolfinger Updated November 14, For almost every stock or index whose options trade on an exchange, puts option to sell at a set price command a higher price than calls option to buy at a set price. To clarify, when comparing options whose strike prices the set price for the put or call are equally far out of the money OTM significantly higher or lower than the current pricethe puts carry a higher premium than the calls.

See figure 2. Traders consider using this strategy when the capital requirement of the short put is too high for their account or if defined risk is preferred.

RISK: Defined.

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See figure 3. Neutral Strategy No.

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See figure 4. Higher vol lets you find further OTM calls and puts that have a high probability of expiring worthless but with high premium.

Exercising Versus Selling

Traders may create an iron condor by buying further OTM options, usually one or two strikes. You might not want to put this position on for a small credit no matter how high the probability, as transaction costs on four legs can eat into the profit potential.

  • The Bottom Line The strike price of an option is the price at which a put or call option can be exercised.
  • How to Use Implied Volatility to Your Advantage
  • By Jeff Kohler Updated Mar 24, Optionswhether used to ensure a portfolio, generate income, or leverage stock price movements, provide advantages over other financial instruments.
  • Final Word An uptrend can simply be defined as a series of higher-highs in price, coupled with higher-lows.
  • Easy way to make big money
  • Why Put Options Cost More Than Calls

See figure 5. Max profit is achieved if the stock is at the short middle strike at expiration. Traders may place the short middle strike slightly OTM to get a slight directional bias.

Intrinsic Value and Time Value

High volatility keeps value the of ATM butterflies lower. Butterflies expand in value most rapidly as expiration approaches, so traders may look at options that expire in 14 to 21 days.

Short gamma increases dramatically at expiration i.

Mark Wolfinger Updated September 23, The implied volatility of an option is not constant. It moves higher and lower for a variety of reasons. Most of the time the changes are gradual. When news is pending for a given stock earnings announcement, FDA results on a drug trial, etc. You cannot afford to make a trade while ignoring the cost.

Consider taking profits—if available—ahead of expiration to avoid the butterfly turning into a loser from a last-minute price swing.

NOTE: Butterflies have low risk but high reward. After all, volatility is related to uncertainty, and, where money is concerned, uncertainty can be unpleasant.