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Posts Tagged ‘high volatility’

How to take Advantage of High Implied Volatility

Implied Volatility (IV) gets high when a company has some impending event that can move the stock price.  The impending event sometimes refers to the stock as being a special situation stock.  The impending event causes the option IV to change based on the likely stock price move.  Here are some causes that increase IV:

  • There is a pending event such as an earnings report, FDA ruling, etc.
  • A significant news event is pending on another company in the same industry
  • The company’s industry is more volatile due to expected changes
  • The stock has a higher level of volatility so its options are more expensive
  • An aberration occurs as there is no apparent reason for more expensive options.

When a stock is already moving its price, option premium will be high.  IV will simply reflect that volatility and potentially more volatility. Options are also more expensive when a stock is in a confirmed trend.  
Time value that is inflated due to spiking IV will collapse when the event causing the spike arrives.  You do not want to be long an option when IV collapse as you can lose money even if the stock price doesn’t fall.  In general, you want to buy low volatility and sell high volatility.

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To use high volatility to your advantage when you are Bullish:

  1. Buy stock as options are expensive;
  2. Write covered calls to collect higher premium;
  3. Sell naked or cash-covered puts for higher premiums;
  4. Write bull put spreads for higher credits.

If you are bearish with high volatility:

  1. Short the stock since puts are expensive;
  2. Sell naked calls;
  3. Write bear call spreads for credit.

Market Update – More CEFs with High Yields

I repeat the advice I gave you last week: we stay the course and move as soon as trading stabilizes.  This is a seriously oversold market.  Since there are no further shoes to drop after the  downgrade, we will begin to see some amazing buying opportunities emerge later  this week, along with options plays providing risk protection.  Once again, the market reaction to the turmoil has depressed  forward estimates of market demand. That, in turn, has further driven down  stock share values.

This is not to say that the market will not go lower.  However, you should create a watch list of securities you want to buy when the dust settles.  This will create an opportunity to pick up monthly dividend payers at a lower share price and higher yield.  Of course, you should dollar-cost average your buys so you don’t get burned by market volatility.

The one advantage to higher volatility is more option premium.  If you are looking at covered calls, you can sell in-the-money calls for more protection unless you want to keep the stock in your portfolio.  If your portfolio stocks have pulled back then you can reset your strike prices to continue to collect monthly income from option premiums.

Here is an updated list of CEFs that pay monthly income:


Closed-end Funds with High Yields

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