Volatility remains elevated in U.S. Equity markets. The CBOE Volatility Index (VIX) is often called the "fear gauge" because it helps show how anxious or confident people are about the stock market.
You should consider buying options when the VIX is low because premiums are cheaper, making it a good time to enter if you expect increased volatility later. Conversely, you might want to sell options when the VIX is high to collect higher premiums, but be prepared for more risk due to anticipated market volatility.
The VIX is not the only indicator options traders should be focused on. The IVR (Implied Volatility Rank) shows whether the current implied volatility of a particular stock is high or low compared to its historical levels. When IVR is high, it means premiums are higher and it can be a good time to sell options, similar to a high VIX. When IVR is low, premiums are cheaper, making it a better time to buy options, much like a low VIX. Both measures help you decide when to buy or sell options based on market volatility.
The VIX has gained approximately 54.4 per cent over the last week and is up an impressive 86.76 per cent YTD and is currently reverting back down towards normal levels, an interesting market environment for option premium sellers.
Trading Central Options Insight now has a unique dashboard where traders can identify opportunities around options volatility. The dashboard is designed to highlight all the key volatility data to help traders with their strategy selection process.
Technology stocks are indicating above average volatility over the last week. Sorting the technology sector based on the highest IVR in TC Option Insight Dashboard, a few stocks caught our interest.
The stock has one of the highest IVR’s in the Technology sector at 92. Implied Volatility remains above the stock’s historical volatility at 49.3/45.4 and is trending higher.
Looking at options strategies that take advantage of high volatility, I decided to look for bullish credit spreads to take advantage of the current rebound in the stock and the overall market.
The preferred strategy is a Sept 20 expiration 200-195 Bull Put Spread (43 days to expiry) for a credit of $1.35/contract. The strategy has a max profit of $135, a max risk of $365/contract and a 72% probability of profit.
The Trading Central analysis team which powers TC technical Views has identified key support at the $200 level (Blue Line) with upside targets of $216.85 and $232 in extension which fit this bullish put credit spread strategy perfectly. The strategy aims to have the stock price of ADI above the $200 support level for a max gain on the credit spread.
For those who are bearish ADI, we got you covered. A Sept 20 220-230 Bear Call Spread is a $10 wide credit spread that brings in $3.40/contract credit and profits with the stock price below $220 by Sept 20th. The strategy has a max profit of $340/contract with a max risk of $660 and a probability of profit of 62%.
TC Options Insight Peers Comparison helps traders compare volatility data to similar stocks in the same industry. Check out the below stocks with elevated volatility levels in the technology sector.
Curious about TC Options Insight? Ask your broker how to access Trading Central's newest insight tool designed to help beginner to expert traders make better informed options trading decisions.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.
