Option strategy for low volatility

Posted: sgolloko On: 17.06.2017

Nasdaq Leads As Biotechs Soar. Options sellers take note! With CBOE's Volatility Index close to its five-year low, popular option-selling strategies such as covered calls and credit spreads have lower income potential and greater risk potential. Positions have to be monitored more closely, and stop-loss points might have to be tighter than when volatility levels are higher.

How To Trade Volatility

Maybe it's time to try buying options! The risk of being stopped out, therefore, increases.

What can a trader do in an exceptionally low-volatility environment? | Futures Magazine

But with volatility at low levels, the cost of buying call options as a stock substitute is greatly reduced. This article first discusses the cost of buying in-the-money calls as a stock substitute.

Second, some examples using current Leaderboard stocks are reviewed. An in-the-money call is a call with a strike price that is below the current stock price. With a stock price of Stock investors, however, should think ahead to the full cost of the stock if a call is exercised. If the call is exercised, then the former call owner becomes a stockholder.

The full cost of the stock is the strike price of the call plus the cost of the call plus commissions. In this example, the full cost of the stock — or the effective price — is But the call cost only 5. In this case, if the stock price drops sharply, the maximum loss of owning the call is less than the loss of 6.

option strategy for low volatility

Also, it is possible for the stock price to dip to 68 or below, thus triggering the stop-loss, and then rebound higher. Whereas a stockholder could easily be stopped out with such price action, it is possible that the call owner could stay in the trade. So, the next time you are considering buying a stock, look at the option prices to see if the effective price of buying the stock with an in-the-money call offers you an attractive alternative.

The ARMH January 49 call was offered at 3. The buyer of this call has the right to buy ARMH at The maximum risk, if the call expires worthless at expiration, is 3. On the upside, the call buyer is paying an effective price for the stock of Also on Tuesday Oceaneering International OII was trading at The OII January 80 call was offered at 8.

The option also costs 1. Should investors buy any of these calls instead of the stock? Is the higher breakeven point worth the lower absolute risk and the near-certain ability to stay in the trade for 87 days? There is no "right" or "wrong" answer to these questions. Every investor must make a personal decision. Track the latest defense deals, airline orders and other aerospace news from the Paris Air Show.

Get 4 free weeks of the IBD Digital edition plus access to IBD's exclusive market analysis, proprietary stock ratings and interactive tools. Stay on top of the market with IBD's exclusive videos. You will find the latest news, market analysis, and education to help you become a more successful investor. Get the most out of IBD's products and features by learning the CAN SLIM Investing System and staying in sync with the market trend. Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities.

The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness.

Authors may own the stocks they discuss.

The information and content are subject to change without notice. You are using an outdated browser. Please upgrade your browser to improve your experience. Your cart is currently empty.

What Option Strategy Works When VIX Is So Low? | Stock News & Stock Market Analysis - IBD

Visit the IBD Store to get started. Start a 2-week FREE trial.

Low volatility strategies

Get instant access to IBD videos. IBD Stock Charts IBD Stock Checkup Stock Quotes CAN SLIM Advisors MarketSmith How to Buy Stocks How to Read Stock Charts When to Sell Stocks IBD Retail Locations Ad Choices.

Connect With Us On.

inserted by FC2 system