Last month, I wrote about a new bull market that most investors were either overlooking or just didn’t have the wherewithal to know how to trade.
Volatility.
That’s right, volatility, if used correctly, is offering us some of the best opportunities in years.
Just look at the IV (implied volatility) rank in the major benchmark ETFs below.
*IV Rank – tells us if current implied volatility (IV) is considered high or low on an underlying security in comparison to all other IV readings over the past 12 months.
IV rank is calculated by taking the highest IV reading and lowest IV reading over the past 12 months.
For example, if a stock has an IV range between 40 and 80 over the past 12 months and the IV is currently 60, the stock would have an IV rank of 50%.
The charts below show just how high volatility is at the moment in comparison to the last year.
5 Charts for Selling Options
Typically, when the IV chart is shaded pale green or higher, options selling strategies become far more appealing. But when we see IV rank pegged, i.e. above 80 like it is now on most of these charts, it’s time to open up the playbook. I am always comfortable selling premium when the IV rank is 40 or above.
S&P 500 (SPY)
Nasdaq 100 (QQQ)
Dow Jones (DIA)
Russell 2000 (IWM)
Images courtesy of Slope of Hope
Every single underlying ETF has an IV rank that is near or above 80. But it’s not just the major market ETFs.
We are seeing inflated levels in the Gold ETF (GLD) and various other ETFs and blue-chip stocks.
For months I’ve been writing about the heightened levels of implied volatility that we are witnessing in the market, and how a high IV environment offers those who trade options the ability to start selling inflated premium.
Now, as I’ve stated numerous times in the past, I use options selling strategies almost exclusively. Yes, I will use debit spreads from time to time, but my true focus relies on having a statistical advantage with each and every trade I place. Therefore, options selling strategies remain at the front of my quiver at all times.
Over the past few years, I’ve discussed various ways to take advantage of the inflated premium in all of the ETFs mentioned above. Here is an example of just a few of those articles and how I approach heightened levels of volatility:
- How to Apply a Protective Asset Allocation Strategy using Poor Man’s Covered Calls
- Another Inflation Trade Idea Using a High-Probability Approach
I will be discussing a few potential strategies and how we can use them to take advantage of the inflated levels of premium next week. Stay tuned!
And as always, if you have any questions, please feel free to email me at andy@cabotwealth.com.