Hi all, Using high/low volatility scanner I found out that UAL has extremely low implied volatility (IV), as can be seen on the chart (box and whisker are for the year of data). I am assuming that IV will go up soon, and was hoping to exploit that by buying options while they are cheap (and if IV is low it means they are cheap) and selling them when IV goes up and they are more expensive. Now comes the question - what options should I buy? Since vega has the biggest impact on ATM options with shorter expiration, I was thinking about buying ATM option with expiration in about 2 or 3 months - I am hoping it will be enough time for IV to go up before theta eats my price. Finally, I have to chose direction of underlying (up (call), down (put), or both (straddle) - I did not want to go into more complicated strategies). While stock has been growing in longer term, recently it was oscillating - I was thinking about buying straddle and betting it will just change in near future, or going with longer time trend of growth and buying call. I am still learning so I did a paper money trade with this (I chose call for simplicity) -> I bought 62.5 call @ $1.88, exp at Dec 18. Not exactly ATM, but pretty close (spot price was $60.3). This is my first post and I am still learning about options, so please forgive me if I made some basic mistakes - I would like to hear your comments on my reasoning, so that I will be smarter the next time I find a similar trade!
You may also want to scan for stocks that not only have low IV but are trending or breaking out so you have a better directional bet.
Check out this SPY thread where you can buy very cheap OTM options for a vega play but still benefit when SPY uptrends. http://www.elitetrader.com/et/index.php?threads/thoughts-on-long-otm-spy-calls.295104/ It's best to use stocks with the highest option volume to minimize giving away money on the spread: http://research.investors.com/options-center/reports/option-volume
If you decided to play a spread, make sure you're buying your options ATM and selling the ones OTM....that way you're long the options that will jump the most should vol pop (ATM options will be more sensitive to vol than those OTM)
@eesnz Thanks - no I have not been long UAL - I trade only paper money for now and focusing on options. @smile Thank you for advice, scanning for stocks where I can make a better directional bet sounds as a good advice, as I would have somewhat less uncertainty in that part of my trade. Do you have any advice for how could I scan for such stocks? Thanks for the idea with SPY - I checked out the thread and I see there are different opinions on the topic . I do not feel like I have knowledge to make my own judgement yet, but I will keep it in mind. @Victory5 Thanks, that is exactly what I mentioned - my first thought was let's buy something that is ATM so it is sensitive to changes in volatility! I am not going with spread, but with call. Why do you think it is important only in case of spread?
Check out this VRX for good example of when NOT to buy calls. See how elevated the IV is compared to where it historically resides at about 0.3. If you buy calls now, the IV will eventually revert to a lower level and you will lose big money irregardless of the price action.
Of course IV is "elevated," because realized vol is crazy high right now. That doesn't make options necessarily a bad buy. It just reflects market reality.