If you are looking to sell a covered call in an equity such as Bank of America, you might need to look further out in time. A shorter-dated option typically has lower implied volatility than a longer-dated one since time is more of a variable.
If you do not want to cap your gains on some of these high-fliers, you should look to protect the gains by purchasing a protective put.
If you are like me and look to sell volatility, you should be looking at other markets where volatility has risen or is rising. The recent rally in equities has negatively impacted currencies relative to the USD. The rally has also hammered bonds prices as yields have surged.
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Source: Dynamic Trend
With implied volatility near the high of the range currently at 16.33, traders could look to sell volatility through number of option strategies. The volatility of stock tends to trade within a range (gold dotted lines) and once that volatility comes out of the range, traders will look to buy or sell volatility.
In the above example, IV moved above its 30-day range of 13.93/16.79 to trade at levels above 17. As volatility is reverting to the mean, it'd make sense to be selling options rather than buying.
Selling strategies that are commonly used are short vertical spreads, short strangles and iron condors (for more on the latter strategy, take a look at this recent trade view
Following up from last week...
For those who followed up on our trade ideas, we outlined two strategic trades
and we still view these as very much current as the selloff in emerging markets is overdone and the seasonal demand for natural gas elevates.
The diagonal spread consisting of March '17 35 call/January'17 38 call closed on Friday at $1.42 versus our cost basis of $1.32.
We do not need to be reactive with this and will make a decision near the January expiration...
Natural gas continues its strength and as of the time of this post, NG futures (NGF7) are trading at $3.31. The movement in the underlying has given a great boost to our long vertical call spread. It is currently trading at $0.079/contract (multiplier of 10,000 units) or some 40% return.
We will make a 50% reduction in the position and keep the rest.
The week ahead
Earnings season has wrapped up, however, the economic calendar is full
. Midweek, we have the Opec meeting which could move light crude either towards its recent high of $52.22/barrel or back towards $43/b. Investors could use a straddle going into the announcement or they could look at a double diagonal.
(For the latter you could use the USO ETF, which tracks the underlying futures...)
The Chicago PMI release on November 30 as well as the weekly US EIA report will be scrutinised as well. The much-anticipated nonfarm payrolls report is due on Friday, and could prove the icing on the cake regarding the (also much-anticipating) Federal Reserve meeting on December 14.
Is the US finally on track for policy normalisation? Photo: iStock
— Edited by Michael McKenna
Georgio Stoev is futures and options product manager at Saxo Bank