Comments on: Implied Volatility: General Market Conditions That Make Option Values Move Up Or Down https://www.thebluecollarinvestor.com/implied-volatility-general-market-conditions-that-make-option-values-move-up-or-down/ Learn how to invest by selling stock options. Fri, 14 Nov 2014 00:23:31 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/implied-volatility-general-market-conditions-that-make-option-values-move-up-or-down/#comment-21186 Fri, 14 Nov 2014 00:23:31 +0000 http://www.thebluecollarinvestor.com/?p=10429#comment-21186 In reply to Adrian.

Adrian,

1- Generally, protective puts are purchased when the cc trade was initiated. This is called “married puts” When implemented we want to generate an option credit that meets our goals. This will be about half the return generated w/o the put.

2- In my view, there are way too many factors that influence our markets to make a general statement about Octobers. See the chart I created below from the past 3 Octobers. Of course, whenever your assessment is bearish you should take appropriate action.

3- I would base my trading style on fundamental, technical and common sense principles as opposed to the implied volatility of the underlying security.

4- The 4 parameters I use are exponential moving averages, MACD histogram, stochastic oscillator and volume. These are the indicators the BCI team uses when constructing our weekly stock reports. I encourage our members to use the indicators they are comfortable with…mine aren’t the only valuable tools…just the ones I’ve had the most success with.

CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG:

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/implied-volatility-general-market-conditions-that-make-option-values-move-up-or-down/#comment-21165 Tue, 11 Nov 2014 19:17:12 +0000 http://www.thebluecollarinvestor.com/?p=10429#comment-21165 In reply to Ted.

Ted,

As time passes and theta is eroding the time value component of our premiums, delaying action could prohibit us from mitigating losses. I am more likely to take the approach of waiting for a share rebound in the first half of a contract but would favor rolling down or selling the shares in the 2nd half of a contract.

Share price can absolutely turn up late in the contract but (in my view) mitigating losses takes precedence during this time frame.

My approach reflects the conservative nature of how I trade.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/implied-volatility-general-market-conditions-that-make-option-values-move-up-or-down/#comment-21162 Tue, 11 Nov 2014 12:34:16 +0000 http://www.thebluecollarinvestor.com/?p=10429#comment-21162 In reply to Billy.

Billy,

Your option is most likely to be exercised if share price moves above the strike price. In this case, the option holder can buy your shares for $5 and sell them @ market for $5.30. Most options are not exercised until the day after expiration Friday. PLUG is a security that has weekly options associated with it. One possible reason for exercise is that you sold a weekly and the price was above the strike at expiration which is automatic exercise.

Alan

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By: Adrian https://www.thebluecollarinvestor.com/implied-volatility-general-market-conditions-that-make-option-values-move-up-or-down/#comment-21161 Tue, 11 Nov 2014 06:34:44 +0000 http://www.thebluecollarinvestor.com/?p=10429#comment-21161 Alan, I want to move on now to ask you probably some of the most important questions I have asked yet, about the use of put option protection. When the market went into a correction recently my papertrades all ended in a loss, and I had thought put options may have been better to have in place.

Therefore my questions about the put options use are:-
1. When thinking of buying a put option as protection within the contract month, what should be the latest time(or week) I should really have bought this by?- is it ever too late?

2. If the market has been known to sell-off in October from fund managers selling, then wouldn’t it be safer to always have put option protection for every October?

3. If the premium of a stock is greater than 4% for an ATM strike or any strike I choose, then can’t I buy a put option(as a collar trade), if because of ‘higher I.V ‘ there is now that concern about a price decline? (and yet will still give me an appropriate return)?

4. And if you sell ITM options when price is channelling s/ways, then do you still do so if the price is at or near the bottom of this price channel? (or is it always best to maybe sell options around the middle of each price-channel – or anywhere in it where perhaps you have more price advantage?)

I’m loving all this help you are giving me so far. Thanks

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By: Ted https://www.thebluecollarinvestor.com/implied-volatility-general-market-conditions-that-make-option-values-move-up-or-down/#comment-21164 Tue, 11 Nov 2014 06:09:41 +0000 http://www.thebluecollarinvestor.com/?p=10429#comment-21164 Alan,

After buy back on drop, and a double not looking good,price slow staying down. Best to wait it out or apply another option position at lower level?

Covered call at lower level could result in call away or increased loss to buy back if volatility/price rise what action to take? Ie: don’t want additional position in shares but think opportunity from price drop/rebound till my existing positions can be “safer”.

Ted

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By: Alan Ellman https://www.thebluecollarinvestor.com/implied-volatility-general-market-conditions-that-make-option-values-move-up-or-down/#comment-21159 Mon, 10 Nov 2014 21:31:36 +0000 http://www.thebluecollarinvestor.com/?p=10429#comment-21159 In reply to Adrian.

Adrian,

Once you own the 2nd stock, the exit strategy execution is exactly the same as if you purchased the stock at the beginning of the contract. Since we are mid-contract, more likely than not, the 10% guideline would apply unless the share appreciation took place very early in the contract.

2- I will generally look to sell an ITM strike on the 2nd position (as depicted in the Encyclopedia…see Figure 99, page 271) generating at least an additional 1% (over cost-to-close) return. The premium generated in the initial position is unrelated to this decision…that trade is already maxed out.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/implied-volatility-general-market-conditions-that-make-option-values-move-up-or-down/#comment-21158 Mon, 10 Nov 2014 14:53:33 +0000 http://www.thebluecollarinvestor.com/?p=10429#comment-21158 In reply to Shelley.

Hi Shelley,

This trade is a win-win for you. You made an excellent return and it will serve as a great learning experience. A few points:

1- There IS an exit strategy for this scenario but I didn’t develop it until after I published my 2nd book (“Exit Strategies…”). It is in my DVDS Programs and in The Complete Encyclopedia…:

http://www.thebluecollarinvestor.com/alan-ellmans-complete-encyclopedia-for-covered-call-writing-scover/

2- The Basic Ellman Calculator does not have a tab for this strategy (mid-contract unwind or MCU) but the Elite version of the calculator does. If you are a premium member, it is free in the “resources/downloads” section of the premium site. If not, it is for sale in the Blue Collar store.

3- Here is a link to an article I recently published about the strategy (more details in the Encyclopedia and both DVD programs):

http://www.thebluecollarinvestor.com/closing-our-entire-covered-call-position-when-share-price-rises-the-mid-contract-unwind-exit-strategy/

4- As I write this reply, MU is trading @ $33.03 so let’s see where you stand now:

Option debit: $3.18 – $1.95 = $1.23

Share credit: $33.03 – $27.58 = $5.45

Net credit: $5.45 – $1.23 = $4.22/$27.58 = 15.3% in a very short time frame…CONGRATS!

BTW: MU has weeklys so be careful of expiration dates when exceuting these trades.

Alan

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