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Ask Alan 186 Using Delta and Implied Volatility to Assess a High Risk Trade

Alan answers a question posed by Greg, who asks:

Alan,
TSLA will be added to the S&P on 12/18. Presumably, there will be a lot of rebalance-related buying toward the end of next week. There should also be increased volatility in the stock. Normally, I would not buy that stock because of various fundamental factors. In this instance, however, I am
thinking of selling one-week puts about 50 points OTM.

I realize that there is a potentially unlimited risk, however, I think the upside substantially outweighs the downside risk. Also, the options should yield a hefty premium. I am prepared to assume the risk.

Thanks,
Ron

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It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#186, Using Delta and Implied Volatility to Assess a High Risk Trade Become a premium member today, and tune in to the educational power of the complete library!



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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

2 Responses to “Ask Alan 186 Using Delta and Implied Volatility to Assess a High Risk Trade”

  1. Bill Gilbert September 12, 2021 11:37 am #

    Hi Alan. I frequently use delta as general guidance when buying/selling options. Because delta is NOT mathematically equal to your percentage chance of expiring ITM, but only approximates it, I tend to use 25 Delta and 75 Delta strikes to approximate the boundaries of 1 standard deviation instead of 32 and 68 Delta. 1 SD should be enough for most situations, but I agree with you about TSLA. One comment from Elon Musk and TSLA could go to the heavens (or the other place.) Same problem with “meme” stocks and their manipulators. It’s all about the “X Factor.” Keep up the good work!
    Bill

    • Alan Ellman September 13, 2021 9:21 am #

      Bill,

      Thanks for sharing your trading ideas with our BCI community. I am a big believer that sharing information will make us all better investors.

      Alan

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