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Covered call writing exit strategies include rolling-down opportunities. We buy back the short call and sell another at a lower strike in the same contract cycle. This podcast shows a real-life example with XLE when rolling-down occurred with only a few hours remaining until contract expiration.
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Alan,
What would be considered a high IV?
Thank you.
William,
This is a tough one to quantify because what is high to one investor, may not be to another. However, there are guidelines we can use to compare IV to the overall market.
To start, the IV of individual stocks will be higher than benchmarks or many exchange-traded funds (there are some exceptions).
To respond to your question, let’s first look at the VIX (CBOE volatility index- “investor fear gauge”). This stat reflects the IV of the S&P 500 and is currently 18.96. One can say that above this IV is high and below, low.
We understand that individual stocks will have higher IVs than benchmarks (generally). As I respond to your question, I am reviewing our most recent premium member stock report of eligible underlying securities for option trading. The range of IVs run from 25.2 to 79.2.
What’s high? Perhaps, above 40. Definitely over 50. This doesn’t mean we should avoid those IVs. It just means that if we use high IV securities, we are willing to take on additional risk. We can also mitigate high IV trades using ITM strikes or protective puts. We can also write a deep OTM cash-secured put to enter covered call trade.
Alan