Comments on: Using Implied Volatility to Determine Safe Strikes for Portfolio Overwriting: A Real-Life Example with PayPal Holdings, Inc. (Nasdaq: PYPL) https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/ Learn how to invest by selling stock options. Fri, 24 Jun 2022 10:05:15 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/#comment-581975 Fri, 24 Jun 2022 10:05:15 +0000 https://www.thebluecollarinvestor.com/?p=20427#comment-581975 Jean,

When we use IV to determine the expected trading range of a security for a specific contract period, we focus in on the movement of that stock from its current price. Not all strikes with the same contract expirations have the same volatility stats. This is known as “volatility skew” I have written about this phenomenon in the past:

https://www.thebluecollarinvestor.com/volatility-skews-defined-explained-and-updated/

Therefore, we focus in on the near-the-money strike or an IV mean (see below).

Yahoo Finance is, generally a reliable site. I have not analyzed the accuracy of their IV stats.

The sites I have used are:

http://www.cboe.com (near-the-money strikes)

http://www.ivolatility.com (IV index mean)

See the image below taken yesterday from ivolaitlity.com.

Either of the sites above will be accurate for determining expected price movement during a specific contract.

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

Alan

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By: Jean Philippe https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/#comment-581679 Thu, 23 Jun 2022 13:01:39 +0000 https://www.thebluecollarinvestor.com/?p=20427#comment-581679 Dear Alan

Thank you very much for this extremelly valuable information.
I have two questions
-On Yahoo finance, we can see the Implied volatilty, is this the one you use for the calculation.
– I don’t understand clearly why we use the Implied volatility correspondting to the strike at the money and not the implied volatility for the strike corresponding to the level you want to sell the call.
Thank you
Sincerely

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By: Alan Ellman https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/#comment-570069 Fri, 27 May 2022 11:06:37 +0000 https://www.thebluecollarinvestor.com/?p=20427#comment-570069 In reply to Harley.

Harley,

For a $100k portfolio, I prefer the diversification of at least 4 securities. If only 3 are in positive territory over the past 1-month, I would select the next best performer.

You will almost always find that these securities will, have initial time-value returns between 1% and 2% per month for near-the-money strikes.

Glad you enjoyed my presentation.

Alan

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By: Harley https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/#comment-570063 Fri, 27 May 2022 05:01:46 +0000 https://www.thebluecollarinvestor.com/?p=20427#comment-570063 Alan, in your presentation on Tuesday, which I enjoyed, one criteria was to locate best performing spyders over the past month. Does that mean one should only consider those with positive percentage during this period, or are those with less negative performance also considered?

Looking at the past monthly performance this morning, only 3 of the 11 sectors are positive. I haven’t computed whether any of them meet the ROO criteria.

Thanks,

Harley

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By: Roni https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/#comment-569754 Thu, 26 May 2022 14:53:37 +0000 https://www.thebluecollarinvestor.com/?p=20427#comment-569754 In reply to Hoyt T.

Hoyt,

Thank you for your kind words and wise comments.

The market improved this week, right after my radical decision, and I hope it continues that way.
I will keep an eye on the VIX, and if it goes down to the level you mentioned, I will return to my regular monthly CC trading.

On the other hand, there are several headwinds still blowing:
Inflation, interest rate hikes, supply chain disturbance, and the Ukraine war. Therefore, I believe the market will take some time to stabilize.

Best wishes to you too.

Roni

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By: Roni https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/#comment-569744 Thu, 26 May 2022 14:29:14 +0000 https://www.thebluecollarinvestor.com/?p=20427#comment-569744 In reply to Alan Ellman.

Thank you, Alan,

I am watching each day, and it looks like the bottom was reached right after I decided to liquidate, making me regret my decision today. But if the market continues to improve, I will be happy to resume my monthly CC trading.

Roni

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By: Hoyt T https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/#comment-569711 Thu, 26 May 2022 13:09:27 +0000 https://www.thebluecollarinvestor.com/?p=20427#comment-569711 Hey Roni,

I feel your pain my friend.

As both a retired person and both an investor and an options trader, bear markets, and we can argue whether or not the last five months have been one, are especially cruel.

In times like these, I tell my grandchildren to load up their accounts with SPY, QQQ, XLK, and IWM. Myself, I worry if this time is going to be the one that takes years to come back. We have had those several decades ago.

My problem is simple. As an investor, since stocks rarely expire, and major market indices never do, I hold on and try to buy more at a discount. As an options trader, since options do expire, I am taking a much larger hit with little hope of recouping my losses.

As you know I do/did a lot of credit put spreads on SPY. I would sell at around the -0.26 Delta range, that used to be outside the expected range, and buy $5 below that laddering 3, 6, 9, and 12 months out. It worked fine until it didn’t anymore. As a matter of fact, it has now worked horribly!

As an options trader, as Alan noted, one can use the VIX to decide when to get back into the market. In this five month cycle the VIX touched 39 once and closed at a cycle high of 37 on 2/24. I personally prefer to trade with the VIX under 20. Oh, for those days of yesteryear, actually only last year!

As an investor it is much more difficult to know when to re-enter. A lot of folks wait too long to re-enter and come back in at the new top.

Each of us have different risk tolerance levels. In my family I am the only high risk tolerant one, save one granddaughter.

You are correct to make your decisions based on your personal risk tolerance. That has always been the first step in the BCI methodology.

Best wishes, my friend.

Hoyt T

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