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How to Find Options Opportunities With Low Volatility


Here are the steps you need to follow when buying options.

4. Identify the target price for the next 30 days. At what price would we take our profit and exit the trade if it went our way during that time?

There was a strong demand zone at around $130. This was the area from which the last major rally was launched. We'd plan to sell the put options on Wynn Resorts reached that point.

5. On the stock's option chain, locate the nearest monthly expiration date that is more than 90 days away.

Wynn had monthly expirations in August (9 days out), September (44 days) and December (135 days). The shortest expiration over 90 days was December. We want an expiration that will still have a large amount of time to go, at that time in the future when the stock hits our target. That is how we cash in on an increase in IV. A rise in IV increases only the time value portion of the option's value. We can only benefit from that if we sell the options when they still have plenty of time to go. We selected the December expiration date.

6. For that expiration date, find the first in-the-money (ITM) strike price.

Below is the option chain for Wynn Resorts.

With the stock at $139.68, the next higher put strike price was $140. The December 140 put was quoted at $8.75 bid, $8.85 ask. Midpoint between the bid and ask was $8.80. That's the price we'd plan to pay.

7. Calculate the profit amount, with the stock at the target price and IV unchanged 30 days from now. You must use option diagramming software for this (details below).

For steps 7-9, we used the Tradestation module called OptionStation to diagram the trade and calculate profit/loss amounts. Below is a diagram showing the profit/loss amounts on the December 140 puts, at any Wynn price between $130 and $142.

WYNN December 140 puts, comparison of maximum profit at the $142 target price
Click to enlarge

In the diagram above, three separate lines are plotted:

The blue line (Plot1) shows the P/L as of a date 30 days in the future, assuming no change in IV.

The magenta line (Plot2) also shows P/L as of a date 30 days out but assumes IV increases to 28% (the average IV for this stock over the past year).

The green line (Plot100) shows the P/L picture 135 days out, at the December expiration date.

The chart values box at the lower left shows us how much profit the put would make with Wynn Resorts at the $130 price target, in each of those three situations. If the $130 target were reached 30 days from the entry date on September 6, our puts would make $449.66 each, if Wynn Resorts stayed at its ultra-low IV level (Plot1). If at that same date the IV were to increase to its 28% average, the puts would make $506.28 each (Plot2). That $56.62 difference ($506.28 vs $449.66) shows the effect that an increase in IV from the current 21% to the average of 28% would have on our P/L. The actual IV change could be greater or smaller than that. IV could conceivably even go down. But since Wynn Resorts was at a historic low in IV, we thought an increase was more likely.

The value for Plot100 in the chart values box is $108.00. That is the amount this same put would make at that same $130 price if the put were held all the way until expiration. The difference between the Plot1 value of $449.66 and the Plot100 value of $108.00 ($449.66 – $108.00 = $341.66), is the amount of time value that would be left in the puts on September 6 vs the December expiration, assuming unchanged IV. That $341.66 is the reason we do not plan to hold these puts any longer than 30 days. We need to sell the puts while they still have most of their time value. Now for step 8.
No positions in stocks mentioned.
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