Trading in a high vol environment. SPY, QQQ, GOOGL, AMZN and more.


Market View

Last Week – Following a volatile week of large moves in both directions the SPY ended the week down 2.9% following two weekly declines near 5%. The 2.9% decline was about inline with what options were pricing.

This Week – SPY options are again pricing about a 2.8% move for the upcoming week.

Implied Volatility / VIX – The VIX closed the week near 32, up from 30 the week before. It is near some of its highest closing levels of 2022.

Expected Moves for This Week (via Options AI)

  • SPY 2.8% (+/- $11)
  • QQQ 3.4% (+/- $10)
  • IWM 3.5% (+/- $6)
  • DIA 2.4% (+/- $8)

Economic Calendar

  • Monday – ISM Manufacturing
  • Tuesday – Fed speeches: Williams, Mester, Daly
  • Wednesday – ADP Employment, ISM Services
  • Friday – Non farm payrolls


Trading in a High Vol Environment

Last week we looked at the high IV conditions in the FAANG+ names and detailed some Iron Condors in Amazon. The point on that is AMZN, like many large cap peers is at the highest implied vol levels of the year and neutral strategies are pricing in wide ranges below the lows of the year in the stock. They also have the advantage if potentially being correct on simply selling high IV and if the market were to stabalize, IV would come in and those types of trades could be taken off for less than they were sold.

AMZN stock closed last week about where it ended the week before, however, overall market IV was higher. So a scorecard on high IV neutral trades in AMZN would look like this so far. Stock not moving: yes, IV going lower: no.

Most of these names begin to report in late October with some reporting before Oct 21st expiry, like TSLA, and others after, like AMZN and GOOGL. With that in mind, and with IV even higher let’s look at another high IV strategy for those that may be looking to turn bullish in a stock.

We’ll use GOOGL, as an example, using Oct 21st expiry, as earnings don’t come into play until the week after. And we’ll compare two credit put spreads, one at the money, the other out of the money:

The first put spread sells the at the money put and buys the expected move put, risking 300, to make 200, if GOOGL is above $94 on Oct 21st. With the way stocks are whipping around this type of trade can be thought of as a fairly straightforward bullish play, with a little bit of wiggle room below where the stock is trading (but not much). The more important factor is with IV this high, this trade doesn’t need a big snapback rally. It just needs a small one, or even one that starts from lower and just gets back to this point in the stock. In other words it doesn’t necessarily need to have its timing exactly right, nor its magnitude of move exactly right. Playing for a reversal with calls or debit call spreads kind of needs to have those things perfect at this point, with IV so high.

The second trade is an out-of-the-money put spread, risking about 75 to make 25 with its strikes set at the bearish expected move. This is the type of trade someone does when they just think IV is beginning to overprice downside risk, and often at levels where they’d psychologically be a buyer of the stock. The advantage with a credit put spread vs a cash-secured put is that if the market crashes, it’s a defined $75 loss rather than unlimited risk below.

GOOGL is simply an example here. There are a ton of similar stocks with similarly high IV at the moment. Eventually, there will be a snapback rally where calls work, but until then it’s interesting to look at some credit spreads and the defined risk associated with selling moves rather than trying to time them for a reversal.


Earnings this Week

Links below go to the Options AI earnings calendar where you can see the other companies each day and click through to see charts (free to use). Recent earnings moves (actual) start with the most recent:

Wednesday

  • Lam Weston LW / Expected Move: 7.3% / Recent moves: +3%, +8%, +8%

Thursday

  • Constellation Brands STZ / Expected Move: 4.4% / Recent moves: -4%, +5%, -3%
  • Conagra CAG / Expected Move: 4.2% / Recent moves: -3%, -4%, +5%

Friday

  • Tilray TLRY / Expected Move: 14.6% / Recent moves: +12%, +3%, +13%


Based upon publicly available information derived from option prices at the time of publishing. Intended for informational and educational purposes only and is not any form of recommendation of a particular security, strategy or to open a brokerage account. Options price data and past performance data should not be construed as being indicative of future results and do not guarantee future results or returns. Options involve risk, including exposing investors to potentially significant losses and are therefore not suitable for all investors. Option spreads involve additional risks that should be fully understood prior to investing. Securities trading is offered through Options AI Financial, LLC, member FINRA and SIPC.

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