04-04-2020, 07:39 AM
(04-03-2020, 03:01 PM)Otter Wrote: Those are pretty risky put options (weeklies). Given the short expiry, you could get absolutely destroyed by IV-crush and theta (time decay destroying the value of an option) if the price of oil and XOM continues to moon in the short-term.
In the most general terms, you can typically make money re-selling a put option contract if the share price has declined below the point it was at when you purchased the contract. HOWEVER, this is where IV-crush and theta can wreck your plans. Imagine a scenario where you buy 5/1/20 XOM 35 Puts today, while XOM is at 37. If XOM suddenly plunges down to 36.50 tomorrow, you should be able to re-sell the option for a decent profit. Alternatively, there could be a scenario where XOM goes up to 40 in the next few weeks, then slowly declines to 34.90 by April 29, with a market expectation in the options market that it will be jumping back up in price soon (implied volatility, where the IV in IV-crush comes from). In that scenario, even though you are under the strike, your option is not profitable. After taking into account the premium you paid for the option, the two days remaining to expiry, market expectation of XOM rebounding (implied volatility), your option is worth less than you paid for it. There are a nearly limitless number of potential scenarios, and a large number of them result in those weeklies becoming worthless in a hurry.
Otter has given a good example of what may happen.
Let me boil it down into even simpler terms.
To successfully trade options you have to good at direction. Volatility direction and stock price direction. If you are right on one you might make money. If you're wrong on both, you're toast. Your focus should be on volatility direction.
Generally speaking, stock goes up, its volatility goes down (outside of earnings events) and vice versa.
Now if you're bullish on a stock in this high vol environment, what is the play? Sell a put or put spread. At high vol, it is likely to fall and any upward stock movement will accelerate the process. Puts are also usually higher priced than calls.
If you're bearish and wish to benefit from a volatility expansion and stock price drop, an out of the money (OTM) put debit spread is the play of the day or a calendar spread.
Get to where it is simple in your mind. Their is only credit/credit spreads and debit/debit spreads using puts or calls. Check the environment you are in and apply the trades accordingly.
Nobody know what is going to happen. Watch your size and let the strategies work.
Good luck