Market volatility is on the rise and that means option premiums are higher than normal. High volatility means high option premiums for many stocks.
Implied volatility rank, or IV Rank for short, is a good way to see if the current level of implied volatility for a stock is high or low compared to the last twelve months.
An IV Rank of 100% means the current level of implied volatility is the highest it has been in the last twelve months.
An IV Rank of 0% means the current level of implied volatility is the lowest it has been in the last twelve months.
When IV Ranks is high, it can be a good idea to look at option selling strategies such as naked puts, bull put spreads, bear call spreads and iron condors.
Let’s take a look at some large cap stocks with an IV Rank above 70%.
The parameters for this screener are:
- IV Rank above 70%
- Market Cap above 40B
- Total Call Volume above 2000
The above list of stocks gives us a starting point to do some more research on with a view to selling options.
Let’s go over to the Naked Puts Screener and see what that shows us. While it takes a lot of courage to sell puts in a downtrend, let’s take a look and see if there’s anything that jumps out.
Naked Put Screener
Here we have the results from the Naked Put Screener screened for the high IV Rank stocks.
The parameters for this screener are as follows.
- Market Cap above 40 billion
- Days to expiration 15-45
- Option volume greater than 50
- Open Interest greater than 100
- Moneyness -15% to -5%
One way to take ownership of a stock for less than the current price is via an option strategy called a cash-secured put.
A cash-secured put is a slightly less bullish trade than buying the stock. It is considered a neutral to slightly bullish trade.
A cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium or be assigned and acquire the stock below the current price.
Selling put options is an easy place for investors to start with options. They are like a covered call and are pretty easy to understand once you know the basics.
Traders selling puts should understand that they may be assigned 100 shares at the strike price.
ANET Naked Put Example
ANET is one of the only stocks with a Buy rating, so let’s look at the first ANET item as an example. A trader selling the November 17th, $170-strike put on ANET would receive $460 into their account, which would be theirs to keep.
If ANET falls below $170 by November 17th, they would be required to buy 100 shares at $170. The effective net cost of the position would be $165.40, thanks to the option premium received.
That is 12.77% below yesterday’s closing price.
If the stock stays above $170 at expiry, the put expires worthless, leaving the trader with a 2.80% return on capital at risk.
That works out to be 42.3% annualized.
The main risk with the trade is similar to outright stock ownership. If the stock falls quickly, the trade will suffer a loss. However, the premium received will help to offset the loss.
The maximum loss on the trade would occur if ANET fell to $0, which would see the trade lose $16,540, but most traders would cut losses long before then.
Cash-secured puts are a great way to generate a return on strong stocks, potentially without ever having to take ownership.
If the put does get assigned, the investor takes ownership with a reduced cost base and can potentially begin selling covered calls to generate additional income from the position.
Barchart’s Naked Put Screener can be a great way to find option trade ideas.
ANET is due to report earnings on October 30th, so this trade would have exposure to earnings risk.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
