When stocks show a high implied volatility in the options market, that's often a time to sell options and collect premium. Since BX stock is currently at a high implied volatility, we'll look at a short strangle option strategy to capture the high premium.
The Short Strangle Trade
When volatility is high, it can be a good time to be an option seller rather than a buyer. Blackstone is currently at a 71% implied volatility percentile. That means the implied volatility on BX stock is higher than 71% of all other occurrences in the last twelve months.
For the short strangle trade, you sell an out-of-the-money put and an out-of-the-money call with the same expiration date.
This trade generates a large amount of premium for the option seller, but it does come with risks. A short strangle is an unprotected trade, sometimes referred to as a "naked" trade. Naked options can be risky as they expose the trader to potentially unlimited losses if the stock makes a big move.
However, if the trader is right and the stock trades sideways, the trader gets to keep the full premium.
BX Stock Short Strangle Setup
Assuming a trader believes that BX stock will trade sideways over the next few weeks, they could look to sell a Jan. 20, 65 put and a Jan. 20, 83 call.
Yesterday, the 65 put sold for around $1.40 and the 83 call sold for around $1.05.
Selling those two options would generate a total of $245 in premium. That is the maximum possible gain on the trade if BX stock closes at 65 to 83 on the day of expiration.
To work out the break-even price of the trade, take the lower strike price of 65 minus the total premium received of 2.45, which gives 62.55.
Then on the call side, take the call strike and add the premium, which gives 85.45.
Know The Risks
This trade is a short vega trade, which means if implied volatility increases early in the trade, losses could occur.
Short strangles are an advanced option strategy, so if all that sounds confusing, it's best not to trade them.
With a trade like this, the potential losses are unlimited and a lot higher than the potential gains, so traders would want to be very confident that the stock is going to remain flat over the course of the trade.
The break-even points offer a place to put stop losses.
According to the IBD Stock Checkup, BX stock is ranked No. 75 in its group. It has an IBD Composite Rating of 23, an EPS Rating of 28 and a Relative Strength Rating of 19.
Please remember that options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
