Although options trading carries a reputation for being the exclusive domain of professional traders, they’re actually powerful tools for everyday investors, including beginners. Once the basic concepts are grasped, these derivative contracts offer flexibility and most significantly, risk management.
To become a successful options trader, one must first understand the lay of the land. As Sun Tzu wrote, “[e]very battle is won before it’s ever fought.” Options are the same way. To use a sports analogy, before a football team decides to kick a field goal, the coaching staff will at least check the wind speed and direction. Kicking into the wind is a huge obstacle compared to when it’s at your back.
Prior to any options trade, you should check implied volatility (IV) or the market’s expectation of movement. Barchart daily offers 20 assets featuring the highest and lowest IV. To get the others (along with many other groundbreaking screeners and data analytics), you must upgrade to Barchart Premier. This tool alone is invaluable because it can help direct whether you should consider a net debit or net credit options strategy.
Low IV relative to historical volatility (HV) indicates that the market is discounting option premiums due to a reduced expectation of movement. In such cases, a debit strategy (which involves a net payment of premium) may be ideal based on the relatively low cost.
On the other hand, high IV relative to HV indicates that the market is pricing option premiums at a higher rate due to an anticipation of movement. Under this environment, a credit strategy (which involves receiving income) may be ideal because of the comparatively expensive premiums.
Simply, high IV is the wind at your back: go ahead and take that monster 60-yard field goal attempt. With low IV, you’re facing a headwind in Chicago, making a long-range kick a potentially imprudent decision.
Exxon Mobil (XOM): A Low IV Opportunity
One of the low IV opportunities that Barchart Premier identified on Sept. 24 was oil and gas supermajor Exxon Mobil (XOM). The energy powerhouse represents an intriguing case because while XOM stock gained over 14% of equity value since the start of the year, it has only moved up 2% in the trailing six months.
Why the slowdown? Fundamentally, concerns exist about fading demand in China. To be fair, in the past five sessions, XOM stock gained almost 3%, in part because of brewing optimism that the Federal Reserve can engineer an economic soft landing. Nevertheless, a weakened job market suggests that pressure could impact Exxon both domestically and internationally.
Further, the technical chart for XOM stock doesn’t exactly provide much confidence. Clearly, a resistance level between $119 and $120 has capped upside movement. That’s no guarantee that XOM won’t make a breakthrough. However, Exxon is showing IV of 19.88% against HV of 22.72%, suggesting that buying options (a debit strategy) makes more financial sense.
But which mainline debit strategy to choose, buying calls or buying puts? Again, because of the aforementioned resistance level, it appears that a put-based strategy is ideal. At the same time, we want to control our risk, which warrants consideration for a vertical spread. Specifically, we will consider a bear put spread.
A bear put spread is similar to buying a straight put option — we make money when the underlying security goes down. However, we also at the same time sell a put at a lower strike price. To be sure, this sale limits our reward. But the key point here is that because we’re receiving premium, our net payment (net debit) is cheapened.
Let’s suppose we want to buy a bear put spread for options expiring Oct. 4, 2024. Barchart provides mathematically viable trades for the nearest expiration date (Sept. 27, in our case) for free. Premier members enjoy the full gamut, which is a vital tool for extracting opportunities.
One balanced bear put spread to consider goes as follows:
- On Leg 1, sell the $119 put (priced at $2.64 on Tuesday).
- On Leg 2, buy the $115 put (priced at 74 cents).
- The maximum loss for the trade comes out to the net debit paid of $1.90 ($2.64 – 74 cents) or $190 when multiplied by 100 shares per contract. You’re almost getting a 30% discount on the price of the put.
- The maximum reward comes out to $2.10 (or $210 when applying the option multiplier), which occurs if XOM stock drops to $115 or lower.
- Breakeven lands at $117.10.
Barchart calculates the odds of profitability success at 50.5%. For better odds, the investment resource offers compelling trades that require lower rewards and/or higher risk. Ultimately, the trade you choose will depend on your personal risk tolerance. Barchart Premier doesn’t make the decision for you but gives you the tools you need to make the prudent one.
Trump Media & Technology (DJT): Taking What the Market Gives
On the flipside of the IV narrative, the controversial social media firm Trump Media & Technology (DJT) pinged alarm for hitting the high end of the spectrum. DJT stock registered an IV of 176.74% on Tuesday, well north of its HV of 85.3%. In other words, the market anticipates incredible movement and as such, it’s offering rich option premiums.
DJT stock is arguably a case of taking what the market gives you. While it may be tempting to take a pure directional (i.e. debit) wager on Trump Media, we’ve got to be smart. Financially, the company suffers from diminutive revenue and hefty net losses. That’s scary given the popularity of former President Donald Trump. Without the election, DJT could be toast.
Still, for the time being, the Trump faithful have demonstrated that they will support both the man and the stock. With that in mind, a put spread may be enticing. However, rather than a bear put spread, we’ll take the opposite side of the wager with a bull put spread.
What’s the difference between the two? In the former trade, we bought put options to bet that XOM stock will drop. But with the current trade, we’re going to sell (make income off) put options and hopefully win by DJT moving higher or sideways.
Referencing Barchart’s vertical spreads options screener, we’ll go to the bull put tab. For options expiring Oct. 4, Barchart has identified over 300 mathematically viable trades. Of course, it’s impossible to cover every trade. However, one conservative idea caught my eye:
- For Leg 1, sell the $10.50 put at a price of 53 cents.
- For Leg 2, buy the $9.50 put at a price of 33 cents.
- The net premium received (which is also the max reward) is 20 cents per contract or $20.
- The max loss is 80 cents per contract ($80).
- Breakeven comes out to $10.30.
- Risk-reward ratio is 4 to 1 (for every $1 of income earned, $4 is at risk).
For this trade to be fully profitable, DJT stock must stay at or above $10.50 by the Oct. 4 expiration date. That seems like a very reasonable bet. With DJT losing over 74% in the past six months, most of the bad news has probably been priced in. In fact, Barchart’s algorithm calculates the probability of success at 77.3%.
Of course, there’s no such thing as a free lunch. But with odds like that, this is about as close to a free lunch as you’re going to get on Wall Street.
Why Barchart Premier?
Any platform sold to the public must address the central question: why? There are several reasons why investors should consider Barchart Premier. However, the main catalysts center on saving time and saving money.
Regarding the time-saving element, it’s true that resources such as Yahoo Finance offer options chain data for free. However, to find viable put spreads, for instance, an investor would have to manually calculate the bid-ask spreads of the transactional pairing of each proposed trade. You’ll quickly find that such busywork — even with the help of an Excel macro — is wildly onerous.
Plus, Barchart gives you the probability of success, along with the risk-reward profile. Just the time savings alone would be worth the membership fee.
As for saving money, Barchart provides a seemingly endless array of tools and screeners. If the company saves you from one bad mistake stemming from a lack of knowledge, the prevention of that error alone could potentially pay for your membership.
At the end of the day, you wouldn’t host an outdoor event without first checking the five-day forecast. That’s the beauty of Barchart Premier — it gives you everything you need to guide your trading journey profitably.
On the date of publication, Josh Enomoto 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.
