For those seeking volatile instruments for Trading Options, choosing the correct Futures Contract or Stock is essential. For analytical purposes we’ll take a look at Amazon, Crude Oil and the E-mini S&P. AMZN reports earnings on Thursday, April 28th after the close of trading. Its Implied Volatility is substantially above its Historical Volatility for the last 20 days, and for good reason. On the other hand, the July Crude Oil Contract, which expires at the same time as the other two contracts, has Options which are trading with an Implied Volatility at a similar level to the Historical Volatility.
The Table below shows the Options Series for select strikes from all three markets. It’s easy to make note of the Implied Volatility Skew of the contracts. All three contracts have Skews with higher Implied Volatilities as the Put gets farther out-of-the money. If you are not comfortable with these terms, they are reviewed in a condensed version in our Options Guide. If you are Trading Options, you should familiarize yourself with these concepts.
The Table provides essential information to be evaluated before trading any Options Contract. For the purposes of this article we will focus on price. For example, comparing the AMZN 540 Puts to the 700 Calls we see how much more expensive the Put Price is compared to Price of the Call even though their Strikes are approximately equidistant from the current trading price. Stocks typically price options this way, but if you would like to get Long at lower levels and establish a Bullish Position, the Pricing Structure of these Options provides a great opportunity to meet your goals. For example, if you were willing to get Long AMZN at 500 dollars then you could Sell the 500 Put and collect the premium or use the premium you collected to Purchase equidistant out-of-the money Calls for a Credit. Be sure that you understand the Inherent Risk of Selling Options and that this is merely an example for you to understand the Pricing Structure of Amazon Options.
In Crude Oil, the Skew is not nearly as well defined. While there is certainly an Implied Volatility Skew which is evidenced by the Implied Volatility of each Strike as the Puts get farther out-of-the money, it is not as pronounced as the one in Amazon. In addition, as you can see in the Table, the price of the out-of-the money Puts and Calls approximately equidistant from the current trading price are almost the same. This lack of pricing disparity makes it much more difficult to find an Options Trading Strategy which may meet your needs. Click the link for a quick view of multiple trading strategies.
At Options Strategy Network our goal is to help Individuals and Corporations design positions that meet their risk/reward requirements by enabling them to build appropriate positions through the analysis of liquidity, historical and implied volatility, the skew and the best options strategy to meet their goals. Contact Us to structure a program that meets your individual or corporate requirements. Our thirty years of trading and risk management experience can be an excellent addition to your skills. On our website you will find numerous educational tools to improve your understanding of Options Trading.
An example of a market with a pronounced Skew, in which the pricing of comparative options enables those with a strong directional bias an opportunity to engage in a Long or Short Strategy with good value, is the E-mini S&P 500 Options. The last portion of the Table provides the Structure of S&P Options. The Skew is large and the pricing differences of Options Equidistant from the current trading price provide you with an opportunity to develop numerous Options Strategies described in the Link above. If you have questions, feel free to Contact Us. We can structure an Educational Options Trading Webinar to meet your needs.
OPTIONS TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. THE INFORMATION IS OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT IS IN NO WAY GUARANTEED. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS.