Hey,
I have a question that is a followup to my previous question: If you think there's a 90% chance a stock will go up tomorrow 5%, what is the best strategy to maximize profits?
And I was thinking that the decision to either buy a call or write a put should depend on implied volatility. If the volatility is high, like over 100, that makes the option more expensive. In that case, it's better to be the seller of the option than the buyer. However, if the volatility is low, like under 80, maybe it's better to buy a call because the option wouldn't have a high volatility premium. What do you think Robert, anyone?
[quote="Valuetrader"]Hey,
I have a question that is a followup to my previous question: If you think there's a 90% chance a stock will go up tomorrow 5%, what is the best strategy to maximize profits?
And I was thinking that the decision to either buy a call or write a put should depend on implied volatility. If the volatility is high, like over 100, that makes the option more expensive. In that case, it's better to be the seller of the option than the buyer. However, if the volatility is low, like under 80, maybe it's better to buy a call because the option wouldn't have a high volatility premium. What do you think Robert, anyone?[/quote]
If I answered it based on the information you provided you would punch me next time you see me....LOL So I will provide two answers and hopefully avoid the black eye
It depends.... 5% means a lot less on a $12 stock than it does on a $50 stock. A low price stock with a high IV would generally have me looking to sell puts, where a high priced stock would have me leaning towards buying calls, all else being equal. if it was 50-50 I would likely buy the calls due to (changing it from all else being equal but more real) calls generally have much greater volume and its easier to get in and out of. This would become increasingly if the expiration date was in the sweet spot of about two weeks away. as the expiration date moves closer or further away selling puts become more attractive.
I know when I ask a straight forward question (turn right or left) I want a straight forward answer, but to do so would be wrong without complete information. Trading always involves a great deal of incomplete information, so it is important to evaluate each opportunity at the time it presents itself based on historical probabilities.
I can provide for sure what I would do in any type of situation but I need the complete picture to give a complete answer (which of course is based on my experience and does not mean it's even correct as I am far from making correct choices all the time)
Respectfully,
Robert
OK, this is more complex than I thought it would be. Thanks for your expertise.
If you know a stock is going to go up a certain amount, say 5%, then isn't the only factor to determine is whether the IV is high or low? Because if you already know the stock will go up, it's a matter of figuring out how much you're going to have to pay for the IV premium. Of course, if you plan to close the position quickly, I guess it doesn't matter either way if the IV premium is high because you're going to buy it back anyways.
Why does it matter how high the stock price is?
It matters what the price of the stock is in relation to the delta of the option (how much it will move in relation to the stock movement), and the IV.
An option with a high IV, low price, and low delta (all in relative terms), is simply not going to move much if the stock is a $12 stock moving 5%
For example, with a .4 delta the option is going to move ~.24 and if you have to pay even a five cent spread it is hard to justify over buying the stock outright even with the added leverage. You have to keep in mind the Theta with the high IVers because if you expect a 5% move and really hit it home with a 8-10% move your delta may not improve much if at all
On the other hand a 5% move with an expensive stock, say $50 or more is going to have in real dollar terms a much larger move and the transaction costs become less of a factor.