By: Tom Gentile
on November 16th, 2021
I Never Buy Calls or Puts on the Expensive IV List
I told everyone that was tuned in to the Money Morning Live session this morning is that options shown on the Expensive IV list are ones I never buy… Calls or Puts.
A component or part of an options price is affected by Implied Volatility. When IV is high and then suffers what’s called a Volatility Crush the damage to an option position could be severe.
This can all happen regardless of the stock price move as well
When does an Option Tend to be Expensive?
One time an option’s IV tends to rise is going into its earnings report.
The anticipation of traders expecting a big move in the price of the stock based on their expectations of what the actual earnings and revenue report is going to be.
If one buys an option prior to earnings and holds over the actual announcement, the IV can drop simply because there is no more expectation or what if as the stock has already announced; the reason for the trade is over and the drop in IV could drop the premium of the option leaving you an option to sell to close at a lower price than that for which you bought it to open.
How can you tell if an option is expensive or cheap?
My tools! You can look at the Options Rankers Morning Reports Lists (Log in > Options > Rankers > Morning Reports). You can superimpose the ATM Implied Volatility for various range of days over the actual chart Or search another options ranker called IV Expensive / Cheap (Log in > Options > IV Expensive / Cheap).