Options Strategy for when Options Implied Volatility is High or Low

Tom Gentile

Posted in
Education

By: Tom Gentile
May 17th, 2024

5 mins read

Meme Stocks

Want to talk about RISKY? And what a risky investment looks like?  Look no further than what is called a ‘Meme Stock.’

A meme stock is a stock that is gaining or has gained viral popularity. Viral meaning it is getting pumped up due to online chatter and social media activity. Rarely are the prices these things are at and or are running to at these prices based on the fundamentals or growth potential of the company itself.

These type stocks seem to be promoted by retail investors to induce a ‘short squeeze’. Keep in mind though, what goes up also tends to come back and in cases like these they come back down hard and fast. Meme stocks are very risky due to their wild price volatility.

With Wild Price Volatility Comes High Options Implied Volatility (IV).

An options implied volatility is one of the components in developing the price of an option. Options IV is a measure of what the options markets think volatility will be over a given period of time.

It is frequently used to price options contracts where high implied volatility leads to higher premiums for options and vice versa. The primary influencing elements for estimating implied volatility are supply and demand and when a meme stock is getting pumped up online this tends to lead to a pumped-up demand.

The two most talked about memes stocks are Game Stock Corp. (NYSE: GME) and AMC Entertainment Holdings Inc. (NYSE: AMC).

It is the former I will show you a scenario of a trade I ‘experimented’ with again this week.

Game Stop Corp. (NYSE: GME)

The man deemed responsible for the spike in GME the first time this thing went ballistic and cranked higher is Keith Gill aka Roaring Kitty. After that happened he went silent. He basically disappeared. That was back in 2021. Fast forward three year later and most recently it is believed he came back and posted on social media this past Sunday a little meme that has spurred on interest ONCE AGAIN on GME.

GME share price spike again. Price volatility ramped higher, and I know that options implied volatility is getting jacked up as well and I was looking for an opportunity to take advantage of my belief this thing can drop just as fast as it went up.

So, I went looking for an option strategy that could take advantage of the anticipated price drop and the drop in its options IV.

The price popped to $30 from $17 and then maybe a day later hit $65 on an intra-day basis.

I was waiting for a down day, and I felt Wednesday was it. I did this Wednesday all the while I was planning to talk about it today, Friday. I did this so I wasn’t front running anyone.

Figure 1: 60-day Candle Chart on GME
Figure 1: 60-day Candle Chart on GME

What I did was a Bear Call Spread

This is a situation where I would Buy to Open May 17 $40 Call and Sell to Open May 17 $35 Call on the same order ticket, and I got a $1.00 for it.

Image 6

This Bear Call Spread is a bearish option strategy, and it is set up to be a ‘Credit Spread,’ where I ‘open’ the spread trade generating into an account a credit. It is on hold in an account until the option expires or is ‘closed.’

My intent was to gain a credit to the account that come Friday’s expiration the option trade would expire worthless, and I get to keep/realize the full credit of $1.00 per contract.

I am expecting the price of GME to fizzle. And by fizzle I mean at least drop under $35 and remain there until the close of market Friday.

The risk in this trade is the difference in the strike prices offset by the credit taken in.

The strike difference is 5-points so there is 5-points of initial risk, but my taking in 1-point for the credit the maximum risk is 4-points per contract.

If I can make 1-point on 4-points risk that is a 25% Rate of Return.  I like that rate of return for what is a 3-day trade. I felt my probability of GME being under $35 at expiration was good.

It proved out correct in that GME was under $35 at close of market Friday – the options expire, and the account realizes the 1-point per contract payoff or 25$ ROI.

Figure 2: 60-day Candle Chart GME (Close under $35 Friday 2024-05-17)
Figure 2: 60-day Candle Chart GME (Close under $35 Friday 2024-05-17)

I go over this is my audio podcast you can find on my YouTube channel: https://www.youtube.com/@TomGentileTrader

Patterns and Profits Podcast

This is the type of education and more along with my take on the current market direction and how one can try and utilize what I teach to make money trading options. I encourage you all to go to my channel and click to subscribe to be alerted each time I produce a podcast entry.

Options Approach for High or Low Implied Volatility

My lesson is when there is High Implied Volatility options I look for options ‘selling’ strategies and when the options have Low Implied Volatility I look for options ‘buying’ strategies.

By hanging out with me my intent is to help you learn to be able to do the same!

Tom Gentile
C1P: Chief 1-Percenter

Mod Logo

Special Offer

Join Mastery On-Demand!

Have you ever wanted to join the Mastery Program but couldn’t make the live events? Well this year I wanted to change it up and offer you the ability to learn on your time with our brand new Mastery On-Demand offering.

Choose from a wealth of Mastery Programs including our System Mastery, Hedge Fund Mastery, and Trend Mastery — or choose to get access to all of them with the All Access pass.

App: Toms Option Tools

Toms Option Tools scan the markets for bullish and bearish trade opportunities using our proprietary scans and strategy algorithms. TTR Darknet finds bullish entries based on triple stack channel collisions. Money Calendar identifies seasonal patterns with at least 90% accuracy looking back 10 years. Weekly Cash Clock finds short term opportunities that last a week on average. Microcurrency Trader applies Darknet technology and moving averages to cryptocurrencies. Velocity Trader utilizes volume spike and Velocity indicators on custom stock lists. Quantum Scripts scans the markets for momentum acceleration signals and employs Quantum noise filters. Optimal Trader finds directional pre-earnings opportunities that are optimized for entry date, stock movement, and volatility surge. My Trades tracks the profit/loss of your trades, displays stock charts and risk graphs, creates new trades, and edits existing trades. Morning Report provides top 10 option rankings in 6 categories each day.


Disclaimers

Stock and options trading has large potential rewards, but also large potential risk.

You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.

This is neither an offer to buy/sell/ or recommend a particular stock or option.

Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.

No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

Disclaimer of Warranties and Liabilities Tom Gentile and TomsTradingRoom, LLC including employees, consultants, and editors (“Publisher”) cannot and do not warrant the completeness or accuracy of the content found in our areas, or its usefulness for any particular purpose.

Tom Gentile and TomsTradingRoom, LLC also make no promises that our content or the service itself will be delivered to you uninterrupted, timely, secure, or error-free. Under no circumstances will Tom Gentile and TomsTradingRoom, LLC be liable for direct, indirect, incidental, or any other type of damages resulting from your use or downloading of any content on our site.

This includes, but is in no way limited to, loss or injury caused in whole or in part by our negligence or by anything beyond our control in creating or delivering any portion of Tom Gentile and TomsTradingRoom, LLC.

You are agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that Tom Gentile and TomsTradingRoom, LLC will not be liable for any I, investment decision made, or action taken by you, or others based upon reliance on news, information, or any other material published by Tom Gentile and TomsTradingRoom, LLC.

Tom Gentile and TomsTradingRoom, LLC relies on various sources of information that we believe to be accurate and reliable. However, we make no claims or representations as to the accuracy, completeness, or truth of any material contained on our site.

Tom Gentile and TomsTradingRoom, LLC are educational portals, providing content for educational and informational purposes only. Neither Tom Gentile nor TomsTradingRoom, LLC are a broker/dealer. Investors need a broker to trade stocks and options and must meet certain requirements. All securities, futures, and investments data and ideas are offered to self-directed investors. All prices in USD unless noted otherwise.

A full disclaimer can be found here:  http://www.tomgentile.com/legal_disclaimers.html.

Sign Up Now for Free Education!