For this Hot Topic, there are two separate trade strategies, one that is aggressive, and the other is more conservative. The "Trades in This Article" box includes the first strategy recommended. Due to a technical glitch, we were unable to enter the trades as two separate strategies. The OptionsProfits Team.
Did you blink while looking at the SPDR S&P 500 ETF (SPY) - Get Report? A little over a month ago SPY was trading around $104.00, and yesterday it was just shy of $114.00. Not quite 10%, but a pretty darn good move.
Most of my picks have been to the long side over the last three weeks, and I am now consciously looking for some over bought issues. This is not a market call. But if you notice, I try to run my picks like I would an option volatility book when I trade. Some long options, some short options, but each trade stands on its own when I initiate it. Right now, I am 100% long delta recommendations so it makes sense to look for a short delta play. The hard part was finding one that made sense in a market going up.
Radware (RDWR) Volatility
The first thing I did in Aqumin's AlphaVision Landscape was create a view with stock's current 30-day implied volatility compared to the last six months (that is the 30-day forward look in implied volatility) and at the same time look for stocks with their 30-day implied volatility trading at a premium to 30-day historical volatility (backward look in the volatility of the underlying- for more on this see my Big Idea last week). The idea being to sell expensive out-of-the-money calls on a stock that is not moving. As it happens with the Aqumin AlphaVision Landscape, what I start looking for is not what I end up with. On the landscape below, the tall green buildings were my original target but the big red spike in Software Industry got my attention more.
Radware (RDWR) - Get Report is trading in the 98 percentile of 30-day implied volatility over the last 6 months, but the 30-day historical volatility was even higher (that is why the buildings are red). The stock was moving violently up on takeover speculation, but you notice from the chart (yes, I read them) on the right that the 30-day implied volatility has come off a bit after a giant spike. A bit of the takeover froth has left.
Now, I compare this to another stock I was following, Arcsight (ARST) . Yes, it got bought out, but at a roughly 20% premium to the current price at the time. If RDWR is bought out, maybe in the $41.00-$42.00 range, the risk on selling the November 40 calls is relatively small (they were close to $1.90 at the time of writing). I am fading the speculation and the option premiums are allowing me to do it.
I think selling 1 RDWR November 40 call for $1.90 on a 37 delta, fits the bill for an aggressive play. Or you can be a bit more conservative and sell 3 RDWR November 45 calls for $0.65 on a 18 delta, with RDWR trading $35.71 or better. In either case, implied volatility is high enough for this trade to be worth it. For holders of RDWR common, look at the 60 volatility level on the chart in the bottom right of the landscape, a very nice time to sell options against your stock.
Trade: Sell to open 1 RDWR November 40 call for $1.90 on a 37 delta (aggressive strategy) *OR* sell to open 3 RDWR November 45 calls for $0.65 on a 18 delta (more conservative strategy).
At the time of publication, Andrew Giovinazzi held no positions in the stocks or issues mentioned.
Andrew is the Executive Vice President of Business Development for Aqumin, where he participated in the design team to apply AlphaVision to the financial markets. For 15 years he was a member of the Pacific Exchange and the Chicago Board Options Exchange, where he actively made markets and traded in both equity and index options.
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