Even though the market's impressive rally has sent volatilities to multiyear lows in many stocks over recent weeks, some issues still are sporting prices that assume a relatively high implied volatility level.

While I'm generally leaning toward endorsing the purchase of options and positions that take advantage of a low-volatility environment, as I described in a recent column , I'd like to provide something of a corollary. First, I'll discuss some strategies that work best and then identify some potential candidates.

Logic would seem to dictate that when implied volatility is high, we should be looking to sell options and collect premiums in order to take advantage of an anticipated contraction in prices. This is true if you're looking to make a pure volatility trade -- that is, you have no directional opinion but simply believe a stock will remain range-bound and premium prices will decay.

Opportunities of this sort usually appear ahead of a widely anticipated news event or earnings report that's expected to have a large impact on the underlying share price.

But more often than not, we have an opinion or directional bias on a given stock, and, as I'll discuss, sometimes a net debit position makes sense in high implied volatility situations.

Seeing the Future

A good example is Boston Scientific ( BSX), which has seen its implied volatility climb into the 70% range, or more than double its three-year historical average, in recent weeks. The reason is that on May 21, the company will be presenting an update on its Taxus stent clinical program.

North for Boston
With the stock climbing, an options strategy could come into play

If you believe that no matter what the report brings, the shares will stay within a defined range and implied volatility will decline, then you might just want to consider the outright sale of premium. A short sale of a straddle (selling both the put and the call with the same strike and expiration) or a strangle (sale of a put and a call with a different strike but the same expiration) are two such strategies.

For example, someone who sells the June $50 call and the June $45 put strangle for total net credit of $6.30 is betting that shares will stay within $38.70 and $56.30 until the June 20 expiration. The maximum profit of that strangle (the sale price of $6.30) will be realized if Boston Scientific's stock closes between $45 and $50, rendering both the put and call worthless.

But with the stock trading near a multiyear high of $48, many people are buying both puts and calls on the belief that the shares will either keep charging to the upside or that bad news could cause a major decline.

Forward Skew

Options traders are always looking to buy options when they're cheap and sell them when they're expensive. Therefore, it might seem counterintuitive when I suggest that sometimes the purchase of a vertical spread for a net debit can create a preferable profit profile to the sale of a similar spread for a credit. Note that when I use these terms, I'm referring to the implied volatility, not the absolute price of the option.

For example, in the case of a vertical call spread, I would actually be buying the closer-to-the-money strike (higher price) and selling the further-out-of-the-money strike (lower price) for a net debit.

The reason is that this approach takes advantage of what is referred to as the forward skew, which occurs when implied volatility rises. Simply put, this is a configuration in which the implied volatility rises as you move across strikes that are more out of the money. This creates a situation in which you can often purchase a vertical spread for less than half the difference in the strikes.

Again let's use Boston Scientific as an example and look at the June options chain, as presented in the table below.

Boston Scientific June Option Chain
Call Strike Call Price Put Strike Price
June 45 $6 June 40 $1.75
June 50 $3 June 45 $3.30
June 55 $1.25 June 50 $4.00
Source: TSC Research

We'll work under the premise that we believe the stock should move higher and implied volatility will decline. Two (of the many choices) would be to sell the June $45/$40 put spread for $1.50 or buy the June $50/$55 call spread for $1.75.

While these two positions are essentially identical in terms of delta and market profile, note the long call spread provides for a maximum profit of $3.25, or about 116% greater than the $1.50 profit potential of the sale of the above put spread.

Of course, if you're bearish, the purchase of the above put spread for $1.50 would offer a greater profit than the sale of the call spread.

The Screen Says

Below you'll find some other stocks that are sporting relatively high implied volatilities. But unlike the "cheap" option table in which many issues were hitting multiyear lows, most of these options, while still historically expensive, are substantially off their highest levels.

The table below is a only a partial list of the relative high volatility screen. The idea was to find stocks either trading with an implied volatility above 50 on an absolute basis or at least 30% above their two-year historical average.

The results were dominated by pharmaceutical and biotech companies. I've listed only a few because I wanted to present some opportunities that might be available in other sectors.

High Implied Volatility Stocks
Stock (Symbol) Current Implied Volatility Two-Year Historical Average Volatility
Boston Scientific (BSX) 71% 45%
Neopharm (NEOL) 72 38
Angiotech Pharm (ANPI) 90 41
Amcore Financial (AMFI) 51 18
LaBranche (LAB) 43 15
Krispy Kreme (KKD) 48 33
Sylvan Learning (SLVN) 42 18
Wendy's (WEN) 28 17
Patina Oil (POG) 24 9
Smithfield Foods (SFD) 28 9
Source: TSC Research
Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to Steve Smith.