Recent Market Correction and Options
The post-pandemic gains have been negated as the accommodative monetary policies are coming to an end. The market has been smacked in the face with several macroeconomic issues via unsustainable inflation, impending interest rate hikes, and geopolitical issues. As such, a third of the Nasdaq 100 stocks are off at least 30% from their highs, half of the S&P 500 has fallen 15% or more, while the median biotech stock has sold off by 60%. Leveraging the Ark Innovation ETF (ARKK) as a proxy for the high-flying growth stocks, this composite is down 60% as well.
This multi-month period of sustained weakness has been accompanied by extreme volatility. With the increase in overall market volatility, implied volatility (IV) and IV Rank become advantageous for option traders as rich premiums can be collected when selling options. This type of extremely volatile environment that we've been faced with recently reinforces why risk-defined options (i.e., put spreads, call spreads, and iron condors) are critical if one chooses to leverage options as a component of an overall portfolio strategy. Risk-defined option trades establish your max losses and allow one to leverage a minimal amount of capital while maximizing returns.
Options and Implied Volatility
The goal of options trading is to sell options and collect premium income in a consistent and high-probability manner. Enabling your portfolio to appreciate steadily month after month without guessing which direction the market will move. The main key for options trading success is leveraging implied volatility and time premium decay to your advantage. Since options premium pricing is largely determined by implied volatility, it's this implied volatility component, when used appropriately, that provides option traders with a statistical edge in trading over the long term (Figure 1). Continue reading "Options Trading And Implied Volatility (IV) Rank"
