How to Trade Stock Market Volatility with Options

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Volatility: In tonight's video update, we're going to go over just the two quick opening trades that we had for Tuesday, September 1st. Let's start off with RIG. RIG is an additional trade that we're entering, stacking this trade on top of an existing position that we already have in R-I-G for September.

We're adding this position but now out in October, implied volatility in RIG is one of the highest it's been even with today's down move that the market had, which was pretty big and significant. The market ended pretty much lower on the day and continued to trade lower all day.

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It wasn't a big day in the sense that implied volatility was skyrocketing like it was a week and a half ago. A week and a half ago, when markets were moving down 2-3%, implied volatility was popping really high. Now we're in a market where it's kind of normal and expected that the markets are going to be a little bit crazy for a little while so implied volatility isn't popping as high across the board.

RIG is definitely one of those areas where implied volatility has remained high, it's up in the 95th percentile, so extremely high. We're going to just continue to add positions to RIG as we go out in the next couple months. With RIG, we went ahead and did the straddle right over where the stock is trading so; we sold the 14, calls and the 14 puts for 2.85 credit.

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Nice big credit on RIG that we took in. Here's where the stock is right now. You can see it's just trading just below 14. We had to choose our direction there and just went a little bit bullish. Notice that implied volatility really hasn't come down even with the market turn down and even still, RIG hasn't really experienced the drop that most stocks have.

It's been pretty stable, pretty resilient in the fact that it hasn't succumbed to the rest of the market's movements down. With regard to where we placed our strategy, again, we already have our position in September, which is centered right around the 14 strike as well. All we're doing is just stacking another trade on top of this out in October.

You can see we went right at the at-the-money spread because implied volatility was really high. There was a lot of liquidity in there so; it's probably pretty easy to get into and out of these contracts. The big credit that we took in of $2 plus is going to help us move that break even point just that much further across the board.

The next trade that we got into today was a vertical credit spread in VXX. Not to be confused with V-I-X, which is the VIX, and we already had a position of VIX but now we're adding another position. Just adding a little bit of diversification by going to the VXX versus sticking with the VIX for now.

Really, what we're trying to do here is, again take advantage of the high implied volatility. At some point, implied volatility is going to come down. We wanted to do something that profited from that drop in implied volatility.

In this case what we did with VXX, is went out to October, sold the 36-37 call spread for $20 credit and this gave us a really nice premium but also puts our position a little bit above where VXX is trading even today. You can see VXX popped even higher, much higher than the VIX did on a relative basis.

Implied volatility's still not as high as it was but VXX is again a volatility index and ETF so it's not going to track it like a normal volatility ETF percentile would. Our strikes are out here at 35 and 36 above the market, sorry, 36 and 37 above the market. You can see, we've got a lot distance of between ourselves and the market.

The market can move higher. Implied volatility can even expand a little bit more, and we could still make some money on this trade. If the market does get crazy, we'll have opportunities to roll this contract another month and another month, etc. etc. I'm not too concerned about it at all. Usually, our volatility, pure volatility plays, are some of our more profitable and consistent trades because we just know eventually, we're going to get an opportunity to close this thing out.

Even still it doesn't mean we have to be super-super-aggressive in our position sizing. We did kind of up our position size just a little bit up to five contracts and we left room to add to this position, for sure. Even though it's one of those trades where I personally feel really comfortable with a trade like this, we don't want to go crazy and do 50 contracts and kind of blow our position size out of the water. Still want to keep things small, manageable, and adhere to our rules as far as trading.

As always, hope you guys enjoy these videos. If you have any comments or questions, please add them in the comment box right below. If you're watching this video somewhere else out there online, like YouTube or some other streaming service.

You just have to understand that this video is public about 10-15 days after it's sent out to our members so that means you can't get real-time alerts. You can't follow our trades unless you sign for membership at optionalpha.com. Until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.