Dan Passarelli is an author and the founder of Market Taker Mentoring LLC, the home of personalized, one-on-one options education.
The saga continues: Trouble in the Middle East, Part 1,573,201. Situation normal all fouled up. Oil is high, gas is high, the CBOE Volatility Index (CBOE: VIX) is high and stocks are faltering. What are professional options trading investors doing? They’re doing their job: Selling insurance to an overreacting market of hedgers. What can you do about the pros taking advantage of market lemmings’ state of panic? If you can’t beat ‘em, join ‘em.
One of this week’s Market Taker Edge trades is selling the Intel Corp. (NASDAQ: INTC) April 18-20 Put Spread. That is, sell the INTC Apr 20 Puts, and buy the INTC Apr 18 Puts for a credit of better than 27 cents.
INTC is a quality company that has traded in a fairly tight channel since last fall. Now, INTC is following suit with the rest of the market and currently resides near the low end of its range. We’re looking for a mild market recovery overall, including INTC. Over the next couple of weeks, we expect INTC to be trading higher, continuing its normal oscillation in its $20 to $22 range. This would lead to the put credit spread profiting from its positive delta.
Furthermore, INTC implied volatility is high — higher than it should be. INTC implied volatility is at the top of its oscillating range. Furthermore, implied volatility is currently (and has been for a while) trading above historical volatility — another indication of overpriced options. A short-vega strategy, such as this put credit spread, will eek out profit as the stock price rises, and Middle East-based selling subsides.
This strategy double dips, potentially making money from both direction (delta) and implied volatility (vega) if the market turns around and goes back to business as usual.