The market melt-up has made finding stocks to buy super easy. Rather than add to the endless stream of articles highlighting sweet chart setups to chase, today we’re focusing on volatile stocks. Specifically, how to build options trades that bank on a stock’s volatility rather than its direction.
Volatility trades offer a unique avenue for speculators. Thoughts of direction are replaced with those of magnitude. Profiting with these specialized bets is all about betting on how much a stock will move.
Long volatility trades thrive if the underlying runs more than expected. And short volatility trades win if the underlying moves less than expected. Because of the sky-high readings for the volatility metrics of today’s trio, we’re offering up three high probability options trades designed to make money as these stocks settle down.
Let’s take a closer look.
Advanced Micro Devices (AMD)
The momentum in Advanced Micro Devices (NASDAQ:AMD) is glorious because it has been so consistent. Despite the elevated volatility, its uptrend has been very well behaved with virtually zero missteps or shakeouts since October. But with the current upswing on its ninth up day in a row, the time for digestion is nigh.
Fortunately, there’s a way to make money if AMD chops around for a spell. Implied volatility is juiced right now, suggesting options premiums are rich.
The Trade: If you think AMD stays between $50 and $70 for the next 29 days, then sell the March $50 put and the March $70 call. This creates a short strangle for a net credit of $1.39.
Tesla (TSLA)
No gallery centered on volatility would be complete with including Tesla (NASDAQ:TSLA). Elon Musk’s brainchild is the hottest stock on the Street right now, and deservedly so. Its ascent has long passed the insanity stage, but the buying remains relentless. Overnight gaps are becoming commonplace, however, making Tesla a trickier stock to trade.
If you’re seeking a way to avoid the chop, the options market beckons. Implied volatility is justifiably in the stratosphere, and that makes option premiums fat. Traders looking to lean long, but with a large margin of error, can use bull put spreads.
The Trade: Sell the March $700/$690 bull put for around $1.20. The profit of $1.20 will be captured if Tesla is above $700 at expiration. The initial cost is $8.80, which means your potential return on investment is 13.6%.
Square (SQ)
Square (NYSE:SQ) is off to a blazing start to 2020. We’re only six weeks into the year, and SQ stock is already up 38%. The first test of its freshly minted gains arrives next week when the San Francisco-based mobile payment company reports earnings. Because I’m a believer in the wisdom of the crowd, it’s impossible not to lean bullish into the number.
While the stock may not blast to the moon, I’m willing to bet it doesn’t crumble, either. The buying has been too relentless ahead of time to disappear afterward completely. Given the buyers lurking beneath the surface, I highly doubt a down gap isn’t bought anyways.
This is why I like bull put spreads into the event. Implied volatility is ramping to the moon in anticipation of next Wednesday’s report, and increases the payday for this short premium play.
The Trade: Sell the March $80/$75 bull put for around $1.35.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!
