2 days ago, when the market was falling, I sold a few covered call contracts and one of them was Tesla. I receive a premium of $1,600 for a covered call contract expiring on 11 March 22 (32 days contract). Strike Price (SP) was $1100.
On 9 Feb 2022, the premium fell and I close the contract by buying it back at $1062, thus making a profit of $538 in 2 days. The reason for this happening was because of the change in Implied Volatility (IV).
Implied Volatility (IV) refers to the probability of the fluctuation in the market price of a stock, in short, it is a prediction of how volatile the stock can be at a certain point. The higher the IV, the more volatile in price movement the stock is expected to be.
IV matters because the higher the IV, the higher the premium for a given option contract. A high IV means the seller of the option contract (whether PUT or CALL) will have a higher risk of the contract not going his way and thus he will be compensated with a higher premium because of the higher risk involved.
On Monday, when share prices were dropping, Tesla’s IV was high at 55%, thus the premium was higher. As an options contract seller, I earned a higher premium. 2 days later on 9 Feb 22, the share price of Tesla rose and IV dropped to just over 40%, so the premium for the contract dropped even though the share price rose higher than the share price when I sold the contract. This is due to an inverse relationship of share price and IV. When the share price drops, IV rises and vice-versa. Thus, the lower IV and lower premium favor the buyer of the option contract.
To take advantage of the situation, I sold when IV was high (higher premium) and bought back to close the contract when IV was low (lower premium), and earned a profit and closed the contract and had no contractual obligation to fulfill.
IV is an important metric in options trading and buying when IV is high, e.g. near earnings report, may lead you to suffer from IV crush when the earnings report is released, i.e premium drops significantly even when the share price has increased after the earnings report.
Read more about IV in this article:
What Is Implied Volatility (IV) And Why It Matters In Options Trading?
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Congrats bro! I also managed to close few contracts for a small win when IV drop. thankfully as IV spiked shortly after the CPI came out.
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Congrats to you too, bro! Happy to read about your small win 🙂
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Decided to play safe and sell 1x low strike price PUT option with 0.001 Gamma on last Friday which expire Feb 25th. Currently it’s deep OTM.
But alas, it rised to 0.002 Gamma…😭
Due to the unexpected FOMC meeting, the premium increased above the premium that i received when i sold the contract.
My strategy is to wait till meeting on Monday is over before making my decision.
If it’s just really what they meant, which is to just discuss the discount rate and not to suddenly increase the interest rate early, then the market may sigh a big sigh of relief and divert their concentration to the impending Russia Ukraine conflict.
If the meeting was just a typical meeting as explained above, i may not need to roll.
I might/might not sell to open another PUT on the same Feb 25th expiry at a much lower strike price to take advantage of the volatile nature of the scenario on Monday.
And if the stock price goes ITM for my first higher strike price contract, i will roll this first contract 1 more week downwards.
The contract with even lower strike, I’m either hoping to let it expire worthless as I’m going to sell at a possible 10% lower strike price contract.
For my initial higher strike price option, if i get a little profit, i might quickly close earlier if the announcement from the FOMC meeting is unfortunately, a interest hike news.
Because this may plummet many stock prices including TSLA.
If the FOMC meeting isn’t about interest hike announcement i might hold slightly longer.
And i will close this contract with higher strike price with a slightly higher profit.
What do you think?
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Hi Z, yes your analysis makes a lot of sense, share price dropping is not good for PUT sellers, it is good for CALL sellers. My question is if it is deep OTM, are you still concerned it will be ITM by 25th Feb? If yes, it will be good to roll them before you incur more loss if the price keeps falling. But in today’s market, it is so difficult to trade, I was selling CC betting on a downtrend to earn some premium but on some days, like Tues, Wed, the price keep going up. Even on Thurs when the interest rate was above expected 7.2%. I had to roll my contract with a loss. So, what starts off rising may end up falling, or what ends up falling may rise again. The market is too volatile IMO. And I strongly agree to go for OTM CALL/ PUT to avoid a greater loss if things don’t go our way and we have to fork out a bigger premium to close the contract.
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Hi there, thank you for taking your time to share your thoughts!
In the end the trade ended well. It went into about 60% profit and i decided to buy to close the position.
Luckily i did that because the stock price dropped subsequently.
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Congrats, feel happy for you, Z 🙂
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