High IV Options Trades: Strangles, Diagonals & Earnings Strategies

Key Concepts

• Strangles: An options strategy involving buying a call and a put with the same expiration date but different strike prices, aiming to profit from a large price movement in either direction.
• Ivy Rank: A metric indicating the relative volatility of an option, with higher ranks suggesting higher volatility.
• Delta: A measure of an option's price sensitivity to changes in the underlying asset's price. Short delta implies a negative sensitivity (profit from price decline).
• Skew: The difference in implied volatility between options with different strike prices.
• Meteor Strangles: Strangles with very high implied volatility.
• Diagonal Spread: An options strategy involving buying and selling options with different expiration dates and strike prices.
• Crab Trade: A specific type of diagonal spread, often involving selling out-of-the-money calls to generate income.
• Synthetic Covered Call: A strategy mimicking a covered call by selling a put option instead of owning the underlying stock.
• Convexity: A desirable characteristic in options trading, representing a non-linear relationship between option price and underlying asset price, potentially leading to greater profits.
• Gamma: The rate of change of an option's delta.
• Ladded Puts/Calls: Selling options at multiple strike prices to create a layered risk/reward profile.

Market Discussion & Trade Ideas – April 26th

I. Korea & Chip Sector (EW Neutral, EW Son)

The discussion began with a focus on the strong upward momentum in Korea (up 3.5% daily) driven by the chip and memory sectors. The primary trade idea presented was a strangle in April, specifically the 120/175 strike prices, with 51 days until expiration. Initial volume was described as “exploding,” and the premium was considered “rich.” Open interest was confirmed to be substantial, indicating liquidity.

The original suggestion was a 120/175 strangle. A counter-proposal narrowed the strikes to 121/170, acknowledging a slight short delta due to the $5 price movement. The 121/170 strangle was estimated to cost around $7.57, representing a 20 delta call and a 14-15 delta put. The discussion highlighted the importance of considering open interest, with a preference for the 170 strike due to increased liquidity potentially resulting from newly opened strikes. This strategy was categorized as a “meteor strangle” due to the high implied volatility. The trader (Zach) already had long delta positions in the chip space, making a short delta play acceptable.

II. CRM (Customer Relationship Management) – Bullish Earnings Play

The conversation shifted to CRM, anticipating a bullish move ahead of its earnings release after market close. The focus was on a diagonal spread, utilizing April and weekly options. The rationale was to capitalize on directional bullish assumptions in the SaaS (Software as a Service) sector while limiting downside risk.

The proposed trade involved buying an April 200 call and selling a February 210 call (expiring in two days). This structure was designed to benefit from a potential price increase while mitigating risk if the stock declined significantly. The trade was estimated to have a defined risk of $8, similar to a put spread, but with potentially greater upside. The April 200 call was assessed as having a 25 delta. The trader acknowledged that a significant downside move (e.g., $50 decline) would be undesirable, but the diagonal spread structure was intended to limit the impact. The importance of volatility contraction was noted, suggesting the sold call would lose premium if the stock remained stable or declined.

III. Roblox (RBLX) – Covered Call/Synthetic Covered Call Strategy

Roblox was discussed as a potential opportunity for layered covered calls or synthetic covered calls. The trader suggested selling in-the-money puts as a synthetic covered call alternative, simplifying the trade compared to the four-leg covered call strategy (buying stock, selling a call, etc.).

Specifically, selling a March 70 put was proposed as equivalent to buying stock and selling a 70 call. The trader also considered selling the April 65 put, noting Roblox’s IV Rank of 50 was relatively high. The 65 put was assessed as approximately 40 delta. The discussion emphasized the ease of executing a two-leg put sale compared to the more complex covered call structure. The strategy was framed as a laddered put, functionally similar to laddered covered calls.

IV. S&P 500 (SPX) – Passing on a Zero-Day Trade

The discussion briefly touched on a potential zero-day trade in the S&P 500 ahead of Nvidia’s earnings. However, the trader ultimately decided to pass, noting that the expected move had already decreased by $3. The core argument was that the market had already priced in the volatility, and the opportunity had passed. A broader point was made about the futility of predicting volatility, emphasizing the importance of reacting to current market conditions rather than attempting to forecast future movements.

V. Apple (AAPL) – Crab Trade Consideration

Apple was considered for a bullish trade, despite an Ivy Rank of 17. A “crab trade” was proposed, involving selling two out-of-the-money calls. The trader ultimately decided to pass, citing unfavorable market conditions and wide bid-ask spreads. The preference for diagonal spreads was reiterated as a way to mitigate downside risk.

VI. BU (Baidu) – Passing Due to Market Conditions

Baidu was briefly discussed as a potential bearish earnings play. However, the trader decided to pass due to unfavorable market conditions and a personal aversion to trading Chinese stocks.

VII. Ethereum (ETH) & Bitcoin (BTC) – Convexity Play

The conversation concluded with a discussion of Ethereum and Bitcoin, both experiencing significant price increases (8% and 4% respectively). The trader acknowledged missing the initial move but proposed buying leap calls to capture further upside. This was framed as a “convexity” play, aiming to benefit from continued price appreciation. The trader already had existing positions in Bitcoin and Ethereum, and the leap call purchase was described as a small, speculative addition. A humorous anecdote about inherited wealth versus earned wealth was included.

VIII. Snow (SNOW) – Existing Diagonal Spread

Snowflake was mentioned as a stock the trader already had a diagonal spread in, consisting of a long April 175 call and short March 200 calls. The trader noted the unfavorable market conditions for new trades in Snow.

IX. Nvidia (NVDA) – Crab Trade & Diagonal Spread

Nvidia was revisited, with the trader expressing a slightly pessimistic outlook but acknowledging potential market undervaluation. The plan was to implement a similar crab trade strategy as with Apple (selling out-of-the-money calls) and potentially add an April/March diagonal spread, buying the April 200 call and selling two March 215 calls. The trade was estimated to cost around $5 and was designed to profit from a moderate price increase.

Conclusion:

The discussion covered a diverse range of trading ideas, spanning various sectors and strategies. The overarching theme was a focus on risk management, particularly through the use of defined-risk structures like diagonal spreads and crab trades. The trader consistently emphasized the importance of adapting to current market conditions and avoiding overly optimistic or pessimistic biases. The conversation highlighted the benefits of leveraging volatility, but also the need to be mindful of potential downside risks. The emphasis on open interest and liquidity underscored the importance of trade execution.