Most Traders Skip Stocks With IV Rank 4. Tony Found a Way to Sell Premium Anyway With This Vol Skew.

Key Concepts

• IV Rank (Implied Volatility Rank): A measure of current implied volatility relative to its historical range. The speaker prefers selling premium when IV Rank is high (30–60+).
• Vol Differential: The difference in implied volatility between different expiration cycles, often caused by upcoming events like earnings.
• Bullish Diagonal Spread: A strategy involving selling a near-term option (high IV) and buying a longer-term option (lower IV) to create a directional bias.
• Delta: A measure of an option's price sensitivity to changes in the underlying asset's price.
• POP (Probability of Profit): The statistical likelihood that a trade will be profitable at expiration.

Market Context and Strategy

The market is currently showing resilience, trading near highs despite bearish overnight activity. The speaker highlights Palantir (PLTR), which is experiencing a significant pullback (down ~$7 or 4%). Because PLTR has a low IV Rank (4), standard premium-selling strategies are less effective. To capitalize on this, the speaker employs a Bullish Diagonal Spread to take advantage of the volatility skew created by an upcoming earnings event.

Technical Analysis of the Trade

• Earnings Catalyst: Palantir has earnings scheduled for May 4th.
• Volatility Skew:
  • May options (15 days to expiration) have 70% IV.
  • June options (56 days to expiration) have 60% IV.
  • This 10% "vol differential" allows the trader to sell the more expensive, high-volatility front-month options while buying the cheaper, lower-volatility back-month options.
• The Trade Setup:
  • Short Leg: Sell the May 155 calls (approx. 30 delta). This is a bearish move with a 74% POP, aligning with the speaker's preference for a 60–70% POP range.
  • Long Leg: Buy the June 145 calls (approx. 55–60 delta).
  • Net Result: By combining a 30-delta short with a 60-delta long, the trader creates a net position with approximately 16–20 long deltas, turning the overall strategy into a bullish trade.

Risk and Reward

• Cost Basis: The trade was executed for a debit of $7.65.
• Risk Management: The maximum risk is limited to the debit paid ($7.65).
• Profit Potential: The spread has the potential to expand to $10 or more. The speaker targets a profit of $1–$3 on the trade.
• Execution: The trade was placed while PLTR was trading at approximately $145.29.

Key Arguments and Perspectives

• Adapting to Low IV: The speaker argues that when IV Rank is low, traders cannot rely on standard premium selling. Instead, they must use directional strategies that exploit volatility differences between expiration cycles.
• Strategic Timing: By selling the front month, the trader captures the "volatility crush" associated with the May 4th earnings, while the long June position provides exposure to the stock's potential recovery.
• Philosophy on POP: The speaker emphasizes that while they prioritize a 60–70% POP, they are willing to adjust the structure (in this case, adding a long leg) to align the trade with their directional bias.

Synthesis

The trade demonstrates a sophisticated approach to options trading where the trader ignores the low IV Rank of the underlying stock to focus on the relative volatility between two expiration dates. By utilizing a diagonal spread, the trader effectively hedges the directional risk while capitalizing on the earnings-induced volatility premium in the front-month options. The strategy is a calculated bet that the stock will recover, allowing the trader to profit from both the directional move and the decay of the short-term volatility premium.