SelectLanguage

A Review of Volatility and its Impact on Option-

Selling
Whenwewritecoveredcallsorcashsecuredputs,wearesellingvolatility.Thetimevaluecomponentof
ashorttermoptionpremiumreflectstheamountoftimeuntilexpirationplusthevolatilityofthe
underlyingsecurity.Sincemostofusarecomparingoptionswithsimilarexpirations,thevolatilityofthe
stockorexchangetradedfundrepresentsthedistinguishingfactorinouroptionsales.Inthisarticle,we
willreviewallaspectsofvolatilityandbringthisinformationintoourworldofoptionselling.

Whatisvolatility?

Volatilityrepresentsthepricemovementoftheunderlyingsecuritywithnopredilectiontodirection.Itis
anannualizedstatisticquantifiedasonestandarddeviationpricechange.Thistellsusthatthestatisticis
projectedtobeaccurate68%ofthetime.Thismeansthatifa$60.00stockhasavolatilityof25%,itis
expectedtofallinthepricerangeof$45.00to$75.00overoneyear68%ofthetime.Twostocksthat
startandendwiththesamepriceoveraoneyeartimeframecanhaveverydifferentvolatilitiesasshown
inthechartbelow:

Tweet

Like
 Share

Comparingvolatilityoftwostocks

Althoughbothsecuritiesstartedandendedtheyearat$100.00,thebluestockhasmuchgreater
volatilityandwillgeneratehigheroptionpremiumsattheexpenseofbeingariskierunderlyingsecurity.
Eachinvestormustdeterminetheamountofvolatilityappropriatefortheirpersonalrisktolerance.For
me,Ihaveagoalof24%foranearthemoneyonemonthexpiration.Inbullmarkets,Illgoabit
higher.ThequestionweshouldaskourselvesishowmuchvolatilityshouldIsell?

Typesofvolatility

Historicalvolatility:Theactualpricefluctuationasobservedoveraperiodoftime,usuallyoneyear.

Expectedvolatility:Thisisapredictionoffuturepricemovementineitherdirectionandistotally
subjective.Thisistheleastsignificantofthethreetypesofvolatility.

Impliedvolatility:Thisisapredictionoftheunderlyingsecuritysfuturepricemovementbasedonthe
optionspriceinthemarketplace.Forshorttermoptionsellers,thisisthemostsignificantofthethree
typesofvolatility.Aneventlikeanupcomingearningsreportcanrendertheimpliedvolatilitymuch
higherthanthesecurityshistoricalvolatility.

Impactofvolatilityonouroptionpremiums

Anincreaseinvolatilitywillincreasethevalueofbothcallandputoptionsandadecreaseinvolatility
willcauseadeclineinbothcallandputpremiums.

TheroleofVega

Vegaistheamountanoptionpricewillchangegivena1%changeinimpliedvolatility.Letssaythat
companyBCIhasanoptionvalueof$4.00andaVegaof0.06.Thecurrentvalueofonecontractis
$400.00.Iftheimpliedvolatilityincreasesby1%,theoptionvalueforthecontractwillbe$406.00.Ifthe
impliedvolatilitydecreasesby2%,thevalueofthecontractwillbecome$388.00,allotherfactors
remainingthesame.

ImpactofVegaandthemoneynessofoptions(forevery1%changeinvolatility)

Inthemoneyoptions:Havetheleastamountoftimevalueandthereforethesmallestdollarand
percentagechanges.

Atthemoneyoptions:Havethegreatesttimevalueandthelargestdollarchanges.

Outofthemoneyoptions:Thesearealltimevalueandthereforethehighestpercentagechanges.

Discussiononincorporatingvolatilityintoouroptionsellingstrategies

Ascoveredcallwritersandsellersofcashsecuredputs,wearesellingvolatility.Forourshortterm
positions,impliedvolatilityisthemostmostsignificantofthethreetypesofvolatilitybecauseitreflects
thecurrentmarketassessmentoffuturepricemovementofourunderlyingsecurity.Agreatstartingpoint
forincorporatingvolatilityintoourtradingdecisionsistosetreturngoalsbasedonpersonalrisk
tolerance.Aconservativestartingpointmaybe24%permonthfornearthemoneystrikes.Extremely
highorlowimpliedvolatilitieswillnotmeetthisstandard.Goalscanbetweakedbasedonyour
objectivesandrisktolerance.Oncesizedoesnotfitall!

BlueCollarScholarCompetition:Greatprizesandaworthycharity

WeretryingsomethingnewthankstoJaysidea.Herearetheparametersweareusing:Twocontests
runningsimultaneouslywithsixprizes:

Contest#1:WhatwillbethevalueoftheS&P500byyearsend?

Contest#2:Infivesentencesorless,giveyourreason(s)foryourresponse(subjective,votedonbythe
BCIteam)

Prizesineachcategory(totalof6).

DonationtotheUSO(UnitedServicesOrganization)of$5000.00worthofbooks.
Clickonthislinkforourcontestvideoandentryform.

Contestresultstodate

Outlook

%bearish:8%

%neutral:41%

%bullish:51%

SampleCommentaryfromArturoS:

Becauseina100daycharttherewasaWformationandithitthatamount3timesalready.Knowing
itsabouttheendoftheyear,peoplewillbecashinginonthisbullishscenario.

Thanksforthegreatresponsewevehadtothisevent.Keepthoseentryformscoming.Weallowtwoper
emailaddressandthedeadlineisNovember30th.

Ivebeenremissinnotsayingthisinawhile

AspecialthanksfrommetheentireBCIteamtoourpremiumsubscribersformakingthesereportsand
toolsasuccessbeyondourwildestdreams.

Nextliveappearance

AmericanAssociationofIndividualInvestorsNationalConference

BallysHotel

LasVegas,Nevada

November7thNovember9th

SundayNovember8th@8:30AM9:45AM(AlansseminarinBronzeRoom)

ExhibitHall#313

***Eventissoldout

Markettone
Majorglobalstockmarketswereneutralthisweekonmixedeconomicdata.GrowthinEuropeoffset
weaknessinChina,whileUSdatawasgenerallybullishespeciallyFridaysjobsreport.Asianstocks
rose,withtheShanghaiCompositeIndexgaining20%sinceitsAugustlow,signifyingabullmarket.
Thisweeksreports:

USnonfarmpayrollsgrewby271,000inOctober,exceedingthemedianconsensusof180,000
Theunemploymentratefellto5.0%,thelowestsinceApril2008
Averagehourlyearningsroseby0.4%fromSeptemberandwere2.5%higherthanayearearlier.It
wasthehighestyearoveryearwageincreasesince2008
TheU6rate,whichmeasuresunderemploymentfellto9.8%,asevenyearlow.Afterthestellar
payrollsreportandcommentsbyUSFederalReserveChairJanetYellenonWednesday,a
Decemberratehikeisnowmoreprobable
TheUStradegapnarrowedtoasevenmonthlowinSeptemberasUSoilimportsfelltotheir
lowestlevelinmorethan11years.Thedeficitnarrowedto$40.8billioninSeptemberfrom$48
billioninAugust
USlightvehiclesalesincreased13.6%inOctoberfromayearearlier.Forasecondconsecutive
month,theannualizedsalespaceexceeded18million,thebesttwomonthstretchin15years.The
automarketisonpaceforitsstrongestannualresultsever

TheInstituteforSupplyManagementsnonmanufacturingindexroseto59.1inOctoberfrom56.9
inSeptember.TheUSservicesectorhasexpandedfor69straightmonths
TheISMmanufacturingindexfellfrom50.2inSeptemberto50.1inOctober,theweakestreading
sinceMay2013
USlaborproductivityunexpectedlyroseata1.6%annualizedrateinthethirdquarter
Initialjoblessclaimsincreased16,000to276,000fortheweekendingOctober31st
Continuingclaimsincreased17,000to2.16millionfortheweekendingOctober24th

Fortheweek,theS&P500roseby0.95%forayeartodatereturnof1.96%.

Summary

IBD:Confirmeduptrend

GMI:6/6BuysignalsincemarketcloseofOctober19,2015

BCI:Cautiouslybullishusinganequalnumberofinthemoneyandoutofthemoneystrikes.Iwill
remaincautiousbutfullyinvesteduntilaftertheDecemberFedmeeting.

Wishingyouthebestininvesting,

Alan(alan@thebluecollarinvestor.com)

PostedonNovember7,2015byAlanEllmaninInvestmentBasics,OptionTradingBasics,Options
Calculations,StockOptionStrategies

Tags:expectedvolatilityhistoricalvolatilityimpliedvolatilityvega
About Alan Ellman

AlanEllmanlovesoptionstradingsomuchhehaswrittenfourtopsellingbooksonthetopicofselling
coveredcalls,oneaboutputsellingandasixthbookaboutlongterminvesting.Alanisanational
speakerforTheMoneyShow,TheStockTradersExpoandtheAmericanAssociationofIndividual
Investors.HealsowritesfinancialcolumnsforbothUSandInternationalpublicationsalongwithhis
ownawardwinningblog..Heisaretireddentist,apersonalfitnesstrainer,successfulrealestateinvestor,
butheisknownmostlyforhispracticalandsuccessfulstockoptionstrategies.Google+
ViewallpostsbyAlanEllman

Connect With Us

Tosendusanemail,contactushere.SubscribetoouremailnewsletterorRSSfeedtoreceiveupdates.
Contactusbyphoneat8668922187.Additionallyyoucanalsofindusonanyofthesocialnetworks
below:

Related Posts:

MechanicsofLEAPS
AskAlan116IsCoveredCallWritingaZeroSumGame?
LEAPSandCoveredCallWriting:AReviewandaHypotheticalExample/ContestApplication
UsingVolatilitytoPredictFutureStockPrices
MergersandAcquisitions:PartIIStockandCashMergers

20 Responses to A Review of Volatility and its Impact on Option-Selling

1.
SeanGreenNovember8,201512:21pm
Reply
#

HiAlan
IknowthatyournewsletterservicesgoesalongwaytofindingthesuitablecandidatesforCC&
CSP.
usingthislistasaprimaryCCandCSPstocks,doesthebluecollarthenfurtheranalysthislist
usinghighIVstocks?
Also,doesthelisttakeintoconsiderationtheIVrank(percentile)?
Manythanks
Sean

AlanEllmanNovember8,20158:39pm
Reply
 #

Sean,

WeprovideIVstatsfortheeligibleETFs.Forthestocksyoucanusethecolumntitled
betatolocatestockswithhighbetasandthosearemorelikelytoalsohavehigherIVs.
Optionschainsmustnecheckedtogetprecisepremiumreturnswhicharebasedprimarilyon
IV.

Alan

2.
RoniNovember8,20151:57pm
Reply
#

Alan,

Ialwaystrytofollowyourindicationinthesummary,whereyousayifyouarebullish,orbearish,
orcautiouslybullish,andyouarefavoringITMorOTMstrikes.
Butmostofthetime,whenIamnotfranklybullishorbearish,IfindtheATMorslightlyOTM
strikesveryatractive,andInoticedthatyoudonotmentiontheminthesummary.Whyisthat?

Roni

AlanEllmanNovember8,20158:44pm
Reply
#

Roni,

IviewATMandOTMstrikesasbullishapproachestocoveredcallwriting.WhenIwrite
thatIamfavoringITMstrikes2to1thatmeansthatinmyportfolioIamselling2ITM
strikestoevery1eitherATMorOTM.Stateddifferently,Iamassigningpercentilesto
strikesthathaveordonthaveintrinsicvalue.

Thismixmayormaynotcoincidewiththeassessmentofothers.

Alan

JayNovember8,201511:06pm
Reply
#

Alan,
AsabuildonRonisquestiondoyouapplyyourratiowithinsecurities,betweenthem
orperhapsboth?

Meaning,inthereplyaboveifyouhad300sharesofBCIwouldyousell2contracts
ITMand1ATM/OTM?Orifyouhad3stockswouldyoucover2ITMand1
ATM/OTM?

Ifthelaterhowdoyoudecidebetweenthem?NotthatyouwouldevercoverBCIITM
.Jay

RoniNovember9,20154:51pm
Reply
#

GreatquestionJay.
Itneverocurredtome.
IalwaystookforgrantedthatAlanmeantdifferentstocks.
FromnowonIwilllookatitinbothways.

Itscurioushoweachindividualhasadifferentapproachtothesamesituation.

Roni

JayNovember9,201510:13pm
#

ThanksRoni,

ThebeautyofbuildingpositionsinstocksorETFsyoulikein100share
incrementsisyoucanthenwriteITM,ATM.OTMornotatallonany
portionoftheholdingdependingonyourmarketview.Jay

AlanEllmanNovember11,201511:39am
Reply
#

Jay,Roni,

Igivetotalpercentilesinmycurrentportfolio.HereshowIhandlethese
matters:

IfavorOTMstrikesforstockswiththestrongesttechnicalsandITMforthose
withmixedtechnicals.Theseareguidelinessoweshootforapproximations
sameascashallocationperposition.
 Heresanexample:

StockA:Boldonourrunninglist

StocksB&Cmixedtechnicalsbuteligible

Weareselling5contractsofeach

BearishmarketassessmentfavoringITM2to1

PossibleportfoliomixOTM/ITM:

StockA:3/2

StockB:1/4

StockC:1/4

ITMcontracts:10

OTMcontracts:5

Theresour2to1ratioagainitsaguideline.

Alan

RoniNovember9,20154:53pm
Reply
#

Understood.

ThanksRoni

BarryBNovember11,20151:09pm
Reply
#

RoniandJay,

Justtoaddtwominorfootnotestothisthread

[1]ThetechniquethatAlandiscussediscalledLadderingandthishasbeen
usedfordecadesinthefixedincomeworldtomaintainaflowofinterest
paymentstothebondholders.Optionstradershavepickedupthemethodology
andhaveaddedittotheirtradingtoolkit.

[2]AsAlanremindsusall,diversificationiscritical.Byladderingstrikeprices
inourtrades,weareaddinganadditionalelementofdiversification.

Best,

Barry

JayNovember11,20159:05pm
#

Barry,

ItisnicetohearyourvoiceontheblogsinceIsuspectyouaretheMan
behindtheCurtaininthisband !

AlanistheleadsingerbutIdoubthecoulddoitwithoutyou!

Pleasecontinuetobeavoice .Bestregards,Jay

AlanEllmanNovember12,20157:35am
#

Jay,

Youare100%correct.Barryisanamazingtalentandavitalpartofthe
BCIteam.Heisresponsibleforproducingourweeklystockreportsand
doessowithincredibleaccuracyandreliability.Iamblessedwitha
skilledanddedicatedteamwhich,alongwithourmembers,haveputBCI
onthefinancialmapandyes,Icouldnothavedonethisalone.

Alan

RoniNovember12,20159:46am
#

ThankyouBarry,
yourclarificationsopenedmyeyesandhelpedmetobetterunderstandthe
fullstrategyofdiversification.

NowIhaveanextravaluabletoolinmyquestforlowriskmanagement
ofmyportfolio.

IreallydoneedallthehelpandprotectionIcanget.Roni
3.
BarryBNovember8,201510:20pm
Reply
#

PremiumMembers:

ThisweeksWeeklyStockScreenAndWatchListhasbeenuploadedtoTheBlueCollarInvestor
PremiumMembersiteandisavailablefordownloadintheReportssection.Lookforthereport
dated11/06/15.

Also,besuretocheckoutthelatestBCITrainingVideosandAskAlansegments.Youcanview
thematTheBlueCollarYouTubeChannel.Foryourconvenience,thelinktotheBCIYouTube
Channelis:

http://www.youtube.com/user/BlueCollarInvestor

Best,

BarryandtheBCITeam

4.
AlanEllmanNovember10,20158:11am
Reply
#

TotheBCIcommunity:

SeveralmembersoftheBCIteamandIjustreturnedfroma3dayeventinLasVegaswhereI
hostedapresentationfortheAmericanAssociationofIndividualInvestors(AAII)national
conference.Itwasespeciallyrewardingforustomeetsomanyofourmembersinperson.Ihope
youenjoyedmypresentationandthankyouforfillingeveryseatintheseminarroommakingme
lookgood!

Iwillbecatchingupwithmemberemailsandcommentsbytheendoftheweekandwillbe
makingannouncementsofadditionalseminarinvitationsIwillbeacceptingfor2016.

Alan

5.
AlanEllmanNovember10,20153:35pm
Reply
#

AAIINationalConferenceseminarphoto:

Clickonimagetoenlarge&usethebackarrowtoreturntotheblog.
 Alan

6.
SeanNovember11,201511:16am
Reply
#

IwouldbeinterestedtoviewtherecordingofyourLVpresentation,ifonewasmade.

Sean

AlanEllmanNovember11,201511:23am
Reply
#

Sean,

Thegoodnewsisthatthepresentationwasrecorded.Themaybenotsuchgoodnewsisthat
asaninvitedspeakerIhavenocontrolastowhentheseminarwillbemadeavailableand
whatthecostwillbetoview.WhenitdoesbecomeavailableitwillbeontheAAIIsite
(www.aaii.com).IwillpublishinformationabouttherecordingtoourmemberswhenIget
updatesfromtheorganization.

ThiswasanewseminarIwrotespecificallyfortheeventsoImdiscussingwithmyteam
thepossibilityofhostingawebinarforourmembersandsharingthisnewpresentationwith
theBCIcommunity.

Alltheinformationisfoundeitheronoursiteorinmybooks/DVDsbutpackagedas5
actionablewaystogenerateincomeorbuyastockatadiscountusing2conservativeoption
sellingstrategies

Alan

7.
AlanEllmanNovember11,201511:42am
Reply
#
 Iveaskedmyteamtotonedownthispopupscreenontheblog.Werehavingagreatresponse
toourcontestbutdontwantyoutonavigatethroughsomanypopupsreadingablogarticleor
commentaryAlan

8.
AlanEllmanNovember11,20155:26pm
Reply
#

Premiummembers:

Thisweeks8pagereportoftopperformingETFsandanalysisofALLSelectSectorComponents
hasbeenuploadedtoyourpremiumsite.ThereportalsolistsTopperformingETFswithWeekly
options.

Notehowallthehighimpliedvolatility(IV)securitiesfromlastweekslistwerebumpedthis
weekconfirmingthathighIVmeanshigheroptionpremiumsbutalsogreaterrisk.AllETFson
thisweeksreporthaveIVsunder24.

Foryourconvenience,hereisthelinktologintothepremiumsite:

http://www.thebluecollarinvestor.com/member/login.php

NOTAPREMIUMMEMBER?Checkoutthislink:

http://www.thebluecollarinvestor.com/membership.shtml

AlanandtheBCIteam

SubscribeHereHavethelatestblogarticlessenttoyourinbox.
SubscribetothisarticlesCommentsviaRSSFeed
LearnhowtotakeaScreenshotsoyoucanaddittoyourcomment

Leave a Reply
Name(Required)

Mail(willnotbepublished)(Required)

Website
 SubmitComment

Notifymeoffollowupcommentsviaemail.Youcanalsosubscribewithoutcommenting.

ChooseFile Nofilechosen Optionallyaddanimage(JPEGonly)

LEAPSandCoveredCallWriting:AReviewandaHypotheticalExample/ContestApplication
AskAlan116IsCoveredCallWritingaZeroSumGame?

First Annual Blue Collar Scholar Competition.

2016COULDBEYOURBESTYEARYET!!!!Clicktheimagebelowtoentertoday

Subscribe To Our Free Newsletter

Name:
Email:
Subscribe
MoreAboutOurNewsletter...
Alans Next Speaking Engagement:
January12,20165:00pm
January12,20166:30pm
OptionsTribeWebinar

ViewAllEvents
Latest Popular Comments Tags

MechanicsofLEAPS
November14,2015
AskAlan116IsCoveredCallWritingaZeroSumGame?
November11,2015
AReviewofVolatilityanditsImpactonOptionSelling
November7,2015
LEAPSandCoveredCallWriting:AReviewandaHypotheticalExample/ContestApplication
October31,2015
UsingVolatilitytoPredictFutureStockPrices
October24,2015
Categories

AskAlan
CoveredCallExitStrategies
ExchangeTradedFunds
ExitStrategies
FundamentalAnalysis
InvestmentBasics
JustAlan
OptionTradingBasics
OptionsCalculations
OptionsTradeExecution
Podcasts
Putselling
StockInvesting
StockOptionStrategies
StockTrading&Taxes
TechnicalAnalysis
Uncategorized

Premium Membership

Joinourmembershipsubscriptiontodayandgaininstantaccesstoexpertresourcesincludingthepopular
WeeklyStockScreen&WatchList. LearnMore&Signup

Recommended Investing Links

DR.EricWIsh'sWishingWealthBlog

TheBlueCollarInvestor
617likes

LikePage Share

Bethefirstofyourfriendstolikethis


Archives
SelectMonth

About BCI

TheBlueCollarInvestorwasNOTabrilliantideaofmine.itjusthappened.Iwasafrustratedblue
collarinvestorjustlikeyou.ReadMore...

Pages
AlanEllmanseBookSellingCashSecuredPutsForBeginners
AlanEllmansSellingCashSecuredPuts
BCIBeginnersCorner
BeginnersCorner
Blog
Contact
CreateSuccess
FirstAnnualBlueCollarScholarCompetition
Media
Membership
Store
Subscribe
Testimonials

Recent Posts

MechanicsofLEAPS
AskAlan116IsCoveredCallWritingaZeroSumGame?
AReviewofVolatilityanditsImpactonOptionSelling
LEAPSandCoveredCallWriting:AReviewandaHypotheticalExample/ContestApplication

Connect With Us