It is wiser to look for calendar spreads where you might expect the implied volatility to increase, which is to say, among the underpriced options where the implied volatility is known to be low.
Options decay with time in a natural way.
Sometimes when a trader seeks to exploit a stock’s expected price decline and sells an overpriced call, the underlying declines as expected but the option price does not.
Last Thursday, March 11, we talked about trading CVR signals with options, especially CVR buy signals. These trades are particularly effective because when the signal is correct, you have the three main features of options working in your favor: time, price direction, and volatility.
Today I’d like to share some option strategies you can use to exploit CVR sell signals. There are two strategies available to exploit sell signals. The first is to sell calls. If you are right, time and price will be in your favor, but implied volatility will work against you.
I will delay part two of “Trading Options with the CVR Signals” (see my commentary from March 11) until Thursday, March 18 so I can share with you a somewhat rare, but solid, set-up that occurred the other day.
A conversion involves buying the call and selling the put if the put premium is too high relative to the call’s, and at the same time selling the underlying short to form a hedge, or selling the call and buying the put if the call premium is too high relative to the put’s, and at the same time taking a long position in the underlying.
Chart analysis is a subjective game, and many commonly accepted interpretations of patterns fail to hold up to detailed analysis. We’ll explain the realities of large-range days and the kind of market behavior they foreshadow.
Even if you are not interested in hedging or
spreading options, you can still put the Overpriced
Implosion and Underpriced Explosion Lists to good
Some of today’s underpriced calls are underpriced because the underlying has been so volatile over the last 100 days.