We have Historical Volatility (HV) and Implied Volatility (IV) calculations in the tastytrade platform! To view these, go to the following link (HERE).
Here's a cool feature: the comparison between Implied Volatility and Historical Volatility. A larger disparity here often hints at bigger trading opportunities. Take Moderna (MRNA), for instance. Its implied volatility is high, contrasting sharply with its much more relaxed historical volatility. This contrast paints a picture of anticipated significant movement for the stock, a stark difference from its usual historical behavior. Such a scenario might be an excellent chance for selling options at a premium.
Historical Volatility
Definition: It's calculated using historical prices. Historical volatility measures the riskiness of an asset based on its past price fluctuations.
Usage: Historical volatility is used to understand how volatile an asset has been in the past.
Implied Volatility
Definition: Implied volatility is a measure of how much the market expects the price of a financial instrument to move in the future. It is derived from the option's price. It is forward-looking, as it is based on market expectations of future volatility.
Usage: Implied volatility is used in pricing options. It reflects the market's expectation of future volatility and is a critical input in option pricing models.
Expected vs Actual Movement
The S&P 500 (SPY) is right at the edge of the expected move based on January's implied volatility.
The Nasdaq (QQQ) is above the edge of the expected move based on the beginning of the year's implied volatility.
We are nearly where we were this time last year. The small capitalization Russell 2000 (IWM) index is between the high and low of the expected movement.
Two Trade Ideas
MU Put Diagonal Spread (JAN/FEB)
Semiconductors are one of the hottest sectors in the market this year - SMH the Semiconductor ETF is up nearly 65% year to date exceeding the move in the tech focused QQQ. MU is the 13th largest holding in SMH, so it won't be the leader, but if you think the space might see a pull back, a put diagonal is a cheap way to get some delta. Long the 77.5 put in the FEB monthly and short the 72.5 in the JAN monthly for a debit of around $2.61 provides around 5 short delta, flat theta, and some positive gamma into a move lower.
DAL Strangle (JAN)
DAL current IV exceeds historical volatility - suggesting that maybe current IV is a bit inflated. The stock is trading right in the middle of it's 52 week high/low - if you think that might continue for a couple more weeks - a short strangle would fit the narrative. Short the 30 delta option on each side in the January expiration, 39/44, provides around $4 in theta decay with a probability of profit around 60%.
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