What options strategies to use when implied volatility is high?

Question

Certainly you can't just buy calls (or puts), because if implied volatility lowers, you may lose money, even if the stock goes up (or down).

On the other hand there are interesting oportunities for a stock to move during high volatility periods, so

What options strategies to use when implied volatility is high?

Answer 1

If it's directional, it's great to sell calls or puts.

If you're not sure of direction, then you should do credit or debit spreads. Your one position is offset by the high IV in the other.

Take ICE for example with the ATM options priced pretty high. If you buy a call and sell a call (or do a credit spread on the put side), you mitigate the high IV allowing you to participate in the movement w/o getting burned by the IV dropping.

Now, there are some stocks that are high all the time. In these "rare" cases, you can buy straight calls/puts, but I still wouldn't hold them for long because theta (time decay) will still eat you alive.

If you have other questions, please feel free to ask.

Hope that helps!

Answer 2

When Implied volatility is greater than Statistical volatility it means that the options are overvalued and cannot be bought at this time because of large premium. A sudden fall in this volatility can bring down the premium and those who get in this time gets fleeced.
A strip is a good strategy now when it is you buy two high priced put options and sell one low priced put options of same expiry.
Even a bear spread can work where you sell the high priced call option and buy a low priced call option.
The one I wrote earlier also might work though this new one is easily understood in bear spread. I mistated strap for a strip also. Make the due corrections adequately. Sorry for the changes.

Answer 3

Generally, you want to sell options when implied volatility is high.

One way to sell options but cut off the risk of a big move is to sell a condor.

There are also ways to use ratio spreads whereby you sell one ATM option and buy 2 OTM options. This way, the ATM option pays for both of the OTM options but you make lots of money if there is a big move.

Answer 4

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