Volatility Metrics that Can be Screened for Cheap Options
Level 2 - Intermediate Vol Trader
In today’s post, the options nerds will describe how to screen for cheap options for those of you out there who are interested in buying options in your favorite stocks. We know that the most important element of driving your P/L in stock options is moves in the stock price (delta), but it is extremely helpful if the implied volatility will reprice higher as well after you purchase the option.
How can we predict that the implied volatility will reprice higher after our buy? Well, that depends on our ability to identify when the implied volatility is low. In this series of posts, we will introduce a series of metrics that can help us identify when implied volatility may be due for a rebound. Let’s dig in!
Implied Volatility Waning Momentum
We introduce this concept based on the idea that the implied volatility surface of an asset (stock, FX, crypto, etc) can only sell off for a limited number of trading days before either 1) stabilizing 2) rebounding higher.
We can define the number of days where the ATM vol has sold off (adjusted for daycount convention) and use this as a criteria for screening for cheap call options, as on first order the call skew should sell off proportionately.
For example, we can set the number of days to 5, and screen for stocks whose ATM vol has sold off for 5 trading days in a row.
At the end of this series of posts we will also start publishing a curated list of cheap stock options from a volatility perspective. Hope you’re all excited about this! Until next time, TopOptionsNerds signing out!
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