Option volume went through the roof yesterday as the market sold off. The implied volatility also spiked to higher levels in a number of stocks, particularly those closely followed Reddit WallStreetBets stocks.
Reddit WallStreetBets Stocks Stick Out In Implied Volatility And Volume
Smile Direct Club (SDC) saw a significant spike in option volume, with over 340,000 contracts traded compared to its average of 48,000. Call options accounted for 78% of that volume.
SDC stock was also the most mentioned WallStreetBets stock. Perhaps this is the next meme stock that will be in focus.
Implied volatility for SDC stock has gone through the roof in recent weeks. Implied volatility now stands at 175% compared to a low of 54% back in June. That means options premiums are very expensive right now for SDC stock.
Palantir (PLTR) was the second most mentioned stock of WallStreetBets stocks. It too saw larger than normal option volume. Total option volume was 700,000 contracts against an average of 400,000, with 67% being call options.
Unlike SDC stock, implied volatility for PLTR stock is still relatively muted. The current reading of 53% compares with a 12-month low of 40% and a 12-month high of 170%.
Another stock that experienced higher than average option volume yesterday was Lucid Group (LCID). This was the eighth most mentioned stock on WallStreetBets. The option volume on Lucid stock was more than double the average at 376,000. Call options accounted for 80% of the volume.
Implied volatility for LCID stock is elevated at 91%. Although, that’s not nearly as high as the 260% level seen in February 2021.
Apple (AAPL) was the most heavily traded stock option yesterday with 1,460,000 contracts being traded. Call options accounted for 62% of the total.
Implied volatility for AAPL stock is 28% compared with a 12-month high of 52% and a 12-month low of 19%.
How To Profit From Implied Volatility Spikes
As a general rule, we want to be selling volatility when it’s high. You can do that with bull put spreads and bear call spreads or combine them for an iron condor. You can also use cash-secured puts) when volatility is high.
Sell-offs like we have seen this week provide great opportunities for option sellers to generate above average premiums. This is a welcome change considering the relatively low volatility for most of this year.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.
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