With some stocks seeing big drops in the last week, we are seeing implied volatility on the rise. Implied volatility rank, or IV Rank for short, is a good way to see if the current level of implied volatility for a stock is high or low compared to the last twelve months. An IV Rank of 100% means the current level of implied volatility is the highest it has been in the last twelve months. An IV Rank of 0% means the current level of implied volatility is the lowest it has been in the last twelve months. When IV Ranks is high, it can be a good idea to look at option selling strategies such as naked puts, bull put spreads, bear call spreads and iron condors.

Let’s take a look at some large cap stocks with an IV Rank above 50%.

The parameters for this screener are:

• IV Rank above 50%
• Market Cap above 40B

The above list of stocks gives us a starting point to do some more research on with a view to selling options.  Let’s go over to the Naked Puts Screener and see what that shows us.

Naked Put Screener

Here we have the results from the Naked Put Screener. We can see stocks such as Lucid Group (LCID), Affirm Holdings (AFRM), Tesla (TSLA), Nio (NIO), Roblox (RBLX) and The Trade Desk (TTD) showing up.

The parameters for this screener are as follows. I customized these slightly from the Barchart default preferences.

• Market Cap above 40 billion
• Days to expiration less than 60
• Last trade time within the last 2 sessions
• Security Type = Stock and ETF
• Option volume greater than 250
• Open Interest greater than 500
• Moneyness -15% to -5%
• Bid price greater than 0.80

One way to take ownership of a stock for less than the current price is via an option strategy called a cash-secured put. A cash-secured put is a slightly less bullish trade than buying the stock. It is considered a neutral to slightly bullish trade. A cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium or be assigned and acquire the stock below the current price. Selling put options is an easy place for investors to start with options. They are like a covered call and are pretty easy to understand once you know the basics. Traders selling puts should understand that they may be assigned 100 shares at the strike price.

Naked Put Example

Using the top result for LCID as an example, a trader selling the December, 40-strike put would receive $420 into their account, which would be theirs to keep.  If LCID falls below 40 by December 17, they would be required to buy 100 shares at 40. The effective net cost of the position would be 35.80, thanks to the option premium received. That is 20.41% below yesterday’s closing price. If the stock stays above 40 at expiry, the put expires worthless, leaving the trader with a 11.70% return on capital at risk. 

That works out to be 118.90% annualized. 

The main risk with the trade is similar to outright stock ownership. If the stock falls quickly, the trade will suffer a loss. However, the premium received will help to offset the loss. The maximum loss on the trade would occur if LCID fell to $0, which would see the trade lose $3,580, but most traders would cut losses long before then. 

Cash-secured puts are a great way to generate a return on strong stocks, potentially without ever having to take ownership. If the put does get assigned, the investor takes ownership with a reduced cost base and can potentially begin selling covered calls to generate additional income from the position. However, they can be risky and are not recommended for beginners. Beginners may prefer to trade a spread such as a bull put spread.

Bull Put Credit Spread Screener

To execute a bull put spread, an investor would sell a naked put and then buy a further out-of-the-money put to create a spread. A bull put spread is considered less risky than a naked put, because the losses are capped thanks to the bought put. Here are the results of the Bull Put Credit Spread Screener using similar parameters to those mentioned above:

We see some of the same names in this screener, but also some new names. Taking the first example using LCID again. This trade involves selling the December 40 put and buying the 32 put. The maximum profit is $2.78 per spread with $5.22 being the maximum potential loss, for a potential 53.26% return. The breakeven price is 37.22 and the spread has a roughly 70.70% probability of success.

Barcharts’ Naked Put and Bull Put Credit Spread Screnners can be a great way to find option trade ideas.

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.

*Disclaimer: On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, Nov 11, 2021.