Striking Options: 3/27 Buying and Selling Volatility


-Jeff Kilburg: Welcome to Striking Options, the show that reveals the options you have to better navigate markets. I’m Jeff Kilburg and I’m joined today by option guru Jon Najarian. -Jon Najarian: Hello Jeff, great to be here. -Jeff Kilburg: Well, Doc, awesome having you, per usual. I wanted a little different Striking Options show today, if that’s okay. I wanted to talk a little more macro, versus the micro we typically do week to week on Striking Options. This is a deeper conversation about the elevated volatility we are now seeing in 2018, versus the suppressed volatility in 2017. And I want to hand the ball off to you really quickly. What have we seen in this elevation recently? -Jon Najarian: Well Jeff, it’s basically gone from averaging right around 10 volatility or VIX last year, to being up around 20 right now. That means that an option that would be $2 last year, is trading $4 this year at that higher valuation for option premium. So, obviously some of the strategies that you use change, given the higher option premiums. -Jeff Kilburg: Well that’s right, and there’s two sides to this coin. We have buying volatility, or buying that option premium, or selling that volatility, or selling that option premium. But let’s break this back into our lightning rounds per usual. You ready for this first lightning round? -Jon Najarian: I am, Jeff. -Jeff Kilburg: Selling volatility. Well we’ve certainly seen that move higher, and how do you capture the opportunities there, associated with that rise in volatility, Doc? -Jon Najarian: Well, one of the ways, Jeff, of course, is to sell it. But we don’t want to sell these options naked, because even in a trade example, it’s something that could blow people up. So what I would do, Jeff, is I would be selling the 2725 call. That’s an in the money call, or right at the money, if you will, and buying the 2775 call. Now in that trade example, which is about the third week in April, we’re in a $50 spread. We’ve collected, Jeff, about $1,300 for that. Much higher premium than it would have collected last year at this same time, and yet that is exactly the sort of spread that we can use to take advantage of the higher volatility. -Jeff Kilburg: Yes, I like that trade example a lot. And remember these are trade examples, not trade recommendations. But that selling of volatility, that is the Warren Buffet way, and I like the way it’s approached, because it is a one-to-one spread like you said, doc. and we don’t have that upside exposure typical, or associated, with just selling one side of a call. You ready for the second lightning round? -Jon Najarian: Yes I am. -Jeff Kilburg: Buying volatility. Well, this is the other side of the coin. And buying volatility in a higher, more expensive volatility regime, does make a difference. But when you see the gains we had in the stock market in 2017, I think it’s important for an adviser to approach this as a risk mitigation. This is a satellite, this is a tool, a satellite to your portfolio, your core portfolio has appreciated. Do you agree with the fact that some of these risk mitigations utilizing these options and futures make a lot of sense right now? -Jon Najarian: Oh yeah, I sure do, Jeff. The higher the VOL, the more some of these strategies really come to the fore. -Jeff Kilburg: Well, the trade example I want to use is in the Dow Jones. I’m buying the 25,000 and selling the 24,000 put spread It’s going to cost me about $1,600. But this trade that’s going out to April 20th makes a lot of sense. It’s protecting some of the gains that I’ve already seen in my portfolio for the last 16 months, and now you have the opportunity, a defined risk of what it’s going to cost you on the downside. You have a max profit on this trade example of $3,300. That’s not a bad risk-reward. -Jon Najarian: No, that’s pretty dang good risk-reward, Jeff. Two-to-one. It’s all about risk-reward, and that kind of trade makes a lot of sense. Well I hope this Striking Options illuminated how to use volatility and harness volatility, either buying it or selling it, to your advantage. And we’ll be talking more here on Striking Options, as we move along. But Doc, I want to thank you again for your insight here this week. -Jon Najarian: Thank you, Jeff. Alright, thank you for tuning in to Striking Options, Be sure that Jon and I will be back, and join us every week as we continue to strike options.

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