Since I was exercised out of my position in GRA, I now had cash to invest. Over the last month I have been experimenting with the options scanner at Trade King to find the kinds of opportunities that coincide with what I am trying to accomplish. So here is an outline of the steps I went through to find today’s investment.
- With the options scanner my main criteria is implied volatility. I have found that I need options trading at greater than an IV of 50 to get the returns I am looking for. So I entered a range of 50 to 70 for the IV. I picked a stock price range to keep me in the amount I wanted to invest. Moneyness from 5% out to 20% in and March call options. I selected to show 20 possibilities in ascending order of IV.
- I then punched each of the resulting stocks into the Motley Fool CAPS to get an idea of what and how the company was doing. This weeded out a few obvious bad eggs.
- Next was comparing the stock price to option strike prices and value. I entered each stock into Trade King and called up the option chain for March. I eyeballed each for time premium, moneyness, open interest and price spreads. This narrowed the list down to about half a dozen.
- Back to Yahoo and MF CAPS to review recent price trends, news and predictions. At the same time I am entering the stock and option prices into my option calculator to calculate the expected returns. I ended up with a couple of stocks right at the money with good call premiums.
- I attempted to place a trade for FRG but could not get it filled at the price I wanted. Right at the end of the day I put in an order on CHINA which was filled. CHINA trades at a much higher volume so was easier to get filled at the price I wanted.
Even though I was looking at March contracts I ended up buying CHINA at $9.99 and selling the Feb10 call for $.55. This works out to 4.5% expected return for 26 days. The annualized return for the March contract was about the same, so I elected for the shorter term call.
Item of interest: It appears a implied volatility of 50 equals about a 5% per month option premium for at the money calls. I will be looking at different volatility levels to see if there is a correlation.