Dan Passarelli, CEO - Market Taker Mentoring

With the VIX still above 20, it's at about 24.65 at the time I'm shooting this video here on Thursday. A lot of people are talking about volatility as if it's high. And to be fair, we have seen the markets moving around quite a bit lately, having a lot of that higher volatility. We have the VIX over 20. People tend to say that the long term average for the VIX is 20.

It's been above that for a while. So it seems like volatility is really high. Which would imply maybe it's a good time to sell options. But in fact, in a lot of cases right now, at this time, it's just the opposite. I found many, many cases where implied volatility is actually underpriced, which makes for really good long option trades. Take Meta, for example. First of all, Facebook changed its name to Meta awhile back. Now, if you look at Meta, nevermind the stock price chart, but let's look at the volatility chart. The historical volatility is 53. What that means is that the stock's annualized standard deviation is 53. And so what that implies is that if we were to buy, say, a straddle today that had three weeks to expiration, if implied volatility stayed exactly where it is at 53 and we bought that straddle at a 53 volatility, we'd typically break even. Now, that's a little oversimplified, but it's about right.

Now, here's the thing, though. We can actually buy this straddle at a much lower price. If you look at the options again, 53 is the historical volatility. The options, if we go out to 36 days here, they're trading below a 43 volatility, a full 20% lower, ten volatility points lower. That means that buying a straddle is a really great deal in Meta (facebook) right now. Now that said, Facebook is not the only case. If we go to, for example, Chewy. That is another one where if we look at the historical volatility, it's 127. Now, that could be this rather larger move here that was a result of earnings. So even if we just removed that bump up in historical here, it's at least a 110 historical volatility.

You can buy options in the high eighty's with eight days, in the low eighty's with twenty two days to expiration. So you can find a lot of examples like this. And buying underpriced straddles just simply means that the time decay is going to be lower for you, which makes it less punitive if the stock doesn't move. And in a market like this where the stocks are moving a lot, it's just more likely for it to be a winner. It's a low risk trade, and I've been looking for a lot of straddles lately.