[Options] It's Not This Simple

Sean McLaughlin
February 3, 2022

I’ve received a few questions from readers about playing bounces in some oversold stocks.

The most recent was Facebook, er… Meta (whatever).

An opportunistic trader hit me with this question:

Is anybody interested in taking a position in these heavily discounted calls in $FB today?

Discounted? Au contraire, mon frère.

Shares of $FB stock may be “discounted” after getting shellacked to the tune of -26% or so. But there are no discounts to be found anywhere on the options chain.

Whether you’re interested in purchasing calls OR puts right now, you’re staring at the highest implied volatility priced into the options in more than a year!


This means not only will you have to get the direction and timing right, but you’ll also likely be fighting the eventual mean-reversion in the implied volatility that is sure to follow once cooler heads prevail (hint: they always do... eventually). 

Implied volatility is the key driver in the cost of the premium that is priced in options. The higher the volatility, the higher the price of the option.

Believe me, I love to keep things simple. And there’s nothing simpler than buying calls when I’m bullish and puts when I’m bearish. But implied volatility always has to be part of the equation and an edge we do not want to give up is to only be a buyer of naked long options when volatility is “cheap.” And by “cheap” I mean, in the lower third of the implied volatility range over the past 6-12 months. 

Hindsight is 20-20, but looking at the same IV chart from above, these are the times where it would’ve been most advantageous to be a purchaser of long calls or puts in $FB to express your bullish or bearish thesis:

The rest of the time, some kind of spread position or net premium selling strategy would have offered better odds of success.

I’m not saying you can’t make money buying calls here in $FB if it rallies hard off its lows. But your win will likely be underwhelming and won’t feel worth the risk you took in catching this falling knife.

Implied volatility is the first thing I look at when deciding on which strategy to employ to express a bullish or bearish bet. This is an edge I cannot trade without.

~ @chicagosean

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