Verizon is showing an implied volatility percentile of 81%, which means the current level of IV is higher than 81% of all other occurrences in the last 12 months. Verizon stock was up about 2% Thursday morning.
When volatility is high, it can be a good time to be an option seller rather than a buyer.
Today we're looking at a short straddle trade. This option trading strategy involves selling an at-the-money put and an at-the-money call with the same strike price with the same expiration date.
This trade generates a large amount of premium for the option seller, but it does come with risks. A short straddle is an unprotected trade, sometimes referred to as a "naked" trade. Naked options can be risky because they expose the trader to potentially unlimited losses if the stock makes a big move.
However, if the trader is right and the stock trades sideways, large gains are also possible.
Setting Up Straddle On Verizon Stock
Assuming traders believe that Verizon stock will trade sideways over the next few weeks, they could look to sell a Dec. 2-expiry, 37 put and a Dec. 2, 37 call.
Wednesday, the 37 put could be sold for around $0.63 per share and the 37 call could be sold for around $1.32.
Selling those two options would generate a total of $195 in premium for a block of 100 shares. That is the maximum possible gain on the trade if Verizon stock closes right at 37 on the day of expiration.
To work out the break-even price of the trade, take the strike price of 37 and add and subtract the total premium received of $1.95. That results in 35.05 and 38.95. If the stock trades below 35.05 and above 38.95, the trade would start to suffer losses.
This trade on Verizon stock is a short vega trade, which means if implied volatility increases early in the trade, losses could occur.
Short straddles are an advanced option strategy. So if all that sounds confusing, it's best not to trade them.
Potential Losses Are Unlimited
Additionally, with a trade like this, the potential losses are unlimited and a lot higher than the potential gains. So traders would want to be very confident that the stock is going to remain flat over the course of the trade.
A stop loss could be placed at the break-even points.
According to the IBD Stock Checkup, Verizon stock is ranked No. 4 in its group. It has a Composite Rating of 33, an EPS Rating of 65 and a Relative Strength Rating of 31.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
