Today’s trade idea calls for a quick reminder/lesson in implied volatility.
Check out these calls in Marathon Digital (Ticker: MARA):
The slightly out of the money (but close to at the money) 55-strike calls have an implied volatility of 124.52.
As the strike prices go further out of the money, look how the implied volatilities just go higher.
This reflects demand for these calls, meaning there are lots of buyers of these calls.
All that extra premium (higher prices) raises the implied volatility number.
According to the Option Pit Glossary, implied volatility is the interpolated volatility (or forward volatility) of a stock or option, reflected in the option’s price.
The higher implied vols of the further out of the money calls is creating skew, which is the difference in volatility per strike for an option
Once the liquidity providers begin selling these out of the money options, there are only so many they want to sell.
They do not want to go short these call units, so they need to jack up the prices to deter the buyers.
This skew makes for setting up a spread with lots of edge, which means a greater chance of profiting.
The Marathon Digital (Ticker: MARA) stock chart is showing a hammer candlestick on Thursday with confirmation of the stock trading higher on Friday:
MARA has traded down 43% just since November 9th, with a high of $83.45 and its low last Thursday of $47.41.
That’s only seven trading days! No wonder those calls are so jacked!
That hammer is signaling a rebound in MARA which I think can take it back to at least $65.
Let’s take a closer look at the calls and see how to take advantage of that skew:
I like buying the Dec. 3 term, slightly out of the money, 55-strike calls with the IV of 124.52.
Now to choose which out of the money call to sell.
Using Friday’s closing prices, the 55/65 call spread is offered at $2.84, with an implied vol of 136.92 on the 65’s.
The 55/70 call is offered at $3.54, that’s only $0.70 for five more points, which I think is worth it.
Those 70-strike calls have an implied volatility of 144.50, quite a bit higher than the 65’s.
If MARA continues to open and trade higher tomorrow, I will be a buyer of the 55/70 calls spread and will pay around $3.45.
With Thanksgiving this week, those out of the money calls should begin to come down in price.
If the spread begins to trade below $2.50, I will take my losses.
I will let this spread ride up to the stock trading $65 again before I take my profits.
Don’t forget to make use of our Option Pit Glossary, it is a great resource.
Thanks for Reading … See You Next Tuesday.