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Can day/week traders take profit from Volatility only?

Personal Finance & Money Asked on January 13, 2021

Assume a stock varies between the prices $40 and $45 every three days, and the current price is $42. The trader buys 1 CALL Option contract for a strike price of $60 that expires in a month.

  1. Can this trader make any profit if the stock has moved a dollar in the first day?
  2. How can this trader make some profit from Volatility only? What should happen to the stock to increase it’s volatility?

One Answer

Under most circumstances, if you own a one month $60 call and the stock moves up $1 in one day, you're not going to make any money. This is because the delta is very low. Add to that the B/A spread and it's even more unlikely.

Yes, you can find outlier situations where the implied volatility is sky high and the $1 move generates a profit (10-15-20 cents) but with such high IV, the B/A spread is going to be huge.

Profiting from volatility requires much more than basic option knowledge because the strategies are more complex. For example, selling high IV straddles/strangles before an earnings announcement. This is high risk. For something tamer, selling nearer term expensive high IV options and buying cheaper IV next week or two out options.

Answered by Bob Baerker on January 13, 2021

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