Implied Volatility

Next week has the potential to be a wild one with the FOMC rate decision on Tuesday and September option expiration on Friday. Opinions about the stock market tend to be passionate and extreme right now. The bulls think that a big rate cut will explode the market higher on a monetary expansion by the fed and the bears see recession and more falling shoes, shoes bought with credit cards. It all seems to revolve around the fed and whether or not they are capable of saving us from the financial crisis that has been developing over the last six months. Whatever your opionion is, and I have my own, we can all probably agree that volatility is likely to be very volatile this week.


This is a very important fact for options traders because implied volatilities and hence the premiums are likely to be all over the place. In this environment it is more important than ever to be mindful of the option you are buying and how its pricing compares to historical and recent levels. A great resource for historical implied volatilities and their trends is IVolatility.com. If you buy an option on a implied volatility spike it can be deadly in a matter of minutes. You can watch the option drop dramatically in value even while the stock doesn't move an inch. I have found that a great way to protect yourself is to plot the option last, bid, and ask next to the recent stock price movement for comparison to the current pricing. You will see periods where the option price changed quickly, for example during a company announcement or at the beginning or end of the day. Those are the periods when you can either find a great bargain or get screwed big time. You can find implied volatility quotes here. I don't know of a free resource for intraday option charting but Interactive Brokers will do it and they also provide live implied volatility quotes. Also, if you want to see some interesting daily option scans, I enjoy perusing the IB Options Intelligence report each night.

The safest thing to do is to wait until Wednesday, after all the FOMC hoopla dies down, to trade September options. Or, just stay away from front month options all together, they do expire Friday after all. I have been very hesitant to trade at all until after this fed meeting is over with because market participants are so wound up about it.

But I do have a few ideas for the week.


GRMN has formed a nearly perfect rising wedge. I'll do a more thorough post about GRMN's fundamentals at a later date, but I find the bulls argument very uncompelling. For now, I think it should at least test that 50 dma and Bulkowski's measured rule suggests a target of $90 which still seems conservative to me. The pattern has to be confirmed with a close outside of the trendlines but that should happen soon with the apex approaching this week. The September 105$ puts could do well.

I had more ideas like SIRF for a swing trade, but I'm tired. I'll probably do another post after the fed meets Tuesday. Good luck out there!