Example A married put trade may look something like this:
| Stock Price | $100 |
| Put Option @Strike Price 100 | $5 |
The overall cost basis of the combined stock and options trade is $105.
And the risk in the trade is the difference between the cost basis and the put strike price, so $5 per share in this case.
But unlike the collar trade, which has limited upside reward potential, the upside in the married put is theoretically unlimited.
The higher the share price rises, the more money you make.
However, as the share price rises the put option will generally lose value.
So you will need the share price to rise above $105 to breakeven in the trade by the time the put option expires.
No matter which strategy, married put or collar trade, you may choose, make sure to select one of the best options trading brokers to avoid any hiccups with trade executions.
How To Get Paid Trading The Most Volatile Stocks
Another way to trade the most volatile stocks is the covered call strategy.Like the collar trade strategy, the covered call involves selling calls against shares already owned. But unlike the collar trade and the married put strategies, no put options are purchased.That means the downside risk is significantly higher when trading covered calls vs married puts or collar trades.
However, the covered call is a good income-generating strategy when the stock is not trending lower.
Related: High Dividend Stocks: A Lonely Opportunity
Investing Tip: Covered Calls limit upside potential but can produce regular income opportunities.Covered Call Example
Sticking with the same share price of $100, a covered call may be structured as follows:
| Stock Price | $100 |
| Call Option @Strike Price 110 | $3 |
Unlike the married put and collar trade strategies, the covered call nets you money.
While you have to take money out of your pocket in the other options trading strategies, the covered call is an income-generating strategy with a cost basis under the share price.
In this case, the cost basis is just $97, the share price ($100) minus the $3 per share earned when selling the call.
What makes the covered call so attractive is not only the income from the sale of the initial call but also the ongoing income from continually selling additional call options in further months.On the most volatile stocks, call premiums tend to be higher than those on slow-and-steady stocks.
Why Trade Options On The Most Volatile Stock
Options offer traders a number of valuable features when trading the most volatile stocks.
For many traders, volatility quickly leads to fear. It’s a rocky ride watching an account balance undulate in the blink of an eye.
Without options to protect downside risk, you may need to become proficient at technical analysis to manage risk.
However, options don’t just afford you protection but income too. And the yield can be significantly more attractive than the rates paid by savings accounts.
Earning just $3 per quarter from selling call options on a $100 stock would amount to a 12% return annually all else being equal.That’s nothing to sneeze at and makes it well worth your time learning how to trade options.
How To Find The Most Volatile Stocks Today?
So now you know what strategies can work to your advantage on volatile stocks but how do you find the most volatile stocks today to trade?Technology stocks like Facebook, Alphabet, and Netflix have all historically had volatile periods and, at one time or another, attractive call premiums. But over time even the most volatile stocks tend to stabilize. So how do you find a list of the most volatile stocks?
First define the types of stocks you wish to trade, for example:
- Most volatile stocks to day trade
- Most volatile stocks weekly.
- Most volatile stocks this month.
- Most volatile stocks under $100
Once you have defined criteria, screen for a list of the most volatile stocks using TradingView, FinViz, or some other stock screening tool.Then double check to make sure the stocks on your list are optionable if you plan to apply married put, covered call, or collar trade strategies.
It’s hard to track a lot of companies simultaneously, so you may wish to narrow your list down to the top 10 most volatile stocks that meet your criteria and create a watchlist.
Then the best next step is to virtual trade strategies that suit your investing style. Brokers like thinkorswim and tastyworks provide virtual trading platforms so you can test out stock, option, and futures strategies risk free and learn what works best for you.
This article has been republished with permission from Investor Mint.