The sky is falling....ain't it great!

The jobs reports is worse than expected. Foreclosures are spiking. The credit markets are in disarray. Yeah, the news is bad and the market's selling off...

...and volatility is picking up.

This is a great time to be an option seller! Selling premium during volatility spikes is pure Options 101.

Stock investors and traders tend to think in terms of price direction. Option traders can certainly trade directionally, but we also have other dimensions in which to play.

Implied volatility is measure of what the market thinks the market may actually do, and when uncertainty creeps into the picture imaginations run wild with dooms day scenarios. Put option premium tend to spike as more and more people seek some protection against market sell-off.

Like most things in the market implied volatility moves up and down, but over time tends to revert back from extremely high or low levels. As implied volatility spikes it can be an excellent time to take a look at selling option premium.

When it comes to at-the-money and out-of-the-money contracts, option premiums are comprised entirely of time value. That time value is effected, not only by the passage of time, but the rise and fall of implied volatility. When implied volatility rises, so does time value.

We pay more for time when implied volatility is high. What' the old adage?

Buy low and sell high, right?

That's what we want to do with implied volatility. When it spikes option traders can begin looking to sell premium to take advantage of the high prices.

Now, you have to be smart about what you sell and high IV levels are no excuse to throw risk management out the window. Be smart, stay in control of your trading, but keep in mind that selling premium during volatile times can be a very effective and rewarding strategy.

Trade well!

Christopher Smith
TheOptionClub.com