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Tuning Deltas for Fun and Profit

In recent years sector ETFs have really opened the doors for retail investors.  With higher volume, some of those have options available, too.  Since the underlying assets are not always stocks, the volatility premium of these options aren't always representative of what you would expect.

For instance, the volatility premium of the October $20 call on DBC is $0.52 per option.  The underlying asset, DBC, costs $22.68 as of today.  The premium is about 2.5% of the asset price.  That asset's price range over the past year has been between 18 and 46. 46!  It seems to me that the volatility is underpriced.  Here's how I intend to take advantage of the disparity.

Since the volatility seems cheap, I use options.  I buy the 3rd in-the-money call option at 3.20, and I buy the 3rd in-the-money put option (Oct $25) for 3.20.  The options that are further in-the-money are highly correllated to the underlying asset price when they (the options) increase in value.  When either option goes down in value, then the price of the option follows a curve that cushions it.  This curve is there because there is still demand for out-of-the-money options, just because they're cheap.  The slope of this is the delta.

The point is that after all this volatility, I expect to see more of the same.  If you think that the volatility has not completely disappeared, then you should consider synthetic stocks using a combination call and put as in the example above.

The way to profit is to trade where the odds are in your favor.