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Forget Direction, Bet On Volatility

On Friday's very fine episode of "Options Action,"the fab five discussed how implied volatility was rich compared to realized volatility. More simply put, options traders were overpricing expected moves for stocks, which means if you had sold some of that volatility heading into earnings, you'd be sitting on some extra cash.

In the Web Extra (the online sensation sweeping the nation), we also explored the misspricing of volatility, but from the opposite perspective: instances of where options traders were underpricing moves.

Case in point:Exxon Mobil. Dan Nathan, of Phoenix Partners, suggested buying the May 65/70 Strangle for $2.10, (buying the May 65 put for $1.45 and the May 70 call for $0.65).

But with the stock trading closer to the lower strike today, Nathan notes that you may get more bang for you buck by simply buying the 65 Straddle for about $4.13. You're committing more capital, but with Exxon out with results on Thursday, this strategy could pay out if you think the Exxon could have a big move on earnings.

Questions, comments send them to us at: optionsaction@cnbc.com

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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