THE PROBLEM WITH FXE FOR PREMIUM SELLING IS ... .
FXE has popped up on my radar again, namely because I use Dough's grid, which ranks underlyings by IVR (IV Rank).
I just got out of the December rung of a short call vertical ladder I set up several weeks ago on this down move, and FXE has naturally gotten my attention again, with IVR popping to 61 (i.e., its IV is in the 61st percentile of the IV for the past 52 weeks). Not fantastic; not horrible either.
So, I ran FXE setups through their paces, thinking I would find short call spreads yielding fairly decent premium. I was sorely disappointed, leading me to question why I ever put on trades in FXE in the first place.
I then looked at FXE a little more closely and discovered the problem. Its IV is low; it's been low for at least the last 90 days (below 20). it's just not that volatile an underlying. Some underlyings are volatile by nature; some are not, and FXE is of the latter variety. While its current IV is relatively high compared to its historical IV, that, quite frankly, isn't saying all that much, since it's never really that volatile in the first place.
So, when looking at selling premium in an underlying, look not only at its IVR (how high its IV is currently relative to its historical volatility), but also at what the underlying's IV is generally. You want both IVR and IV to be high to maximize premium. (Purely as an example, look at P, IVR at 100, IV at 88; it's at the high end of its IV range now, and it's volatile as a general matter, with an IV of over 50 for the past 90 days).
I just got out of the December rung of a short call vertical ladder I set up several weeks ago on this down move, and FXE has naturally gotten my attention again, with IVR popping to 61 (i.e., its IV is in the 61st percentile of the IV for the past 52 weeks). Not fantastic; not horrible either.
So, I ran FXE setups through their paces, thinking I would find short call spreads yielding fairly decent premium. I was sorely disappointed, leading me to question why I ever put on trades in FXE in the first place.
I then looked at FXE a little more closely and discovered the problem. Its IV is low; it's been low for at least the last 90 days (below 20). it's just not that volatile an underlying. Some underlyings are volatile by nature; some are not, and FXE is of the latter variety. While its current IV is relatively high compared to its historical IV, that, quite frankly, isn't saying all that much, since it's never really that volatile in the first place.
So, when looking at selling premium in an underlying, look not only at its IVR (how high its IV is currently relative to its historical volatility), but also at what the underlying's IV is generally. You want both IVR and IV to be high to maximize premium. (Purely as an example, look at P, IVR at 100, IV at 88; it's at the high end of its IV range now, and it's volatile as a general matter, with an IV of over 50 for the past 90 days).
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