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The Nasdaq 100 fell 6.5% on Thursday, its biggest drop since the worst of the pandemic crash in 2020.
And while it was mostly AI and semiconductors that dragged the market down, that doesn’t mean the AI trade is over.
But it does mean that investors are shifting their focus into new sectors and stocks, which could present a good buying opportunity.
Now, you may want to get ready to buy the dip in select sectors or stocks…
Or you could consider selling the dip instead, by using one of my favorite strategies.
No matter which approach you prefer, options allow you to easily position yourself for success as the market rotates.
And when it comes to trading options, there are few tools as handy to have as TradeSmith’s Fair Value tool.
Fair Value scans each individual stock’s options to find the ones trading well below their intrinsic value. By targeting these mispricings, you can increase the odds of an options trade paying out big.
And with all the volatility, there’s plenty of mispricings out there in the market right now.
Take a look at this snapshot of the Fair Value tool from last week, looking at options on the SPDR S&P 500 ETF (SPY).
The blue line on the Fair Value graph represents the estimated fair value options curve that we calculate using a modified Black-Scholes model.
The dots on the line correspond to contracts on the options chain, and the color and position of those dots track the market prices of each contract:
- When the dots are above the blue line, it means the option is overvalued. If the dot is red, it’s flashing an overvalued signal…
- When the dots appear below the blue line, it means they are undervalued – and dots that are green are flashing an undervalued signal…
- And dots sitting at the blue line are close to fair value, regardless of color.
Simply hover your mouse over any dot to view details about how under- or over-priced the option is, according to our analysis.
With the Fair Value tool, you can potentially get more than your money’s worth when buying or selling an option.
If you’re a buyer of call or put options, find undervalued options you can buy for less than fair value.
And if you’re a seller of options, look for overvalued options – priced above fair value – that you can sell to earn a bit of extra income.
For option traders, knowing whether an option is over- or underpriced before placing a trade can make a big difference in profit potential and odds of success.
That’s what makes our Fair Value tool so valuable. To go even further, let’s look at an example for my favorite options strategy: selling overpriced puts.
Sell The Dip for Bigger Potential Profits Using Fair Value
Now, what if you wanted to take advantage of the recent pullback to buy leading tech stocks at a discount?
In that case, you can use one of my favorite trading strategies by selling put options.
Let’s take semiconductor company Skyworks Solutions (SWKS) as an example.
SWKS shares have held up well, compared to some other tech stocks, trading near $82 at the time of this writing. It’s only down about 8% from its one-month high – outperforming the tech-heavy Nasdaq 100’s 13.4% fall over the last month.
But when it comes to entering positions, my motto is “never pay retail.”
Why buy the stock at the market price when you can aim to buy SKWS at a discount and get paid up front cash to do it ?
To do that, consider selling a short-dated put option on SWKS with a strike price that’s comfortably below the current market price.
You get paid the option’s cash value, the premium, to do this.
If SWKS share prices fall below the put’s strike price by the expiration date, you will automatically be assigned shares of SWKS, which you’ll now own at the strike price – at a nice discount – and you’ll keep the premium income earned in the process.
If you’re assigned, you’ll own a quality stock for $12 less than it traded when you sold the put, and you’ll keep the premium on top.
Keep in mind that this is meant as a demonstration of our Fair Value rather than a direct trade recommendation. The options prices you’ll see at market open tomorrow are likely different from what we’re showing you here.
So if you’re subscribed to Trade360, be sure to check the Fair Value tool to see if this is still a good trade.
Now, let’s go back to our Fair Value tool and look for SWKS put options that are trading above their fair value:
You can sell these overvalued put options for more than they’re worth, and pocket extra income in the process.
The SWKS $70 Put Expiring Nov 20, 2026 shown above looks like a great candidate for this strategy.
The latest price for the option is $0.60. But according to our calculations, its fair value is just $0.50 – so it’s overvalued by 20%.
You can sell this put option – aiming to buy SWKS stock at a $12 discount – and get paid $60 to do it. In this case, you’re getting paid more than the option is worth.
Again, given market volatility, this is simply a demonstration, not tradable information.
Mike Burnick’s Bottom Line: Markets are volatile right now, but you can turn that volatility to your advantage.
With our Options360 Fair Value tool you can easily “sell the dip” with overpriced put options on stocks you aim to buy at a discount price.
But before you pull the trigger on any option trade, be sure to consult our Fair Value graph first. At a glance, it will clearly show you the market price of any option compared to its data-driven fair value. And that gives you a valuable edge.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith
