Can We Use 2 Standard Deviation Implied Volatility When Portfolio Overwriting?

Core Insights - The article discusses the strategy of portfolio overwriting, which aims to generate additional income through option premiums while retaining underlying shares, with a focus on minimizing the risk of exercise to less than 1% [1]. Group 1: Standard Deviation and Implied Volatility - Standard deviation (SD) measures the average deviation of data points from the mean, which is crucial for understanding price movements in stocks [2]. - One standard deviation (1 SD) indicates that a stock's price is expected to move within a certain range 68% of the time, allowing traders to select strike prices based on their strategy goals [3]. - The application of 1 SD in portfolio overwriting involves selecting high strike prices to minimize the risk of exercise, estimated at approximately 16% [4]. Group 2: Application of 2 Standard Deviations - Two standard deviations (2 SD) double the range of 1 SD, indicating a stock is expected to move up or down significantly, with a 95% probability of staying within that range [7]. - For Intel Corp. (Nasdaq: INTC), using 2 SD suggests selecting strike prices above $50.00, resulting in an exercise risk of approximately 2.5% without exit strategies [12]. Group 3: Real-life Example with Intel Corp. - Intel's at-the-money implied volatility (IV) was reported at 74%, with expected price movements calculated for both 1 SD and 2 SD scenarios [5][10]. - The $43.00 strike price (1 SD) offers a bid price of $1.37, while the $50.00 strike price (2 SD) has a bid price of $0.69, indicating potential returns based on the selected strikes [8][16]. - The expected returns for the $43.00 strike are 3.87% over 33 days, annualized at 42.81%, while the $50.00 strike shows a return of 1.95%, annualized at 21.56% [16].