Schaeffer--"Low Implied Volatilities: A Boon for Option Buyers", 5/31/01...
schaeffersresearch.com <---stats / tables
CBOE Volatility Index (VIX):
stockcharts.com[l,a]dholyymy[dc][pa30!a25!b50!b200!d20,2][vc60][iLp14,3,3!Lk14!Ll14!La12,26,9]
Nasdaq 100 Trust Volatility Index (QQV):
stockcharts.com[l,a]dholyymy[d19980101,20010601][pb50!b200!d20,2][vc60][iLp14,3,3!Ll14!La12,26,9!Lk14]
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Rearranged/modified some for clarity & ease of reading.
>>>Low Implied Volatilities: A Boon for Option Buyers
5/31/2001 4:08 PM ET
Option buyers should be taking notice of recent trends in implied volatilities, many of which have sunk to near annual lows.
Implied volatility is the market's assumption of the underlying stock's volatility.
Of greater importance to options players is that implied volatility is a significant determinant of an option's price.
Simply stated, the more volatile the market feels a stock will be, the higher the premium an option buyer will pay due to the higher implied component.
There are two indicators that track the overall implied volatility of the broader market:
1) The CBOE Volatility Index (VIX – 25.64)
...reflects the implieds of S&P 100 Index (OEX – 647.09) options.
2) The Nasdaq 100 Trust Volatility Index (QQV – 51.26).
...reflects the implieds of Nasdaq 100 Trust (QQQ – 44.97).
Despite rallying earlier this week, both of these indicators are at historically low levels.
The VIX is off its March 22 high by nearly 40 percent after bottoming around the 23 level, while the QQV is recovering from its lowest mark ever and is over 30 percent below its early-April high (see the charts above).
Looking at individual stocks, a similar picture is emerging.
A huge number of Nasdaq 100 stocks have options with implied volatilities at or near the bottom of their 52-week ranges.
... For many of these stocks, implieds have come down by half or more from their peaks.
... In fact, according to ivolatility.com, only four of these 100 stocks are currently in the top 50 percent of their implied volatility ranges of the past year.
The current situation is very similar to that of late January, when the QQV and VIX were at levels similar to today.
... That period turned out to be an attractive opportunity for option buyers, as premiums were relatively low.
How is this low volatility advantageous?
To many options traders,
... low volatility presents an excellent entry point for buying premium,
... the goal being to sell the options once the volatility and hence the premium have increased.
Let's take a look at an example using Cisco Systems (CSCO – 19.56) based on a Black-Scholes option pricing model.
... The table below (see link above) shows implied volatilities and premiums for at-the-money CSCO puts and calls on April 11 and May 25.
... Note that when the implied were 100 percent in April, a 22-percent move by the stock was needed to result in a doubling in the option price.
...Compare this to the more recent situation when implieds were at 60 percent, which required a much smaller move in the stock to achieve the same return.
The importance of this low volatility cannot be underscored.
...Increasing volatility from these lows can only benefit the option buyer, especially if he or she can catch a major upswing in implieds.
In short, option buying makes more sense now than ever.
For those who want to take advantage of this rare opportunity, let Schaeffer's help you choose the right option with one of our various option buying programs. Call us at (800) 448-2080 or click here for more information.
- Jon Lewis <<< |
