<<That could be setting up a dangerous situation, considering that the U.S. is in both a recession and a war, and most rational people could consider the event risk high. The implied volatility of the overall market should be relatively high, making options prices similarly so. Neither is happening. As a result, any significant bad news will cause a relatively greater panic "because there is no volatility," the trader said.
Dave Schultz, a Virginia-based money manager and options market veteran, says he thinks options right now "are really cheap, and there's a move coming somewhere." Schultz reminds us that implied volatility doesn't predict the direction of a move, but rather its severity. "Right now, it should be an even bet to go up or down," he says.
That may sound indecisive, but considering that the options market is signaling the market's not likely to go anywhere, it's actually a gutsy call. If he's right, that means options prices will increase.>>
Actually with the VIX very low, calling for a sudden move either up or down is not so gutsy. McMillan has been saying in his weekly commentary that extremely low VIX levels presage a move, but which way cannot be predicted by the VIX alone. Usually the move is down but doesn't have to be.
I have not been able to sit in on McMillan's online seminars but I did buy the CD of the seminar on Buying Volatility to listen to at my leisure ($99). The take away lesson for me was that times of extreme low volatility mean low options prices, but since volatility tends to fluctuate about the mean, there will likely be a rise in volatility off the lows, meaning that the value of options will predictably rise. Whether that means a rise or fall in the stock can't be predicted. Utilizing that knowledge he recommends buying a straddle. If volatility increases, both the long put and long call will increase in value. If the underlying security also rises or falls you could gain more from the increase in the corresponding option.
I realize that raising the issue of buying a straddle is risking the wrath of the old farts of the thread (dUF and dFL), but in times of low option premiums what are we going to talk about?(g) |
