Brave Investraders Have No Fear... Someone posted an article a few days back, from Schaeffer web site, showing that options are actually trading now at a discount to the actual recent volatility. In other words, the part of the volatility component of the option’s price which is supposed to reflect fear is actually a negative quantity. I can think of only one thing this may mean – crazy complacency.
Generally, IMO it is smart to use options to short rallies, and not quite as smart to use them looking for bottoms. At the bottom, assuming you are right, you still don’t capitalize as much, because when the underlying will rally, the implied volatility will collapse, eroding the profits. The opposite happens when shorting tops. At a low, all it takes is for the decline to stop, and the implied volatility goes down.
On occasion I wondered that maybe sometimes “smart” – or big – money may drop the implied volatility because they “know better”, and become willing enthusiastic sellers of options, increasing supply… Maybe this can happen, but I haven’t seen it yet. VIX and cousins were good contrarians all along. Once though, in the spring of 2000, I saw VIX make a lower high as the indexes were making a lower low, and this did turn out to be a bullish divergence. |
