Clipped from an email advertising investment services, dated August 11 2016; everyone would recognize the name.
..................The low volatility of the broad market as well as the low option premiums (as measured in terms of implied volatility) has made trading of any sort, but especially option trading, a challenge lately.
Traders have little incentive to buy options because if the market doesn't move, which has been the case for nearly 3 weeks now, option positions lose as a result of time decay. And option traders have little incentive to implement income (option-selling) strategies because the low premiums mean the profit incentive is very low. And if the market breaks out of the range, which it will at some point, the risk is very high.
The good news, seemingly ironically, is that volatility is likely to increase. From a simplistic standpoint, all traders know tight ranges can't last forever, so each day that passes, while the market remains in a tight range, means we're one day closer to a breakout. But more cerebrally, the term-structure of VIX futures indicates the market is collectively pricing in higher volatility with each successive futures expiration. VIX futures prices represent the market's expectation for the forward value of the VIX (or the implied volatility of SPX options). VIX futures have higher prices the farther out in time we go. That means the market, especially the smart money, thinks we are in for higher, much higher, volatility through the rest of the year.
Talking my book, but I hope this guy is right.
The attractive weekly premiums on VXX have so far not been able to match the decrease in the price of the ETN or the decrease in VIX. |
