Lower volatility means calmer seas, but can the boat still sink? Revenue strategies for option traders during low volatility – Taking advantage of the CBOE VIX


Lower volatility for options contract generally translates into lower vega, and lower premiums. The lack of price variation in the underlying assets, is a volatility best represented by the CBOE VIX, volatility index of the S&P 500. This index found comfort at higher levels since mid summer, when stock prices varied extremely, often times by more than 10% within the week. This volatility was due to better than expected results in earnings release, in most cases, and a horrible economic performance from Europe and the United States.


The volatility index went down a notch in november, from high 40s to 30s

Since mid-November, volatility levels have come down from their 50% peak, and are resting, around 30%. The higher volatility earlier in this quarter implied more chances for options buyers, to make significant profits. Most of their out of themoney contracts would end in the money. As well, it was a different situation for  option writers, who maybe had a better premium, would eventually fall out of the money on their side.

The time has come for sellers to strike back, as now option selling strategies can allow option writers to reap a profit. Although the current economic forecast is not clear, and we are still bombarded with good and bad news, with the holidays around the corner, I would expect the same sort of “Calm before the storm” situation in the market as it happened this summer, it is therefore just a short period of time for sellers to get back on their horses, and collect their dues, before it’s time to get on riding a higher volatility again.

Europe still has not fixed it’s debt issues, and day after day more and more large institutions and banks are defaulting, companies in the USA might still be bringing forth many good news on their performance, but they are part of an economic system that is unfortunately intertwined and thereby codependant.

As such, I would strongly advise traders to watch the news carefully, but not to be too optimistic over the long run (1-2 months) for a steady recovery yet.

 

Share

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Market and trading news