Is volatility too high now?
When is the volatility not high enough? A good question to ask since I am back in Chicago for the Option Pit Traders Summit and it brings back memories of days as a CBOE member in the 90s. Most of the option education information is centered around selling volatility and I agree that much of the time selling juice is a better trade. However, sometimes it is not. Right now VIX is hovering around 19 and that is just about fair. On a day when the Dow is up and the QQQ is down 2+% a 19 VIX feels right. Feeling and being are two different things.
My First Real Premium Buy
I don’t know how many option contracts I have traded over the years, but the number is probably north of 5 million in a 15 year span. The trade that most stands out in my mind was buying puts in a stock called Immune Response back in 1992. I was the DPM on the Group One, Ltd. post at the time and IMNR was trading 20k contracts a day as the biotech that would cure AIDS. The stock would move $10 a day on a 50 dollar number. That is a daily volatility of 320%. The option IV was well in the hundreds, 120% or so, and that drove premiums to big levels. $8 atm puts were not unheard of on 3 months expirations. And some one sold them, 1000 of them, to me. At the time I talked with my partner in the pit, Roma, and we agreed it was worth it. Still, buying 120% vol was a lot but not much compared to how IMNR was moving. We hedged them and by the next day a lot of the net premium was already gone as we sold options at even higher prices. This still left us with a long Vega and Gamma position and a few days after that the stock dropped 50%
Is VIX pricing the current movement?
The IMNR example is illustrative that high option prices are not necessarily underpriced. Once a trader starts to price expected moves, that is where the edge shows up. This is accessible to most traders who want to take the time to learn. Our Edge Hunter sheets help with that. VIX is 18 but expected dally moves are still in the 15% range. VIX is pricing a bit more movement than we are currently getting. Jun or Jul VIX puts don’t look too bad here and paired with cheap SPY put spreads could be really nice.
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