So let’s look at volatility another way, the volatility of stocks themselves. It’s absolutely soaring, ahead of options themselves n fact. Bill started the ball rolling the other day, and Dr. Brett keeps up the analysis.
The chart above (on Dr. Brett’s site, please click thru) shows the S&P 500 cash index (blue line) versus its 20-day average daily true range (ATR). The 20-day ATR is a measure of actual price volatility in the index; not implied volatility as calculated by options and not premium levels built into options pricing. The ATR is the larger of the following:
* The percentage price range between today’s high and low prices;
* The percentage price range between today’s high price and yesterday’s closing price;
* The percentage price range between yesterday’s closing price and today’s low price.What this means is that ATR captures, not only the size of the range during the trading day, but also the gaps that occur between yesterday’s close and today’s trading. It is a measure of past price volatility both within and between trading days.
The chart is showing us that actual price volatility has gone into a parabolic rise and that we recently exceeded the volatility levels from the 2002 bear market period.
What’s it all mean? Dr. Brett finds some other times when ATR got this high, and all of which are associated with long term buying opportunities. But here’s the catch. If can get stupendously worse before it gets better (like in 1987 when it got super-elevated) or simply linger and fail to resolve (like in summer of 2002; we didn’t make significant new lows after that, but we also didn’t bounce until March 2003.).
It’s also important to note that while elevated stock volatility in and of itself is ultimately bullish, it would be more bullish if in fact options got so nervous they actually trade even more elevated than stocks. And it would also be more bullish if it stopped going up.
Again, my basic strategy it so play very small, lean a little long via put vs. stock trades, and kick myself for any stock I buy.
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If it’s a good long term buying opportunity, how about LEAP calls, short term puts? Would make sense to hold both calls and puts if ATR is above option volitility, no?
yeah, i mean it sounds insane, but you want to be long options when this happens. But shorter term ones, I would be careful committing to LEAPS at too high a volatility.
Adam, any thoughts about EEV puts right now?
Does the high VIX make the ultrashort options overly expensive now as well?
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yeah, they’re all on the moon (I looked at FXP this morning, wow). But that being said, I bought some SDS puts at idiotic prices. I mean on yours, EEM will have an extraordinary percentage up day some day soon I would think, the question is timing obviously, so scaling in on EEV seems like a decent idea.
Sorry, not sure if I was clear… the high VIX DOES contribute to an overly high price, even on ultraSHORT puts?
And you think the EEV puts do make sense?
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Adam, good stuff and very timely.
As much as I want to put my balls into the fire, I’m going to wait until other people get burned before committing any more capital, or until an overlooked opportunity arises. I have mostly been unwinding puts, and today it resulted in super silly profits. I still have a couple of handfuls but with the money I have made off their brethren, I’m not stressing any rallies and I can afford to gamble on a crash with what I have leftover.
I nibbled today on a small position of NCC calls, which is the only new option position I have opened in almost two weeks. I’ve been scared away by the premiums on my regular trading vehicles and have since tried to locate setups on individual stocks that I think are overlooked and primed to move with the direction of the market or at least their sector. The downside to this strategy is the illiquidity when operating in size.
For example, 2 to 3 weeks ago I started to accumulate puts on LEG at various strike dates and prices. Paid anywhere from .30 to .45 for LEGVD. With today’s action I thought it would be a good idea to get out of many of my October expirations, but I had to wait forever to finally get filled at $2.05. So I can’t complain about the profit but I accounted for almost (if not) the entire day’s volume on this contract (and it was also like that when I bought them).
I absolutely agree that it will be worth it to be in options for SDS, FXP, EEV, etc., if timed correctly. Easier said than done of course. I’m hoping to go long at some point this week but I just don’t feel like we have capitulated quite yet, and since we are in turmoil of historic proportions, I’d rather miss it than hit it too early this time around.
Like O.H. alludes to, the volume on some of these inverse etfs sucks…FXP & EEV especially. This results in some egregious spreads and terrible fills. Can’t stand wide spreads.
FXI puts could be more viable if you’re looking to de-ball China. EEM options are also more liquid than EEV.
Jake: sorry, I forgot I never responded. EEV doesn’t so much get pulled by the VIX and they’re all one in the same. IT’s just spiking volatility everywhere. At least it was, today could see a big decline…..back to levels that we’d have considered thrombolic a couple week’s ago. But yes, I like the EEV idea, but I looked and the markets were extraordinarily wide, so might be tough to leg.
OH and Dpeazy: Yes, exactly. I like the concept, but easier said then done, the markets are silly wide. I really have no prob. paying up for puts in these pups as a way to get long. Agreed in that that probably won’t be THE bottom, but who really knows or cares. What I would say though is if it pops, it REALLY pops, and the directional gain will way more than offset the added premiums. Which is of course why they’re priced this way, so in a sense it’s fair value for this particular environment.