Traders Choking On Premium
Option volatility is down significantly in most
stock options. Most major issues have lost 20 points in the last
five weeks. You
might say, “so what?” You might be thinking, “how does that affect me,
hot-shot options trader from Las Vegas?”
For hot-shot call buyers or put buyers from last year who did well, this year
there is a new sheriff in town, and he is bringing a lackluster, directionless
market. The routine 10-15% moves in Juniper Networks
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PowerRating), Siebel Systems Inc.
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PowerRating),
etc. look like they might be taking a year off. Selling straddles or
strangles near term month vs. buying strangles in, say July (the next big
earnings month), is a great way to play the market over the next six months.
Some traders are going to be buying (historically) cheap
three- to five-month
options. Buying the July options and selling four months of premium (starting with
March), will make them good money in sideways or moderate movement markets.
Even if it heats up, they’ll make money from the volatility increase due to being
long Julys. On a big move, they’re not short any calls on the upside or any puts on
the downside. When March expires, they can sell April, then May, then June, vs.
Julys. Like most strategies, if one can stay disciplined and keep their impulses
in check, they’ll do well.