Market Insider

Buyer’s Market for Options


Despite nagging concerns about the euro zone, major stock indices — S&P 500 , Nasdaq , Russell 2000 — are off to a strong start this year, while volatility has been falling.

And as volatility falls, so do those sky high option premiums that were more common in 2011.

The forward looking CBOE Volatility Index or VIX has declined over 10 percent year to date to about 21 percent, but still above its 52-week low. Realized volatility is closer to 17 percent for the past 15 days, and 24 percent for the past 60 days.

“The trade is to really get out there and make a statement and buy volatility at these levels," says Alex Panagiotidis, managing director of Sterne Agee Institutional Equity Options.

It’s worth fighting the time decay because investors would be buying ahead of earnings and other potential market moving events including the possibility of a Greek default or other disruptions in the euro zone, Panagiotidis says.

The March at the money straddle on the S&P 500 Trust  is “extremely cheap” trading at about $8.00 or an implied volatility of roughly 20 percent, he went on to say.

Conversely, for traders that prefer to be net sellers, it’s getting harder to find those rich option premiums.

“Overall, the market has dropped dramatically, the premiums have dropped dramatically,” says Bill Lefkowitz, an options strategist with vFinance Investments.

“But if you look hard enough,"  Lefkowitz says, "you can still find premiums.”

Lefkowitz sold Google January 560 puts Wednesday for a dollar ahead of its quarterly earnings report expected after the bell on Thursday.

Bottom line: selling on single stock stories remains in vogue but overall, cheaper volatility makes this a buyer’s market.