Options premium sellers make hay while volatility rules

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - Wild gyrations in the U.S. stock market that sent a key measure of volatility to a near seven-year-high has created a big opportunity for options premium sellers, and traders are making the most of it while it lasts.

U.S. stocks rose on Wednesday, with the market on track to snap its six-day losing streak. It was still a volatile day, however, with the Dow industrials trading in a 420-point range, and the ups and downs were expected to continue.

Monday's sharp selloff sent the CBOE Volatility Index <.VIX>, the market’s favored barometer of volatility, up 25 points to 53.29, the highest since Jan 2009. The VVIX Index <.VVIX>, the volatility index for the VIX, shot to an all time high of 212.22.

Though volatility is still high at 32.24 on Wednesday, it is off sharply from the high on Monday.

"I think the market is implying that yes, volatility may be higher going forward, but not to the same extent that we have seen in the last couple of days," said Christopher Jacobson, derivatives strategist at Susquehanna.

Higher volatility expectations helps boost options prices. Traders who sell that protection - in effect betting on volatility to fall - have jumped at the opportunity to sell options to collect fat premiums.

"I think traders think there is a pretty good chance that we have seen the top in the VIX even if we haven’t seen the bottom in the S&P 500 <.SPX>," said Bill Luby, chief investment officer of Luby Asset Management of Tiburon, California and publisher of the 'VIX and More' blog.

In that type of situation, those who sell puts and calls try to collect as much premium - the cost of an option - as possible while prices are high. Premium selling was likely a big part of options activity the last few days, strategists said.

"If you are of the mindset that the worst is over and that things are going to get better from here, then this is an ideal time to sell options premium," said Randy Frederick, managing director of trading and derivatives for Charles Schwab in Austin.

David Miller, portfolio manager of Catalyst Macro Strategy Fund, said the fund had been lapping up premium over the past few months when it was cheap.

"We are selling premium now that premiums are significantly higher,” he said. The fund trades options on individual securities, international exchange-traded funds, and VIX ETFs.

(Reporting by Saqib Iqbal Ahmed; Editing by Chizu Nomiyama)

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Investing.com’s stocks of the week
• Sonova unveils new AI-powered hearing-aid platform to support growth targets
• China chipmaker YMTC files for $4.9 billion IPO