Sunday, November 29, 2009

Implied Volatility = Too Low

Last week, on Tuesday or Wednesday, I took at look at the options of old friend FAZ - the triple financial short ETF.

The underlying was around 19.50 and the the Jan 20 calls were offered at 2.15 I believe.

I scratched my head in disbelief. What was I missing?

Yeah, a long Thanksgiving week of decay was imminent; and yeah January was a short expiration month (the 15th) but still....what was my risk here?

Two stinkin' dollars!

I was just about to buy a few handfuls of them but, alas, I did not.

Then on Friday they closed at 3.10.

And there's still a VERY LONG 47 days until expiry!

Get yourselves some options while they're cheap.


Anonymous said...

Your basic thesis - that the whole rotten mess is going to come apart - is correct.

Wait for it. As Centrifugal Deforest notes, "Being early is so over-rated."

CaptiousNut said...

But he's a momentum guy, a day-trader.

I can't play that game because I can't sit at the computer all day.

And, as I blogged about recently, I do not foresee an orderly descent.

JReality said...

I'm sticking to 1X inverses because the slippage on the 3X's is killer.

Anonymous said...

RE: One day massive collapse

There are too many idiots on both sides of the tape for that scenario. Really, I'm not so sure we would have had the whipsaw liquidation days in '08 if it wasn't for govt ignorance like the shorting ban.

Back in '07 the smart guys were predicting a long slow grinding decline. That is still the most likely scenario upon trend reversal.

Look how long it took to grind bulls into hamburger during the last deflation: a little over two years! Hope springs eternal, and this time will be no different.

CaptiousNut said...

Agree to an extent.

Stock volatility was aggravated by the *short ban*.

But bond and credit markets imploded on their own.

There were other factors like *runs on money markets*. Look for more trouble there, soon.