Friday, May 7, 2010

Market Gyrations create opportunities as Options Premiums expand

The insane market gyrations over the last week have had one positive note for investors.  Option Premiums have increased because the market volatility has gone up (VIX is over 30 as of the close).  Volatility is a key component of option prices and has a direct effect on the premiums of calls and puts.  The market is presenting a good entry point today for investors looking for more yield by selling options against equity positions (buy write).  Let’s focus on the At the Money (ATM) options that will yield at least 6% until June expiration (June 18th, 2010).  Also, I want to take earnings out of play by only looking at companies that have already released .  The stocks have to be down only 5% or so over last 30 days to avoid “problem” names, so I filtered for that.  The strategy here is to collect the yield from the option premium and offer some downside protection (at least 6%) while things are still choppy.

Buy Write

I have ordered the landscape so that stocks with the most expensive ATM Implied Volatility in June relative to the 30 Day Historical Volatility of the underlying stocks are in the lower left hand corner.   Pay attention to the green issues in the lower left corners of each sector as they fit my Buy Write Filter to a higher degree.   With stocks falling and volatility moving up sharply, there is much more (green) to chose from.  The PDE At the Money buy write yields +6% on the options alone until June Expiration.

The opinions expressed by the author are his alone, and do not reflect the opinions of Aqumin LLC, its shareholders, partners or affiliates.

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