Dear Friend,
 
Option prices are at multi-year lows.  VIX, the most popular measure of option prices, is at 13.36.  For several years we never saw it much below 15 except for maybe a day or two.  The mean average of VIX is 20.54 so today’s value is 35% below the mean average.

We usually prefer dealing with an index such as SPY because it is a bet on the market as a whole rather than an individual stock (which tends to be much more volatile and subject to quick price changes due to either good or bad individual company news or rumors).  When SPY option prices get as low as they are today, we might want to expand our coverage to some individual stocks which have short-term unusual circumstances that result in higher option prices and implied volatility (IV) advantages (where IV is lower for the long side of spreads than it is for the short side, so we are buying “cheaper” options and selling “more expensive” options).

Does this mean that we can’t make money with SPY calendar spreads when option prices are at historic lows?  The answer is “no.”  Similar low option prices existed from 2005 – 2007 and we were able to generate an average of 50% gains each year.  Everything depends on what the actual volatility ends up being. Bottom line, the ultimate success of any calendar spread strategy depends on the difference between IV and the actual volatility of the underlying stock or index. 

 Terry

Alternative Options Strategies When VIX is Low

One serious alternative option strategy in a time of low option prices is to find a time or situation when short-term options are selling for higher prices (IV) than longer-term options are selling for.  One such instance comes up just prior to a company’s earnings announcement.  Since there usually is some uncertainty about what earnings (and guidance, and sales levels, and margin levels, etc.) will be, the options that expire just after the earnings announcement usually spike higher until after the announcement is made.

Last week, on Thursday, the day before Wells Fargo announced earnings, I recommended buying a calendar and diagonal spread - How to Play the Wells Fargo Earnings Announcement for Tomorrow.

I closed out my spreads the next day for a 44% gain after commissions.  If I had been a little more patient I could have made more (several subscribers wrote in to say they had made 60% - 68% for the day).  But I saw a nice gain for the day and decided to take it rather than hoping for more.

I will keep my eye open for other pre-earnings announcement plays where the IV of the short-term options moves much higher than the longer-term options, and will pass them along on occasion (paying subscribers will get all the recommendations, of course).

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Any questions?   I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here.  Why wait any longer to make this important investment in yourself?

I look forward to having you on board, and to prospering with you.

Terry

I was stuck in a meeting and had to wait 2 hours before I could close out my positions, but was lucky to make some further gains, which worked to a net gain after commissions of $1110.

That's a 68% gain in an overnight trade - extremely good!

Thanks for an excellent trade recommendation!

Anders (received January 11, 2013)

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Sincerely,
Dr. Terry Allen
Terry's Tips