As 2012 rapidly comes to a close, it’s only natural to review the notable events of the year, and Rocky White of Schaeffer’s Investment Research looks back on winning straddle plays this year.
The average CBOE Volatility Index (VIX) reading in 2012 is at 17.5. This will be the first year since 2007 that it averaged below 20, and the lower VIX is an indication that option prices are falling. Lower option prices suggest that stocks do not have to make such big moves for the options to be profitable. It made me curious if there were any stocks that were benefiting from the lower option prices. This week, I'm looking back over the past year to see which stocks had options that were most consistently underpriced.
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A Simple Volatility Strategy: One strategy for profiting from high volatility is the long straddle. This consists of buying a call option and a put option on a single underlying stock or index with the same strike price and expiration date. While the position can profit whether the stock goes up or down, the stock's move must be big enough to offset both premiums paid.
Good Straddle Plays This Year: To find some good straddle plays, I looked at each stock in our database and found what kind of returns you would have obtained had you blindly bought an at-the-money straddle one month before each expiration so far this year. Note that not all of the stocks will have 11 returns, because I didn't consider a straddle if the bid/ask spreads were too wide.
Going by the average straddle return, the table below shows the top 20 stocks for straddle plays so far in 2012 (using this particular method). I also show the number of trades that were positive, along with the number that would have at least doubled in price. The last two columns show how many of those positive straddle trades would have been profitable due to the call option (in other words, because the stock increased in price) and how many were profitable due to the put option (because the stock fell). Essentially, this group of stocks has been much more volatile this year than what option players priced in.
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Here's another list of stocks using the same method and same data. This group has had the greatest number of positive returns. Five stocks have seen nine of 11 positive straddle returns, including big banks Citigroup (C) and Bank of America (BAC). Six more stocks had eight positive returns. Valero Energy (VLO) is interesting; even though eight of 11 were positive, it averaged a slightly negative return.
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Finally, the list below shows the stocks that had the greatest number of straddles, double in value. (VLO, above, proves you cannot simply count on a consistently positive return if those returns are small compared to the losing trades.)
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The seven stocks above showed four doubles among their monthly straddles. Note that on this list, the smallest average return is 24%.
By Rocky White, Senior Quantitative Analyst, Schaeffer’s Investment Research
