As the markets sighed in relief last week over one fiscal cliff averted, with several more to go, the VIX registered its largest one-week drop ever of 39%. Option trader Greg Loehr of OptionsBuzz.com offers some ideas if the VIX rebounds or heads even lower.
The new year is being brought in with some of the lowest VIX levels in the past two years. Back on August 17, the VIX bottomed out at 13.3. Last Friday the low was 13.64. Granted, Friday readings are understated since option prices are lowered throughout the day to take into account the weekend’s time decay. Even so, the VIX closed Monday at 13.79.
This is about as low as the VIX is going to go. In last week’s Live Trading Session, we looked at what the options were saying about this.
So does this mean that it’s time to buy volatility? Not necessarily since the volatility can remain low for a very long time. Even though it doesn’t take much movement to overcome the daily theta, stagnant markets will bleed you slowly to death unless something happens. Without a pop in the volatility or a bigger-than-expected movement, simply buying options when the volatility is low isn’t necessarily a smart way to go.
This is where you can get into trouble with some of the old adages. For instance, the “buy low, sell high” rule needs further explanation. If you buy a stock low, and the stock doesn’t go higher, you’ve only lost the opportunity to have invested your money in another stock that could have gone up.
If however you buy options when they’re low, you can’t simply wait around for the options to go up in value because you’ll be fighting time decay—even if it’s only a little each day. So the rule needs to be amended to say something like: “Buy when it’s low, AND only when you think it’s going to go up.”
As an aside, the “sell” part of the old adage should say something like: “Sell when it’s high, AND you think it’s going lower.” Don’t just sell because it’s high because it can always go higher. Right, 2008 volatility sellers?
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