Is It Time to Buy Straddles?

Focus: OPTIONS

Lawrence McMillan Image Lawrence McMillan Founder and President, McMillan Analysis Corporation

With the VIX flirting with six-year lows, eventually it has to go up, and Larry McMillan of McMillan Analysis Corporation offers a trade idea based on this scenario.

Currently, option implied volatilities are near extreme lows, by many measures. We have seen that VIX got down to nearly 12. It has been below 10 in the past, though, so it is not at historically low levels. However, many stocks have options that have never been cheaper. For example, IBM’s composite implied volatility (VIX) has been hovering near 10 lately. It has never had cheaper options in the nearly 40 years that listed options have been traded on the stock.

Over 50% of all stocks have options that are in the 5th percentile of implied volatility or lower. This includes nearly every large-cap stock there is (except for something like McGraw-Hill (MHP), which is being sued by the Federal Government).

Other potentially volatile stocks that are in the 0th percentile of implied volatility (as IBM is), include SNDK, SOHU, WYNN, CAT, TSN, LCC, MUR, ASH, IR, HUM, RIG, NDAQ, and POT.

It is highly likely that straddle purchases on these stocks will be profitable at some point in the relatively near future.