Seasonal Analysis for Selecting Options

11/08/2013 6:00 am EST

Focus: OPTIONS

John Person

Founder and President, John Person, Inc.

In terms of deciding which options to buy and which to sell, John Person uses seasonal analysis, as well as several other strategies, before making any selection.

TIM BOURQUIN:  My guest today is John Person.  We are talking about selecting options.  If you look at an option today and there is so many there, what do you do to kind of narrow it down to find out which ones to buy or sell?  John, give us some ideas here just from the beginning here or the foundation, how, there are some many options on so many products first of all, but then how do you decide what to buy or sell?

JOHN PERSON:  Well I think the first thing is to select the market direction or have an idea if you think the market is going up, down or sideways.  Most people think that just because the markets not going to go anywhere that is a directional call; you are making an assumption that the market is not going to move, so therefore, people would do a specific strategy maybe they are looking at an iron condor, but for the most part my style of analysis, I’ve always applied seasonal analysis and looking at what trends, supply and demand functions, will influence a particular sector or a commodity and then with that looking with seasonal analysis, it also tells me what the potential duration of that strength or weakness will last with that.  That’s where it helps me to select the time duration of my option expiration, so there are other factors involved with selecting the right option strategy and two of the most important variables, the first thing I look at is implied volatility.  Are the options expensive relative or less expensive relative to historic volatility?  So that’s one of the things that will help you nail down whether it’s best to buy, look for a buying option strategy or a selling or writing option strategy. 

TIM BOURQUIN:  All right now, so with historical volatility being so low as it is right now, does that necessarily mean that broadly over broad market you are looking to buy options at this time of year, and we’re talking about maybe the last part of 2013 here. 

JOHN PERSON:  Sure, and what you’re referring to, that low volatility was in the overall stock indices, but when you nail it down to individual stocks, you take like a Priceline, stock symbol PCLN, which at the early onset of October as we were coming through a little mild correction in the S&P 500, Priceline was racing up to new highs, so the implied volatility compared to historic volatility was in the upper 70% quadrants of Priceline.  So the important thing is not to misunderstand that individual stocks may not be moving in tandem with the underlying index, so I think that is another focus that investors need to make.  When we take a look at probably one of the most popular indicators for volatility, the VIX, and the VIX is on a measurement of implied volatility on the options on the S&P 500, so most people look at the VIX as the fear gauge if it has a high level, say over 20 to 40 range, then we assume that there is a huge demand for options and volatilities increased as the stock market is going down; there’s a rush of demand for protection, and when implied volatility is lower there is a less demand, generally we see the stock market rise.  Interestingly enough as the stock market has pressed to new highs in 2013, the VIX, the volatility index, has been at the lower end of the spectrum, so it is important to look at your volatility.  It is also important to look at individual stocks and sectors when it relates to volatility. 

TIM BOURQUIN:  John, thanks for your time. 

JOHN PERSON:  Thanks a lot Tim. 

TIM BOURQUIN:  You’re watching the moneyshow.com video network. 

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