At any given time, over 50% of all options are overpriced. This is why most traders like selling premium. At the same time another 20-30 are typically fairly priced with another 20-30% being underpriced. This means that while it is likely that an option is overpriced, its not always the case. Take AAPL for instance. Take a look at how the underlying has been moving relative to the price of its overall options:
This is a white paper Authored by Russell Rhoads of the CBOE and Mark Sebastian Founder of Optoin Pit discussing how one can consistently trade the CBOE PutWrite index and outperform the SPX Total Return index.
The NFP number was pretty good by most accounts. If we did not have the Euro issues, one would almost think the USA was getting back in the swing. Lower deficits, low rates with job and wage growth is looking pretty good right now. The problem is almost too good.
While the general media might be excited that the DJIA is now up on the year, I think the more concerning subject should be that IV is still massively up on the year as well. In fact, looking at the SPX one can clearly see that it has essentially done NOTHING, yet IV30 (Livevol's VIX) has been going up and up and up.
The OIV (the WTI VIX) settled at a new recent high at over 64%. That is a MASSIVE move and points toward something really unsettling going on in the WTI contract. The last few days the commodity has started to move around again, and I believe there is a chance that the underlying could really move over the next few weeks. The question is which direction.
One of the reasons that the market has been so tough for many retail traders is that the volatility has come from a strange place. Take a look at this chart where i have connected down moves and up moves.
LivevolX (r) www.livevol.com
While we all know the VIX is the best known measure of SPX volatility, there are some different ways of looking at IV. Livevol has an IV30 measure that I think tracks VIX quite well, but puts a little less ephasis on put prices as the VIX. Since we use LivevolX extensively, this means we look at IV30 alot. One thing we always look for is when realized volatility in the last month passes IV30. We saw that happen today:
Stocks ended the week in an ugly fashion with the SPX down about 1.25%. There was enough in the bad sentiment train with Greece, Euro Area deflation, poor GDP and Russia annexing another part of the Ukraine. Not the stuff of rising markets with earnings only tepid this season. So far most companies that are reporting are doing better than estimates. Not 80% to blow it out but just ok.
On the heals of last nights complete and utter annihalation of the FB straddle I thought it would be interesting to follow a few of the other big earnings plays. AMZN, which had a straddle that was below the average straddle price over the last year, saw its straddle go out 23 dollars. As I write this the stock is up 36 dollars from the close, and really, if one was trading the straddle this morning, the 300.00 straddle went out a massive 24 dollar winner, a full 100% return on the straddle bet. Increadible.