T. Rowe Options: Lesson in Volatility

By way of example, the April 25 puts currently have an implied volatility of 84. At the time of our report, the implied volatility of that $3.70 price was 107. That 23-point decline in volatility is why the puts are down nearly a dollar despite the stock being down.

The strangle buyer today indicates that someone is still willing to bet that TROW could be volatile between now and February expiration. Based on past history, earnings are likely to be the end of January or beginning of February, so this February strangle will be the front month at the time of earnings. But it is the decline in price of the April options that tells an interesting story of how implied volatility declines have not only occurred in the S&P 500 as evidenced by the VIX, but also in single stocks as well. Investors should be wary of cautionary tales such as this when they are thinking of purchasing options in these volatile times.

Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.