This complimentary article from Options Profits was originally published on January 17 at 10:23am EST. Don't risk missing over 40 options trade ideas every week and exclusive commentary from over 10 experts. Click here for more information and a 14-Day Free Trial.
A colleague mentioned it seemed like a 'slow' start to the year in terms of news and options action. He may have a point since options volume has averaged about 15.7 million contracts per day so far this year, but that includes a healthy dose of ex-dividend trading, with Verizon (VZ) and AT&T (T) totaling 11 million contracts on January 5. Taking out that flow knocks that average down to 13.3 million contracts -- relatively light action for the industry considering how the memory of the astounding 40 million contract day back in August is still fresh in many professional's minds.
Adding to the sense of quiet is the CBOE Volatility Index (VIX) back in the 20 zone. While ultra-high implied vols tend to scare off many market participants, the same is true about very low premium levels and modest realized market swings. Quiet markets present fewer opportunities for trades, and tend to result in the fair prices that many traders have no axe (desired position) to trade against.
While volume may be off to a relatively light start, I'd say we may be returning to a more 'normal' and less macro-event dominated market for 2012, and this is good news for stock pickers and option traders who don't enjoy overnight 3% moves in the futures whipping their positions around. In crises, global factors have the power to instantly add or remove trillions of dollars in value from equity markets, and well-researched trade ideas can get lost in the noise of panic selling and buying, where price is not a major factor in where capital will flow to. ETF traders were beneficiaries of such activity over the past few years- when correlation among securities shot up to levels where single-stock selection was irrelevant and ETFs were an optimal product for quick portfolio adjustments. In fact, just back in August when the broad market shed some 17% in a few weeks and VIX shot up to 47, ETF option market share actually eclipsed single stock for the first time ever- with ETF flow making up about 45% of the option volume- way above the 20 to 30% levels seen thru most of 2008-2009. As correlations have come back to earth (one measure of implied correlation surpassed 100% last year), ETF share has slid a bit and single stock traders are seeing new signs of life in their markets.
I believe that the general volumes and volatility levels seen today are ideal for customer trading, as professionals 'hungry' for volume make very tight markets and retail traders experience very little friction getting in and out of trades. Premium sellers will have to be extra cautious, since the reward for their risk is lower than it was last year, but for buyers and spread traders there are plenty of opportunities.
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