With two weeks remaining before July expiration, options activity has slowed to a crawl. But beneath the quiet surface, volatility has climbed higher as corporate America unleashed a slew of earnings warnings.
Historically, the week of the
Fourth of July holiday has been marked by light trading volume and increased volatility. Heading into the weekend, the daily option volume average stands at 1,373,781 contracts, compared with the 2001 year-to-date average of 3,323,685 contracts.
Chicago Board Options Exchange Volatility Index
, which essentially gauges investor fear in the market, is up 12% this week. Since March 22 -- the day the S&P 500 reached its low for the year -- the VIX has dropped 35% from 39.70 to 22.72.
volatility were to begin to rise sharply, that would be bearish," says Larry McMillan, head of
says. However, "the overall trend of volatility is still down. In that regard, then, volatility is still categorized as bullish."
Implied volatility will increase during periods of uncertainty such as earnings season or chatter about a possible merger. As a result of the recent volatility, option premiums have come down significantly, creating some good trading opportunities for investors, according to McMillan.
He contends that there are over 900 stocks whose options can be considered "cheap" right now. Among these are
Royal Caribbean Cruises
As for index options, there are a number of cheapies for volatility traders out there too. However, when dealing with options an investor should always be wary of selling naked -- that is, to sell an option without having an offsetting position in the underlying stock. So before you go naked be sure to read
Getting Naked by
Selling Puts Naked Stripped This Investor of Most of His Assets by
Dr. Don Taylor