We had much angst in the market with the meltdown in the financial system and many options investors stayed on the sidelines. And while the angst is still there for many options investors, some are making some shrewd trades.
Could it be that we are starting to see some signs of a continued decline in the VIX as evidenced by option sellers in the single stocks? Two trades of note give a look into ways that investors are taking advantage of heightened volatility to sell contracts and take in some income.
First, we saw a seller Monday afternoon of long-term equity anticipation securities, or LEAP, options in
. This investor unloaded more than 7,500 of the IAC/InterActiveCorp January 2010 12.5-22.5 strangles, with the stock trading $15.39. The seller collected $2.55, an implied volatility of around 46. Open interest at the time was just 310 in the puts and 349 in the calls.
Tuesday, we saw that same straddle get sold again, 7,500 more times for $2.45 versus the stock at $16.85. That equates to an implied volatility of about 43.5. The seller could be taking advantage of two things: The first is that since Aug. 21, 2008, when IAC spun off HSN, Ticketmaster, tree.com, and Interval leisure group, the shares have been between $17 and $14.
The second factor that this investor could be betting on is a mean reversion in the implied volatilities. For the last 63 days, shares of IAC/InterActiveCorp have realized a 63 volatility. But prior to this falls heightened volatility, the stock was hard pressed to realize more than a 35 volatility.
A second trade that demonstrates how investors are starting to sell options again could be seen today in
A customer sold 3,750 of the April 30 calls for $1.15 in the first hour of trading, with the stock around $23.01 a share. That implies a 57.5 volatility between now and April expiration.
This might be a long holder trying to take in some income. As with IAC/InterActiveCorp, despite very violent moves for the last 62 trading days -- where Lowes realized and 82 volatility -- prior to the panic of this autumn, Lowes rarely realized more than a 40 volatility. Further, the stock has traded in a range of $20 to $25 a share for more than a year now.
So there we have it. All of us are aware that the VIX has now been above 50 for more than two full months. But trades like these suggest that some investors out there are beginning to dip their toes back in the pool to take advantage of option premiums that have risk reward levels rarely seen.
Selling options is not a strategy for the faint of heart. But these trades in Lowes and IAC/InterActiveCorp demonstrate how some investors with firm convictions about the ranges their stocks will have are taking advantage of high premium levels to put some income in their portfolios.
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.