For the options trader looking to buy cheap contracts, now might be the time to do it, considering how options prices have come down from recent sky-high levels.
Buying options that are cheap and hoping to sell them later for a profit can be a rewarding game. It should be noted, however, that what is known as "trading volatility" is also extremely risky. But for investors using options as a proxy for long or short positions on stocks, the current climate might provide a good entry point.
What's unusual is prices have gotten soft now, in a time of the year when uncertainty around specific stocks traditionally rose because of earnings season, which normally has driven options premiums higher. This, some traders said, may suggest that investors are becoming complacent.
A big reason options prices are low compared to where they have been recently is because implied volatility in options -- the market's general measure of uncertainty -- has dropped markedly, even in the midst of earnings season, options traders said.
Alan Goldstein of
Five Dollar Trading
in Chicago said overall, there hasn't been much action so far this week in the options that his firm trades, and that volume has been light even in the options on some companies that are reporting earnings this week. He noted volume in
was pretty sparse through midmorning, even though the company is reporting earnings Wednesday.
Goldstein said options prices overall were falling, in part, because options volume has been soft. With no huge demand from investors to buy options, prices decline. Even options on some stocks of companies slated to report earnings soon are showing notably low levels of implied volatility.
One options trader highlighted the cheap implied volatility levels on
AOL Time Warner
, to name a few. Qualcomm and JDS Uniphase are expected to post earnings Thursday, while AOL Time Warner is expected to report earnings Jan. 31.
Meanwhile, although overall volume in the options market may not be as record-breaking this week as it was late last week, there was some action that caught traders' attention.
One of those trades was a sizable play on
put options, the kind of contract that allows an investor to sell shares of a company at a preset price by a certain date.
This morning, an investor bought 15,000 (representing control over 1.5 million shares of Microsoft stock) Microsoft March 60 puts as Microsoft's stock slipped 44 cents to $59.69.
The volume, however, didn't result in a big move in the price of those puts, which fell 1/8 ($12.50) to 4 ($400) on the
Investors buy put options to either speculate on further downside on a stock or index, or as insurance against a long position in the underlying security. That means the investor who bought those Microsoft puts is either expecting the stock to be trading below $60 by the third Friday in March (when the options expire), or owns a stock position and is concerned it may get weaker and is using the options to hedge.
Today is the first day traders will be able to get quotes on a volatility index for the Nasdaq market. On Monday, the
Chicago Board Options Exchange
announced it would launch a new volatility index to estimate the fear in the Nasdaq market through the prices of options on the
Until now, traders could only look at the
CBOE Volatility Index
, or VIX, which is based on
(OEX) options. (
took a look at the VXN in a story
CBOE Nasdaq Market Volatility Index
is based on the Nasdaq 100 options, it makes the index more of a pure read on tech stocks, since only a handful of stocks that are in the Nasdaq 100 are also in the S&P 100.
The VXN slid 4.92% to 62.75 during its inaugural meeting.
The nation's options exchanges and several individual exchanges reported that single-session volume records were set on Friday, the January equity and index options expiration day.
Options Clearing Corp.
said a new options volume record was set for the second consecutive session Friday, when 6.172 million contracts changed hands, blasting the previous record of 5.291 million contracts, which was set Thursday.
The Chicago Board Options Exchange, the largest options exchange, said 2.502 million contracts were traded on Friday, a new record for single-day total volume. That figure also marks the first time that single-day volume surpassed the 2.5 million contract mark at the CBOE. The previous record was 2.392 million contracts, which was set April 14, 2000.
American Stock Exchange
, the second-largest options exchange, said it set a record for the number of total options contracts traded, 1.734 million, breaking its previous record of 1.502 million contracts, which was set Thursday.
Philadelphia Stock Exchange
, which set a volume record Thursday, broke it on Friday. The PHLX said 853,803 equity and index options contracts traded, breaking Thursday's volume total of 732,251 contracts.