When Options Don't Work

SanDisk's pummeled I.V. is a case study in the downside.
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This column was originally published on RealMoney on Jan. 27 at 10:06 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

I cannot stress enough how important it is to take implied volatility into account when placing a directional bet. As I mentioned below the I.V.in

SanDisk

(SNDK)

options was trading near 100% yesterday. This morning, with the stock is down $4.50 to $66, the I.V. is down to around 50%. The result is that the Feb. $65 puts are trading

down

some $2 to $2.85. And this isn't just out-of the-money strikes. The Feb. $70 put is also trading lower by $1.20 to $5.80, meaning if you bought these puts looking for a sell-off you were technically right but the reality is you were very wrong(ed).

On the other hand

Broadcom's

(BRCM)

I.V. is in fact hanging tough and holding above 40% meaning buying calls on that named would have "worked."

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback;

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