Over the past several weeks, many market-moving events -- heavy mutual fund redemptions, the Fed's weak view of the economy and the Aug. 14 certification deadline -- have had an impact on volatility. The ease with which the Chicago Board Options Exchange Volatility Index, or VIX, has been gyrating up and down this summer is unprecedented. Wild market swings have caused the VIX to move at least 30% four times over the past 45 days.
The Aug. 14 certification deadline, when CEOs were required to attest to their financial statements, was met with only a handful of revisions, and that seems to have alleviated some of the market's uncertainty. Investors feel relieved because they don't own the next potential disaster. The compression that was keeping stock prices down has been released, and investors have been subsequently moving back into the market. For example, Millennium Pharmaceuticals ( MLNM) is a good candidate for the strangle combination. At a level of roughly $14.25, you could sell a September 12.5-15 strangle against long stock for a credit of around $1.40. If Millennium is unchanged at expiration, the return is 10%. If it goes out at $15 or higher, the return is 15%. That's not bad for a one-month trade. The break-even point at expiration on the downside is $12.85. The stock looks enticing at these levels, but it's not expected to have any dramatic news in the next 30 days. As with any trade, you need to decide where you want your risk to reside. By choosing the strangle combination, you may be sacrificing some significant near-term upside potential for a more likely attractive return with more downside cushion.