Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

To Hold or To Sell in a Holiday Week?


Several issues are making it quite a conundrum for options traders.


This week presents a bit of a conundrum for options traders as to whether owning or selling is the better play heading into a holiday weekend. A few of the issues that are at play against each other include:

  • The fact that light trading could leave stocks in a holding pattern, or that thin liquidity could lead to an increase in volatility.

  • One less trading day will cause a markdown of implied volatility on Friday to reflect the impact of this time decay, but that little thing called the "monthly jobs report" could provide a catalyst for a big price move.

  • Note that upon the return after Labor Day, there will just nine trading days in the September option cycle, meaning that the rate of theta, or time decay, will be accelerating as expiration approaches.

  • Third quarter earnings will still be two weeks away, meaning there will be fewer price-moving events.

  • There's a notion that when the "A" teams return to their trading desks, it will provoke price movement.

Give Me Credit

Any discussion about whether it's better to buy or sell premium must also take the current levels of implied volatility and how that compares to the real or historical volatility of the underlying. And of course, one must distinguish between individual stocks such as Apple (AAPL), for which the implied volatility is relatively low, against broad index products, such as NASDAQ 100 (QQQQ) in which IV is relatively high.

All that said, very generally speaking, I'd fall on the side of saying the next few weeks isn't a great time to own option premium. But I'll try to keep myself on the fence by also saying that I wouldn't want to be net short options.

So that means the most likely approach would be to use credit spreads, which will benefit from both a directional move or simply by time decay.

Pairing Off

One approach I'm considering would be to use some of the leveraged ETFs products Ultra S&P ProShares (SSO) and Ultra Bear S&P (SDS) paired against the more traditional Spyder Trust (SPY) to create a long straddle or strangle, which are essentially strategies that get long volatility, without paying out much premium.

For example one could sell a straddle in the SPY using the September $102 puts and $103 calls for a $3.90 net credit. Then those proceed could be used to buy puts and calls in the leveraged products. A similar straddle in the SSO and SDS would cost around $3.20, meaning that the whole position is done for around a $0.70 net credit. So if the market just stays in a narrow range for the next few weeks, you collect that premium.

If there's a large price swing, theoretically the long straddle in the leveraged products will have greater increase in value than the short straddle in the SPY if there's a major market move. I say "theoretically" because these leveraged products have some quirks and I don't track their benchmarks over longer time frames due to the fact that they're reset each day.

But I think that over the next two weeks, this strategy could work and resolve the question as to whether it's better to buy or be sold.

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos