There is no doubt that volatility has returned to the markets, and the graph below doesn't tell the whole story. Intraday volatility has shown some remarkable swings.
Excluding 1987 and 2008, this week VIX visited a level seldom seen (>45). There is definitely a lot of fear and investors are grabbing options to protect themselves – or to speculate on a big market move. It's amazing to me that people seem to use option strategies to protect their portfolios only when everyone wants to buy options. They choose to own insurance when that insurance is costly.
An expiration story
Last Thursday afternoon, the day before settlement prices were calculated, Jason posed this question:
I'm short the May 620/630 RUT put spread. Currently trading at 651. Settlement is
tomorrow. Settlement always scares me since getting sideswiped in March.
Could it settle more than 25 points down from close?
I told him that yes, it could, and suggested that he exit the trade. In fact, after he wrote, the market declined further and RUT closed for the day at 640.
I held my 620/30's open. (Never again). Got busy, came home to
closing of 640. Lesson learned. Sleepless night ensued.
RUT settlement (ticker: RLS) finally came out at 629.95. Bullet avoided.
Restless night coupled with having to wait until after the market closed for the day (Friday) to see the results. Not worth it. And Jason agrees – I hope that 'never again' quote becomes reality.
"Your chapter on Equivalent Positions was the clearest explanation that I have ever read. I
learned a great deal – and it made sense! Thank you for making the
effort to put out such a fine book." DS