VIX Graphs May 21, 2010

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

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4 Responses to VIX Graphs May 21, 2010

  1. Andy 05/23/2010 at 12:58 AM #

    Mark, hope you can explain this to me!
    A month or two back I had sold some May RUT put spreads at 640-650. I decided to just let them go to expiration and when I checked my account today it said I own May 640 puts that are worth zero and on friday night my account automatically closed the 650 short puts at 20 dollars?!! That means RUT was 630 when the may options were exercised but if that’s the case why didn’t my 640 puts get exercised nor do I recall RUT ever going that low. What happened, I thought european style options are automatically resolved or did I make a major mistake by not exercising the 640 puts?

  2. Mark Wolfinger 05/23/2010 at 9:02 AM #

    Relax. You made no mistake (other than holding to the bitter end).
    I note from the timing of your comment that you checked very early Sunday morning. By now (8 hours later), your account should be correct. And if it’s not, this is one of those mistakes that can be fixed.
    These ITM options are automatically exercised, so if some major error occurred, the broker, or the OCC, owes you the cash. But I cannot imagine that the problem still exists.
    Why did it happen? My guess is that not all exercises and assignments are completed in a single ‘flash.’ There is a sequential process and you checked your account before the process was completed.

  3. Mike 05/24/2010 at 7:42 AM #

    I have one question for you.
    How or where do I find covered calls which give good premium?

  4. Mark Wolfinger 05/24/2010 at 7:58 AM #

    That information is available – mostly from people who sell that information for a fee.
    I suggest that you proceed differently. Covered call writing can be risky when markets decline. Thus, it’s important to only own stock of companies that you truly want to own.
    Build a list of stocks by carefully deciding which companies are worth owning – a difficult task.
    Choosing stocks based on the option premium is not a sound investing method. Stocks that have high premium do so for a reason: they are volatile stocks and risky to own.
    You are free to invest that way, but I am not willing to help you take on too much risk.