by SP Joe

As option traders we must always be aware of the various factors that affect options.  A lot more so than regular stock traders.  One thing we must pay attention to is volatility and what it is doing to options.  Simply, we will want to sell “expensive” options and buy “cheap” options.  Now the terms expensive and cheap are relative and don’t mean much if we don’t say what they are relative to.

In this case we will say options are cheap when volatility is lower than normal and options are expensive when volatility is higher than normal.  Google (GOOG) has been on a nice little run up as of late.


This run up along with the general market has dropped GOOG volatility to 52 week lows.  Thanks to the CBOE we now have VXGOG to look at which is the volatility of Google.



Looking at the volatility we see it hovering around the lower 20s.  We can also see the average volatility run around the higher 20s.

So what do we do here? Buy calls? Buy puts? Something else?  The one thing we know is that volatility is low.  We still have no idea if the price is going to go up or down.  Therefore, we want to avoid the puts and calls and focus on volatility plays.  There are several volatility plays but the one I like here is the straddle.



The long straddle is used when you expect a large movement but unsure of which direction.  It is also a great play to use when we are looking for volatility to expand.

The Trade
The trade we are looking at here is the September GOOG 640 Straddle.  



Looks like we have a 35 debit pushing our breakeven spots at 605/675.  That is a move of 5% in either direction which is something Google should achieve in the next month.  Again, we are not banking on the move as much as the uptick in volatility.  We get a big move, say +10%, in volatility we can go ahead and close out the trade.

Still not sure about the trade don’t take a large position stick with a 1 lot to get a feel for how it works.

by SP Joe

CBOE (Chicago Board of Option Exchange) has done it again and created new option products.  Usually I am a fan of their work especially with the formation of the weekly options.  The weeklys were a plus to the option world giving us a way to play stocks on a shorter term basis.  Obviously, everyone else agrees since weekly option volume continually picks up on the various stocks.  

Usually the weeklys would start on Thursday and expire the following Friday.  Pretty simple and straightforward mechanics.  Now, however, the CBOE have gone and taken the weeklys a step further.  Now the CBOE has created weekly options on the S&P 500 (SPX) that last for a month.  Yes, you read that right, weekly options that last a month.  Now instead of starting on a Thursday they will start and last for 30 days.  

So what is my beef with this?

• Now people can use these weeklys to hedge their portfolio.  The VIX does not take into account weekly options.  Are we going to lose VIX accuracy?
• Options are already a complex trading vehicle what happens when new traders get a hold of these?
• Where will we be able to find liquidity? Can we expect liquidity to fall off other major SPX products or will these not get the type of volume we can expect?

I am not a huge fan of this new change.  I would have rather seen a larger list of stocks get weekly options.  At the very least I would have prefered to see this change happen on the SPXPM options.  If you don’t already know SPXPM is options traded on the SPX but done electronically instead of pit traded.  This allows users to get better and tighter fills.  This also removes the uncertainty of SET.

Perhaps these new weeklys will go the way of the binary options.  We will see...