Is it the time to buy a straddle?

Discussion in 'Options' started by Financial Saint, Mar 17, 2010.

  1. Today the VIX have hit the support of 16 and change. In the recent 12 months, every time the VIX have hit a new low, they went up 50 to 100%.

    So do you think it is the time to buy a straddle?
  2. No, straddle requires large volatility, like earning reports.
  3. For me, buying a straddle or strangle requires a low IV environment where the IV is likely to rise before the straddle nears expiration. Also, an environment where stocks are still moving but IV may be low due to "boring" markets and/or no fear in the markets.

    I do think we may be at that point with many stocks. CLF would have been a good straddle a few weeks back as it was at $55 or so and climbed surely enough to $65 - the IV didn't rise though. I choose to do an RCC on it as I noted in another thread, but you can see the straddle part of the RCC was the profitable side. I have also seen for example GS rise from 155 to 175 so slowly and surely that no-one even seems to have noticed.

    Personally, I doubt market IVs will remain this low for too long with items looming such as Financial earnings, Health care bill, any other business/political issue that may come up, etc.

    Of course, you have to pick the correct straddle and manage your risk properly in any scenario.

  4. Is low VIX a good indicator of rampant "animal spirit" meaning this uptrend will keep going for quite sometime?
  5. The VIX isn't nearly as important as the IV of the stock you're looking to straddle. As others in the thread have said, you want to buy low IV in anticipation of selling high IV or in anticipation of a sudden large movement. But the key is a relatively low IV for that stock.

    Keep in mind that most of the time the ultimate movement of a stock's price from an earnings report is uncannily priced into the options as IV. The market frequently predicts the future volatility correctly.
  6. turkey, not quite sure what you mean by "animal spirit"? Are you saying happiness/excitement? I think the low VIX right now reflects the thought that a lot of risk seems to be out of the market - I should add that this thought may not be correct. Let's face it though, buying a stock in general "seems" less risky right now then for example in Nov 08 or Mar 09.

    That could change real quickly though if some real bad news came, a major market scandal, some unexpected bankruptcy, a sudden drop in big name stocks that was not easy to explain, etc.

    My point being I don't feel that a low VIX means that the markets will necessarily continue higher - it seems to mean that people expect the markets to remain fairly stable - of course, the "people" are often wrong.

    We have barely had a DOW down 100 or 200 and NASDAQ down 50+ day in a long, long time that I can remember - when that next happens, I would expect VIX to rise from wherever it is at that time - the question is will the market continue slowly and quietly upwards, or be shaken by a sudden unexpected jolt of some type and rocket the VIX up? No one knows for sure it seems.

  7. "Animal spirit" = complacency or people more willing to buy the dips because they think it's less risky to long stocks.