VIX Not Too Low to Sell Premium

 | Jun 27, 2014 | 11:00 AM EDT  | Comments
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Stock quotes in this article:

amzn

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googl

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FB

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twtr

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nflx

We have spoken in the past about the virtues of selling premium. Certainly in a low-volatility environment with cheap options, it seems as though we are not getting the bang for our buck as sellers. But what compensates for the lack of premium is a vote of confidence in the direction and the trend of the markets.

A low-volatility reading implies much lower expectations of a big move up or down, and lately it has been that way with very narrow price ranges all day long. Just this week the S&P futures traded within the smallest range in many years (only 4 handles).

So, if the expectation is for little volatility on the horizon, then we can have confidence that the market will continue in the direction it has been heading -- and mostly that has been up. We often see volatility deflate in front of a holiday, and this is usually a great time to take advantage of time decay. Options are a wasting asset, and as such, the clock is always ticking.

Next week is a short week, with Friday being the holiday (July 4). With three days off, sellers have time decay working for them. We can sell call spreads or put spreads (my favorite tactic to define risk). Hence, we would look to take advantage by selling premium that expires after the July 4. There are weekly options that expire on the July 11 and the monthly July expiration (July 18). This is a great way to let the clock work in your favor. Even with VIX settling around 11.5% currently, this could go sideways until next week and then come down dramatically, as it did prior to Good Friday.

I will look to some of the usual suspects, normally selling put spreads (defining my risk in case I am wrong). The names I will consider include selling spreads on include Amazon (AMZN), Google (GOOGL), Facebook (FB), Twitter (TWTR), Netflix (NFLX) and some other names with good premium. The objective is to capture the premium, let the stock rise above the short strike and then decide whether to close out early or let it expire worthless (which is always a risk when you keep a position live).


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