Last week I recommended buying a calendar spread on SVXY to take advantage of the extremely high option prices for the weekly options (at-the-money option prices had more than doubled over the past two weeks). The stock managed to skyrocket over 7% for the week and caused the calendar spread to incur a loss. When you sell a calendar spread, you want the stock to be trading very close to the strike price when the short options expire. When the underlying stock makes a big move in either direction, you generally lose money on these spreads, just as we did last week.
Ironically, this spread was the only losing portfolio out of the 10 portfolios we carry out at Terry’s Tips (ok, one other portfolio lost a couple of dollars, but 8 others gained an average of almost 5% for the week). The only losing spread was the one I told the free newsletter subscribers about. Sorry. I’ll try to do better next time.
Maybe it’s Time to Buy Options Rather Than Sell Them:
Option prices are almost ridiculously low. The most popular measure of option prices is VIX, the so-called “fear index” which measures option prices on SPY (essentially what most people consider “the” market). Last week VIX fell almost 11% to end up below 11. The historical mean is over 20, so this is an unprecedented low value.
When we sell calendar or diagonal spreads at Terry’s Tips, we are essentially selling options to take advantage of the short-term faster-decaying options. Rather than using stock as collateral for selling short-term options we use longer-term options because they tie up less cash.
With option prices currently so low, maybe it is a time to reverse this strategy and buy options rather than selling them. On Friday, in the portfolio that that lost money on the SVXY calendar spread, we bought at-the-money calls on SPY for $1.36. It seems highly likely that the stock will move higher by $1.50 or more at some point in the next 3 weeks and make this a winning trade (SPY rose $1.81 last week, for example).
With option prices generally low across the board and the stock market chugging consistently higher in spite of the turmoil in Iraq, maybe this would be a good time to buy a call option on your favorite stock. Just a thought.