After about 20-plus years in the financial markets I think I have seen just about everything.
Seeing everything might not be accurate but more like watching similar things happen over and over again. One thing about trading options is timing and chance is part of the game. Market crashes, industry bubbles, Acts of God (Katrina and now Sandy), a couple of liquidity implosions and two wars are a collection of the events I have witnessed through the lens of the option markets.
SOME PERSPECTIVE
My first month as an exchange member the U.S. and coalition forces invaded Iraq (the first time). The day before the U.S. went in the sentiment was so bad all traders could see was the downside and the fear of the unknown (a possible poison gas attack was very real to the troops). When the U.S. went in the Dow rocketed 100+ points (which at the time was a lot on a 2300 Dow) and market volatility collapsed. Within weeks a stock like AT&T (T) was trading at 9% volatility and the relief rally was underway.
WHEN THE MARKET OPENS
That brings us to the likely opening tomorrow. Implied volatility was firm going into Friday and it will be hard for it to hold up on Wednesday.
On balance this week, the calamity of Sandy aside, the news was positive with better home sales, car sales and less unpleasant earnings surprises. If things were truly ugly the short session futures would have traded much lower. There is the inevitable decline in option prices once the market perception about volatility withers.
STILL EYEING THE ELECTION
While there is tragic damage after Sandy the markets will start to re-price and discount the future. The big event on the horizon is the election but it is tough to make a case for heavy movement until then. Wednesday is not a day to load up on options and we can well see the Volatility Index (VIX) decline.
BIGGEST IMPACT
Most big weather calamities hit the property/causality insurers first. Those names all could trade lower on Wednesday morning. It also is a good opportunity to jump into those names, especially if there is any pop in implied volatility. Names like Allstate (ALL) hit near term lows around Katrina in 2005 and became nice put spread writing stocks until the financial crisis three years later. The big weather gives these companies room to re-evaluate risk and raise pricing and this hurricane should be no different.
CHANCE WAS ON YOUR SIDE
For those that were short option premium, sellers got a rare four-day weekend. Chance was on your side. When the market opens tomorrow you will happily discover what positive theta is all about.
