We have spoken in the past about the virtues of selling premium. Certainly in a low volatility environment when options are cheap it seems 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 SPX futures traded in the smallest range in many years (four handles).
Time Decay
So, if the expectation is for little volatility of the horizon then we can have confidence 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.
Holiday Week
Next week is a short week once again, much like we had recently 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 favored tactic to define risk). Hence, we would look to take advantage by selling premium that expires after the 4th. There are weekly options that expire on the 11th and the monthly July expiration (18th). 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 AMZN, GOOGL, FB, TWTR, NFLX and some other names with good premium. The tactic here 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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We will discuss this in more depth next week in a free webinar among other topics. Stop by the website and sign up.
