In front of today’s FOMC rate decision, that all-important attached policy statement and Q & A from Fed Chief Bernanke, credit markets still in turmoil, investors still on edge and the financial sector (XLF) amongst the hardest hit in recent days; BofA’s (BAC) implied volatility is some of the stiffest in the market.
It may still not match the height of the credit crisis circa 2008 – 2009, but with shares of BAC at $7 the ATM August Weeklys 7 straddle with just three days until expiration is priced for $0.75 on implieds of about 144%.
Premiums are quite steep but already under pressure from this morning’s reading of 170% and $0.87 with shares also squarely at the strike. The pricing of risk compares to quickly elevated statistical readings of 88% and 48% (20 and 90 day) which prior to the last couple days of invigorated price action, were in the low 30s and mid 20s.
Of course, so close to expiration, today’s intraday pinch on the straddle premium is due more to theta than anything on this 100% extrinsically-priced non-directional position. Shown below in Figure 1 is an illustrated 10 lot of the “mostly” open risk strategy.
Figure 1: BofA (BAC) 10 x ATM Aug Weeklys 7 Short Straddle
There’s an old Wall Street saying or at least one popular on the options floors that states “Sell 100 and Buy 200.” The gist of the adage is temporarily frenzied and rich premiums typically lead to opportunity for premium sellers and strategies such as the short straddle; but only up to a certain point. On those occasions where call and put prices continue to spike, such as through the 200% IV level; well, it’s time to cover for a likely loss but for an equally good reason.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
