Monday, December 21, 2009

Buying Cheap Put Options While Volatility Is Low

In today's Growth Stock Wire, trader extraordinaire Jeff Clark takes a look at the use of Bollinger Bands in making trading decisions.

Bollinger Bands don't tell you which direction the stock is headed, but as the bands pinch closer together, they're warning a large move is on the way.

This is the best time to be a buyer of options. Call and put options are relatively cheap because the implied volatility is so low.

As volatility expands, the stock is using up the stored energy. When the Bollinger Bands spread abnormally far apart, they're warning the stock is headed for a period of consolidation.

Today, Clark points out, the market's Bollinger Bands are as tight as they've been all year. Which makes sense, as the broader market has been range trading for quite a bit.

So, the next move may be a very sharp one. It may not be a bad time to pick up some cheap puts.

4 comments:

Esoterictrader said...

Bought some Jan SPY puts today. With volatility so low, any increased activity will likely increase implied volatility and net a decent delta simply from that change.

Brett Owens said...

Nice trade! Here's to a post-holiday market throw up - cheers!

White Bear said...

1. From Jsmineset, the trader Dan commented on how the COT commericals are net short the USD at a bigger amount than during the USD spike in 2008. Given that the USD was just up from 74 to its current 77 and the COT commericals are already at its all-time high, I just don't see how the USD can muster further strength upward.

2. Just after your comment, financials have been up the last few days. XLF back to 15. KBW above 27. GS up 10 the last 2 days.

Now, would you change your outlook that inflation is taking a rest?

Peehu Sharma said...

Gold December and Platinum October contracts are up 0.3 percent each at $ 1,331 an ounce and $ 1,079.40, respectively.
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