By Steve Papale
This is direct from the files of “I can’t make this stuff up”. Back in 2011 a British photographer was in Indonesia doing what photographers do – take pictures. It seemed a gorilla started to investigate, grabbed one of his cameras and cut out. When the photographer recovered the camera he found a selfie of the gorilla. Pretty good picture actually – better smile than I can get out of my kids most of the time. Anyway the pic has gone viral now and it seems there is a fight over who owns the copyrights. PETA apparently tried to argue that copyrights go the person (or in this case gorilla) who took the picture and hence the photographer has no rights to the selfie. Yep PETA spent money going to court saying the gorilla owned and controlled his selfie. Happy to report the gorilla lost in court. Planet of the Apes here we come.
To state the screaming obvious the stock markets have been selling off just a bit so far this year. So far, last week the SPX is down 122 points or about 6%. As expected the volatility was up as well with the VIX sitting near 27, up from 18.21 last Thursday, December 31.
As for why this is happening there may be many factors but as far as position and trade management it does not really matter. It is what it is. If you own stocks you are likely down money since as we know their performance is linear, meaning it is strictly tied to market direction. If you have options positions however things get a little blurry, depending on what you have on. Any sellers of options in this environment will likely see losses due to increased implied volatility. Even if you are short calls against stock it is likely you won’t realize the expected cushion from the short call on a stock that is down due to the increased IV. This is temporary (remember all extrinsic value must go to 0 at expiration) however if you want to roll the strike it forces you to pay more to buy your call back then under lower IV conditions. Short puts have the same effect however losses are magnified due to losses both on direction and short vega.
Being long options in this environment is a good thing. Long options = long vega. Long puts looking great for the opposite reason short puts look bad – short directionally and long vega. Long call losses are smaller than expected. While the directional factor may work against them the increased IV works in their favor. Obviously spreads will have a combination of characteristics based on structure. Derivative products like options were created first and foremost as a tool to manage risk. If volatility in markets continue the value of options and their proper use will become more and more important. In bull markets options are more of a leveraging tool – to increase return. In flat or bear markets however options become a risk management tool to lower or eliminate risk.