Schaeffer's Outside the Box Blog
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It's mid-December, which can only mean one thing when it comes to options. Walk, don't run, if you have a mind to buy some. Calendar time moves significantly faster than active market time. Long champagne and short stock-specific news is generally the rule.

We have regular expiration this Friday, then a vacation-soaked week with a short session, followed by a holiday, followed by another Tuesday holiday. Regular January options have 28 days until expiration as of this Friday, but the time we're all back after New Year's, the first 11 of those calendar days will be in the rearview.

And if recent action is any sort of guide, it's very likely the market will sit at similar levels on Jan. 2 as it does on Dec. 21.

Yes, I'm well aware of the Looming Fiscal Cliff. So is the market, and realized volatility (RV) keeps getting lower and lower. 10-Day RV in the S&P 500 Index (SPX) dipped below 5 at one point last week. That's not a misprint.

How low is an RV of 5? It implies that 66% of trading days will see trading ranges under about 0.3%. That's roughly a 50-cent range in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) on the majority of trading days.

It's not atypical performance for this time of year, however. I ran numbers for my book that examined the monthly (by option cycle) relationship of implied volatility (IV) to realized volatility. I found that the December cycle had the highest ratio of the year. Median IV in the December cycle was 1.58 times the average realized vol. That's considerably higher than the second-fattest cycle by this metric, January, which checked in at 1.35.

This year was even higher -- the ratio would have averaged about 2, meaning if you bought options, you ended up paying an implied volatility that was about twice the volatility SPX actually realized.

Of course, hindsight is always 20/20. A CBOE Market Volatility Index (VIX) in the mid-teens did not strike anyone (myself included) as a hugely fat level, especially with the potential news "looming." Nor does it feel like a major sale going forward.

The January cycle tends towards a tale of two halves. The first half of the cycle sees low implied volatility carrying over from December, while the latter part of the cycle sees a significant pickup. Kind of as you would expect, as earnings season follows the holiday week. So if you net sell options now, whatever benefit you gain from selling generally gets offset by the lift in implied volatility.

Disclaimer: The views represented on this blog are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.

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