Fire Sale on Blue-Chip Options

Near-term options on Dow stocks are attractively priced right now

by Andrea Kramer

Published on Apr 8, 2016 at 10:57 AM

If you're an option buyer, it might be time to strike on blue-chip stocks. In fact, near-term options on Dow Jones Industrial Average (DJIA) components haven't been this attractively priced since the second half of 2014, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. Below, we'll break down big-cap option prices, and which Dow stocks' options could offer the most bang for your buck. 

First, a brief primer on our Schaeffer's Volatility Index (SVI). In the simplest terms, SVI tells us if traders are over- or underpaying for a stock's short-term options, from a historical perspective. The SVI averages the implied volatility of at-the-money front-month options, and by using a percentile rank, we can determine if those options are seemingly inexpensive or pricey, from a volatility perspective. So, if a stock's SVI is in the 25th percentile of its annual range, volatility expectations are relatively low -- a boon for option buyers.

That said, the average SVI percentile rank for Dow components recently fell to 9% -- the lowest since Aug. 29, 2014, according to White. The average percentile rank now is still below 20%, suggesting blue-chip options are attractively priced, from a historical volatility standpoint. And just ahead of earnings season, to boot.

160408DowSVI


Of the 30 Dow components, fast-food titan McDonald's Corporation (NYSE:MCD) sports the lowest SVI percentile rank, as its reading is lower than 95% of all others from the past 12 months. Taking runner-up is media mogul Walt Disney Co (NYSE:DIS), with an SVI lower than 92% of all others from the past year. The highest is financial firm JPMorgan Chase & Co. (NYSE:JPM), though its SVI is still in the middling 53rd percentile of its annual range, likely as traders gear up for the company's earnings next week.

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