Sometimes simple is better.? With VIX in the low 11?s and S&Ps at all time highs, I hear traders whining that there is nothing to do!? They say IV is too low to sell and they cannot possibly buy the market here at all time highs. Doing so would be nothing short of insanity!? Well, I have been droning into a vacuum about the fact that there is not only historical precedence for the market to continue to rise with low IV, but that probabilities actually do not disparage it.? Let me illustrate.??
If I asked you what the odds are of flipping a fair coin 10 times and coming up with 10 heads, you might answer ?extremely low?, and you would be correct.? In fact, the odds are 0.5 raised to the 10th power.? This would yield odds of 0.098%.? But, if after 9 heads in a row I asked you what the odds are of the next flip being a heads, you might respond, ?I doubt that will happen.?? But, in fact, the odds are 50%.? The past has no effect on the future, as these are mutually exclusive events.? And though many will argue trading days? results are not mutually exclusive, they are relatively so or the assumption of Brownian motion built into our options pricing models yields our models useless.? Some may argue we have seen 19 heads in a row already, but that has little predictive value for tomorrow, or so say the options models!? So, am I predicting more upside to come?? Those who know me well will fade any directional call I make.? I am, however, much better at making bets I feel put the odds in my favor.?? So, call me insane, but I continue to sell premium every month and have been reaping the rewards.? Will the music stop?? Of course, and when it does I might have a losing month.? But one losing month in 24 is less than my trade probabilities even predict.? I will manage my trades and take losses where appropriate, staying with my Kelly Criterion strategy (see Nov. 1, 2013 blog).
On to simple?. I want to have a brief discussion on DISH networks.? The stock is at all time highs closing yesterday at $65.61.? With the market at all time highs, DISH is not alone in this situation.? But there are two things that are a bit unique about DISH.??
1.???? Since May expiration, IV has risen from 36% to 53%, with the last eight points coming in the last 5 trading days.? That is a huge move upward.
2.???? The volatility skew has inverted.? This can happen in ?break-out? stocks, but does not often happen in stocks whose short interest is as low as DISH?s. ?
How do I take advantage of this?? It depends on my assumption for the stock.? Mine is that it is quite frothy and deserves a much-needed rest.? I am still okay with a bullish assumption, just not overly bullish.? So, I put on a simple covered call.? Generally, a covered call is used to enhance returns.? It can also give you a bit of downside protection to your bullish trade, but not too much.? With IV so high in DISH, I see two choices.? First, I could buy the stock and sell the ATM call (which is what I did yesterday.)? I bought the stock around $65.60 and sold the August $65 call for $4.75.? This gives me protection down to $60.85, a 7.24% drop.? But, if the stock closes above $65, I rake in 6.25% return in 45 days, or a bit over 50% ROC annualized.? Not a home run, but a good high probability trade with a nice yield.? Of course, if I wanted to be more aggressive, I could have sold 1 or 2 strike out of the money calls ($67.50, or $70).? This would give me less downside protection and a greater upside yield.? Since my portfolio is already bullish, I took the ATM route.? That takes advantage of the high IV but ignores the skew component.? The further OTM calls take advantage of both high IV and skew, and might be the better trade, especially if you need more long deltas.
This is not a trade recommendation (as always).? Just rambling about how I line up trades and ?fit them? into my overall portfolio.