July 27, 2017

This year has not been kind to holders of long options. Equities have either gone sideways, as they have in Canada, or they have slowly edged upwards, as has been the case in the U.S.

Long volatility books (or gamma traders), have been challenged to trade stocks around in order to pay for the cost of their options – and it hasn’t been easy with daily ranges for the indices being very narrow. In fact, despite option premiums being so low this year, 2017 could turn out to be one of the most challenging years ever for long gamma index option strategies.

Is there hope? I like the saying: “It’s always darkest before the dawn” – meaning that even in the most dire of circumstances, there is still hope. Is this low volatility sustainable in the medium term? The following chart offers some insight.

Volatility Through the Business Cycle


Source: Deutsche Bank/Bloomberg, as at July 15, 2017.

It shows market volatility through the business cycle. Based on this, the low volatility environment does indeed make sense. Importantly, it would seem that we could have some elevated volatility in store for us next year. In the meantime, it’s still a great time to consider harvesting shorter-term option premiums as the actual market movement remains low. Perhaps it is also a good time to pick up longer-term downside hedges as longer-term index puts are as cheap as we’ve seen them for some time.

Stay the course: Consider harvesting short-term options and hedge for the longer view. For shorter-term long option players, the dawn can’t come soon enough. They just might need to be patient for a little while longer.

The views/opinions expressed herein may not necessarily be the views of AlphaPro Management Inc. and Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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