Premium is back!

Volatility has finally made its way back into the market. For months the market had been lulled into a period of complacency and as a result, option premium suffered. The VIX, often referred to as the “investor fear gauge” touched historical lows months ago and remained there for what seemed like an eternity for option sellers. Now, with the recent decline, option premium has returned to an attractive level.

The timing could not be better for our Iron Condor strategy. The extra premium allows us to widen our chosen range and increase our monthly premium. Some may choose to keep their range the same and bring in more premium. Yes, that is certainly an option, but after an extreme jump in volatility I would be hesitant to make such a move. I will continue to strive for small, steady gains and gladly take less risk with a larger range.

As I stated yesterday, the trading day following options expiration is overwhelmingly bearish. The market is currently near an oversold state, so if the historical tendency holds true for Monday the market could reach oversold territory. If we do reach an oversold state I will be looking to for an opportunity to move into a short-term position. As always, I will patiently wait until the set-up comes to me.

Overbought/Oversold levels for March 16, 2007

• SPY - 35.7 (neutral)
• DIA - 33.9 (neutral)
• IWM - 45.9 (neutral)
• QQQQ – 46.0 (neutral)
• OIH - 52.2 (neutral)
• GLD – 57.5 (neutral)

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