Wednesday, January 6, 2010

Sideways Markets, Covered Calls and the RUT

I had originally thought that I might begin 2010 with a series of articles on covered calls and other ways of using options to generate additional returns during sideways market action. Since several other writers have already jumped on this subject (notably Jeff Opdyke of the Wall Street Journal in Covered Calls Prove Popular Strategy; Mark Wolfinger of Options for Rookies in Writing Covered Calls in 2010; and Adam Warner of Options Zone in When Is the Best Time to Use a Buy-Write?) I am going to start slowly with these pointers above and a handful of links to previous posts below.

There is another point I wish to make. As of today’s close, the RVX, which is the volatility index for the Russell 2000 small cap index (RUT), is 33.8% higher than the VIX. As the chart below shows, this is at the high end of the range for the past year. Should volatility return to the markets, then I can certainly see how one might anticipate higher volatility in small caps than in the SPX. On the other hand, if stocks are going to continue to move sideways as they did today, then sellers of RUT options (straddles, strangles, iron condors, butterflies, etc.) should receive extra compensation for their short volatility positions.

For more on related subjects, readers are encouraged to check out:

[source: StockCharts]

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