Monday, August 24, 2009

Options Action- NSC Covered Call

The VIX got some face time on Friday night's Options Action. The options crew pontificated on the current state of the VIX- namely its blatant overpricing vs. the realized vol of the SPX. With no major economic announcements or news to speak of on the horizon, the consensus was we could continue to see implied volatility getting sucked out of the market as it comes closer in line with realized vol.

So how to play it?

Finding overpriced options and selling them was the overriding tone for most of the show. And I tend to agree. It's worked for the last few months and will continue to work....

... until it doesn't!

So one of the names they mentioned with "supposed" overpriced options was Norfolk Southern (NSC). For those long the stock they suggested selling the September 50 call for $.85 to take advantage of the "juiced up" options. I agree with the general idea to sell calls on profitable existing stock positions as a yield enhancement tool, but I'll have to disagree that NSC options are pumped up enough to make it a stand out candidate for selling covered calls. Take a gander at the implied vol chart below:

While 30 day HV currently sits around 40%, IV is actually lower sitting at a mere 37%. So, in a market backdrop where it's actually hard to find options implied vol less than recent realized vol, they pick NSC as a prime candidate for selling covered calls? Not sure I follow on that line of logic.

Although I will say if you're long NSC, expect it to stagnate for the next month, and insist on holding the stock, selling a covered call may be better than doing nothing.


Justin said...

There are so many better candidates out there right now with juiced up IV, makes you wonder why they chose NSC.

Tyler Craig said...

Exactly -