Are FAS Options Cheap With Implied Volatility of 232?

Generally the thought of buying some options on the cheap is not consistent with an implied volatility (IV) of 232.

Today, I have a counterexample to consider.

Take the case of the Direxion Russell 1000 Financials Bullish 3x (FAS), one of the new Direxion triple leverage ETFs. FAS is intended to track 300% of the price performance of the Russell 1000 Financial Services Index. In the recent market environment this has proven to be a daunting task, resulting in FAS racking up a 30 day historical volatility number of 332 – a full 100 points higher than the current implied volatility.

In practical terms, an IV of 232 translates into an anticipated average change of 14.6% per day. For comparison purposes, an IV of 332 translates into an average daily move of 21%. So far the mean one day change in closing prices for FAS has been 17.4%. Looking at recent history, an implied volatility of 232 may turn out to be a bargain and options in FAS may not be as expensive as they look…(click on chart to enlarge)

Comments

[AlexR:]

FAS options are very illiquid. I wonder if the low IV makes up for getting dinged on the bid/ask spread?

2008 Dec 13 09:43 PM

[Illusional ...:]

with fas less liquid than uyg, im not confident if the bet will cover enough spreads...

2008 Dec 14 02:36 AM