Option Buying Fund Closes Because Options Are Too Expensive

by: Don Fishback

This is interesting. A fund that specialized in buying options based on unexpectedly large moves (black swan moves) is closing its doors and returning money to investors. The reason?

The market has gone from under-pricing risk to over- pricing it,” he said. “On a risk-reward point of view, I can’t put my hand on my heart to investors and say ‘listen, this is a good investment to be buying options at this juncture,’ because I don’t believe it.

I agree. Even with the cataclysmic move in the stock market since February options expiration, the March at-the-money straddle has increased a measly 6% since that day. On February 20, the SPY was at 77.42. The March 77 straddle had a closing ask of 7.85. It is now bid 8.35. That’s a gain of just 0.50.

One of the biggest two-week downdrafts in history, and all you get is a lousy 6% ??? Be careful being an option buyer here!