I occasionally trade LEAPS and straddles. A couple weeks ago (Sep 22) I attempted to close out my last short position (a bear price spread on Goldman Sachs) after having a very heavy short bias in my option portfolio the past couple years. That is unfortunate because last week would have been a great time to have short positions. I’m still roughly 50% cash so I’m not broadly optimistic at the moment. However, there are some individual stocks trading at great valuations that I haven’t been able to ignore. Even if I started cherry picking them a little early.

A somewhat frustrating result of the no short rule is the unusually high bid/ask spread in the option market. I called my broker and asked why he wasn’t jumping between the bid/ask spread to fill my option order. Granted I could have done this manually by splitting my trade, but with the excessive volatility recently I preferred avoiding this. My broker said that due to the no shorting rule the market maker was not jumping between the spread to fill orders, but was instead just letting clients name the spreads. I said that explains why there appears to be no market maker, because basically there wasn’t one.

I’m sure governments around the world didn’t care about option bid/ask spreads when outlawing shorting, but it has an impact on the efficiency of markets. The no shorting rule will probably keep the VIX elevated for some time. The
past month has seen the VIX spike straight up. One consequence of this is that this has been and will continue to be a great time to trade options.

I typically avoid writing about option strategies as there are many that know far more about it than me. However, I’ve been surprised that no one (that I’ve heard) seems to have connected the suspension in shorting hundreds of companies with the spike in the VIX. I could elaborate on how government interventions to increase market efficiency will have many unintended consequences that could actually increase volatility, but I’ll leave that to “the experts”. Alas testing is something that exists only in traditional engineering; not financial engineering… Posted in Investing