The Predictive Power of Volatility Premiums

Are the market makers clairvoyant? On December 30th, 2019 a patient was diagnosed in Wuhan China with a novel (new) strain of Corona Virus; by January 9th, WHO (World Health Organization) confirmed the existence of Corona Virus 19 - now (COVID-19).

One of the strategies I manage uses a proprietary system of monitoring option volatility premiums using a five point proprietary calculation. On January 23, 2020 a stock we had never heard of came across my desk (NVAX). The volatility premiums of the options indicated something was up. Over the last 15 years of developing this formula we have seen this time and time again. It worked for us on AXSM where unusual volatility premiums made us take a position (11/7) at $23.00 on average and the stock rocketed up to over $80.00 (by 12/16). Admittedly, it sometimes works in reverse too (like it did for EYEG and even PCG - who knew the feds would make it non-marginable).

Well, when NVAX came across my desk, a seemingly obscure stock we had to pick it up at $7.63. The options had this enormous spread (Bid 2.85 X Ask 6.20). We had no news but there was activity in the options and the premiums were enormous. Corona Virus was barely on anyone’s radar but here was this stock… Even though we haven’t closed out the position yet, it is one of the reasons our performance has really made up for a couple of inevitable bad trades. Now, we have a couple other new ones in the pipeline too. We can’t divulge them because these things take time to develop.

Anyway NVAX looked too good to pass up.

If there is one takeaway, pay attention to those volatility premiums - they often signal things yet to come. Big things. Some bad some good.

Many happy returns.


I agree @ArbiTomsen, Option Put premiums are insanely high right now this typically means a reversal or at least sideways movement is coming soon.

Same goes for the VIX and other volatility instruments as I see far too much volatility occurring right now.

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