Are FAS Options Cheap With An 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 Direxion Financial Bull 3X Shares ETF (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…

[source: International Securities Exchange]

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