Is there a point where option premiums are too high? It’s a rhetorical question.

How about this? If premiums seem too high, does that make you a buyer or seller?

That question is not rhetorical. And like most things in the options market, the answer may be counter intuitive.

When the MVX is high – say above 50% - covered call writing or cash secured puts is usually the right, well… call. Because, generally speaking, the premium is overstating the market’s longer term volatility.

Even with equities, writing expensive three to six month covered calls usually generates a decent return. That is, if investors remain positive about the stock and you can withstand short-term shockwaves that often accompany high premiums.

Having said that, there are times when individual equity option premiums are so high, option buying strategies are the right choice. Which is to say, there are times when despite abnormally high premiums, it makes more sense to buy straddles than to sell them.

Recall when equity option premiums were abnormally high from November 2008 through the first quarter of 2009. Options on many blue chip equities were trading at 100%+ implied volatilities.

When premiums are that high, the options market is really telling us that there was no way to effectively price the short-term risks. In most of these examples, underlying stocks moved well beyond the trading range being implied by the options. And they were doing it on a daily basis! In retrospect, during that six month period, buying short-term straddles was one of the more successful strategies.

So what price is too high? Some professional option traders will sell volatility all day long (i.e. write calls) if implieds are below 80%. But when implied volatility exceeds 80%, many believe the options market has reached a point where it can not effectively price risk. In such instances, straddle buying strategies are generally profitable.