This article was originally published in The Option Strategist Newsletter Volume 21, No. 16 on August 24, 2012.
For quite some time now (perhaps since last November), we have been pointing out how the voracious appetite for volatility protection has had the effect of distorting the term structure of the $VIX futures. Recently, though, this activity has branched out in a way that is only rarely seen in the markets: in short, large institutional traders are both buying stocks and buying volatility ETNs (thus, by inference, they are buying $VIX futures). Hedging on a large scale can distort technical indicators and other things – such as the term structure. That is, we can’t really interpret this activity in a contrary manner. Are these traders bullish (because they’re buying stocks) or bearish (because they’re heavily buying protection)? In truth, it’s probably the former, but their need to buy protection also means they’re not overly bullish. This reminds me very much of what was happening in QQQ options at the end of the tech stock craze in 2000.
This article was originally published in The Option Strategist Newsletter Volume 4, No. 4 on February 23, 1995.
If it seems that we preoccupied with volatility, it's because we are. It is the only variable factor in determining the fair value of an option; the others are known with certainty at any point in time — strike price, time remaining until expiration, stock price, dividends, and short-term interest rates. However, it has practical and real application as well. If you buy options when volatility is low, then you stand to gain doubly if volatility increases. Or, even if you're wrong on the direction of the underlying market, your loss will be reduced if volatility increases. Some examples may help to clarify these points.
This article was originally published in The Option Strategist Newsletter Volume 17, No. 17 on September 12, 2008.
We often get questions regarding the operation of volatility trading strategies. While we endeavor to explain why we are establishing certain trades, or why we are taking follow-up action, we really haven’t put it together in a sort of “how to” article. That’s the purpose of this week’s feature.
This article was originally published in The Option Strategist Newsletter Volume 16, No. 13 on July 13, 2007.
In this newsletter, over the years we have presented many methods for protecting a portfolio of stocks. Some are “ancient,” such as buying S&P 500 Index ($SPX) puts and some are “new,” such as buying $VIX calls. With the continuation of the bull market well into its fourth year (making it the fifth longest bull market in history – but not the fifth largest), many portfolio managers and individual investors are becoming concerned that a sharp correction may be more than just a remote possibility. As such, the topic of protecting a portfolio with derivatives has once again risen to the forefront. With that in mind, I wrote The Striking Price column in Barron’s this week, on this topic.
This article was originally published in The Option Strategist Newsletter Volume 17, No. 20 on October 24, 2008.
In recent weeks, one of the more profitable strategies has been the $VIX/$SPX hedged trade. We have recommended it several times in this publication, as well as in other newsletters that we write. Many of our readers have asked for more information on the strategy, as it is either new to them, or they haven’t tried to use if before. So this article will describe the strategy in detail – discussing its basic concepts, determining how many options to trade on each side of the hedge, and finally how to handle follow-up strategies.
This article was originally published in The Option Strategist Newsletter Volume 19, No. 17 on September 17, 2010.
One of the main problems with commodity-based ETF’s is that they don’t necessarily track the underlying commodity very well. This is mainly due to the fact that the ETF is forced to trade the futures contracts, and there are times when it isn’t feasible for the ETF managers to roll from one futures contract to the next without making a “losing” trade that puts “drag” on the performance of the ETF vis-a-vis the spot index or commodity itself.
This article was originally published in The Option Strategist Newsletter Volume 5, No. 9 on May 9, 1996.
The concept of volatility, and especially implied volatility is extremely important for option traders. We often refer to implied volatility, for it is the foundation of many of our strategies. However, when meeting the public, I find that many people don't have a clear concept of what implied volatility is, so this article will be educational for some readers, and merely review for others.
This article was originally published in The Option Strategist Newsletter Volume 3, No. 10 on May 27, 1994.
We have, in the past, often written about the fact that options can be used to help spot "hot" stocks, such as potential takeover candidates. Option premiums tend to inflate and/or option volume tends to increase prior to a major fundamental news event concerning the stock. The reason for this, of course, is that "insiders" — those who have prior knowledge of the news, or at least have a very educated guess — buy options because of the tremendous leverage available from the profitable purchase of an option.
This article was originally published in The Option Strategist Newsletter Volume 19, No. 2 on January 28, 2010.
Over the years, we have written many times about the problems in predicting or estimating volatility. However, it is necessary to attempt the task, because it is so crucial in determining which (option) strategies can be used.
This article was originally published in The Option Strategist Newsletter Volume 16, No. 14 on July 27, 2007.
A “90% Day” must satisfy two criteria: 1) either advances or declines comprise more than 90% of all issues that moved that day (unchanged issues don’t count), and 2) either advancing or declining volume was 90% or more of the sum of advancing and declining volume.