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Options On $VIX (14:06)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 14, No. 6 on March 25, 2005.

In a press release issued on March 18th, the CBOE has announced that option trading on $VIX will begin on Friday, April 22 (2005). We consider this to be a major new derivatives product. It is the first time that there will be the opportunity to trade options on volatility in a listed marketplace (they have traded over-the-counter, institutionally, for some time). In today’s article, we’ll not only look at the mechanics of these options, but at some of the theory as well.

This product will be useful for a wide range of applications for stock and option traders. Wherever $VIX futures were applicable, these options will be as well. Furthermore, option strategies on $VIX can now be constructed – with their own unique sets of risk and reward parameters. As we will discuss in this article, however, $VIX does not behave like a stock, so there will have to be some adjustments for that fact in the modeling of $VIX option prices.

Capitalizing On Pessimism (05:08)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 5, No. 8 on April 25, 1996.

When traders get overly pessimistic, they sometimes create trading opportunities for those who have the patience to wait for the pessimism to reach a peak. In fact, extreme pessimism often leads to panic. Panic doesn't occur too often in the marketplace, but when it does, if you can view things in a level-headed manner, you can find some great trades.

September Tops October Bottoms (08:16)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 8, No. 16 on August 26, 1999.

In this article, we’re going to look at a market tendency that has a long, reliable track record: a tradeable top usually appears in September – often near Labor Day – culminating in a good trading bottom sometime in October. This is a subject that we have addressed before, but not for the past three years. Fairly often, these turning points have been accompanied by market buy or sell signals from our oscillator and/or the equity-only put-call ratio.

This year, a buy signal has just been registered by the oscillator (see page 5 for further details). But that just might fit right in with the broad seasonal tendency. The market could rally into Labor Day or slightly beyond, then register a sell signal, and therefore fit right into the “normal” pattern. This is not one of those patterns that I would recommend trading without confirmation. In other words, just don’t go out and short the market on Labor Day, figuring that you’ll be able to cover at a nice profit by early October. Rather, it is more useful as a guide: be alert for sell signals in September, and when one occurs, be ready to jump on it. Then, if it works and the market is getting hammered in October, be alert for buy signals at that time.

Earnings-Driven Straddle Buys (15:10)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 15, No. 10 on May 25, 2006.

In our last issue, we discussed the viability of buying a stock after event-driven news has caused the stock to gap. The conclusion was that there was a small potential profit there, but we are continuing to gather data on that subject. In this issue, we want to take a different tack: does it make sense to buy straddles on stocks that are about to report earnings? In particular, what about the stocks where traders expect the most action – i.e., those with inflated implied volatility prior to the earnings report? This is not an entirely new subject for this newsletter (reference issues 7:04, 9:20, and 13:16, for example), but it is the first time we’ve addressed this issue in a while. Furthermore, we are still of the opinion that this past quarter saw a new, higher level of earnings speculation than ever before.

Expected Returns On Naked Put Writing (15:20)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 15, No. 20 on October 26, 2006.

We have written a couple of articles recently on naked put writing and put credit spreads as alternative strategies to covered call writing. We are not going to re-hash all of that previous information (although we will summarize it). Rather, this short article is mainly to address the topic of what sorts of returns can one expect from naked put writing – and what do they mean?

Many covered writers prefer to conduct the strategy on a cash basis – buying shares for cash and selling the option premium against those shares. The premium can then be withdrawn and used for whatever the writer wants – as long as he is willing to have the stock called away.

Protecting A Stock Portfolio With $VIX Options (15:06)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 15, No. 6 on March 30, 2006.

As our regular subscribers know, the CBOE recently listed cash-based options on its Volatility Index ($VIX). We have published several recent articles describing the details of these options, so we’ll review those only briefly in this article.

Clearly, these options can be used by speculators trying to predict whether $VIX will rise or fall over the lifetime of the options. However, perhaps a more broad-based approach is to use them as a stock portfolio hedge against a declining stock market. That will be the focus of this article.

Option Volatility: How Good A Predictor? (09:16)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 9, No. 16 on August 24, 2000.

It is somewhat common knowledge amongst option traders that the CBOE’s Volatility Index ($VIX) can be used as a predictor of forthcoming market movements. In particular, when volatility is trending to extremely low levels – as it is doing now – it generally means that the market is about to explode. In this article, we’ll put some “hard numbers” to that theory and we’ll also look at alternate measures of volatility (QQQ and the $OEX stocks themselves) to see what they have to say.

Volatility: U.S. vs. “The World” (21:10)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 21, No. 10 on June 1, 2012.

These days, there are more and more volatility indices and futures than ever. One can observe the same sorts of things about them that we do with $VIX futures – in particular, the futures premium and the term structure. We thought it would be an interesting exercise to see how these other markets’ futures constructs compare to that of $VIX. The $VIX construct, for a long time (see chart, page 12) has been that of large futures premiums and a steep upward slope to the term structure. Historically, that sort of construct has been associated with bullish markets, although it has persisted throughout the current market decline as well. How do these other markets line up in comparison to the $VIX futures construct?

Just How “Neutral” Is Delta Neutral? (12:08)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 12, No. 8 on April 24, 2003.

The concept of “delta neutral” is an intriguing one – especially to traders who have had a hard time predicting the market or to those who don’t believe the market can be predicted (random walkers). The concept is even sometimes “sold” to novice investors as a sort of “can’t-lose” trading method, even though that isn’t true at all. While the idea of having a position that can make money without predicting the direction of the underlying stock seems attractive, in practice the strategy is difficult, if not impossible, to apply – at least in terms of keeping a position delta neutral.

McMillan's Investor Inspiration Webinar Video Now Available

The video of Larry McMillan's recent The Current State of Option-Oriented Indicators webinar with Investor Inspiration from August 8th is now available on their YouTube channel. In the video, Larry takes an in-depth look into our various technical indicators and discusses what they are saying about the market. Scroll down to watch the video or click here.

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