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Modern Portfolio Protection (16:13)

By Lawrence G. McMillan

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.

The VIX/$SPX Trade (17:20)

By Lawrence G. McMillan

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.

VXX vs. $VIX (19:17)

By Lawrence G. McMillan

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.

THE BASICS: Review and Explanation of Concepts: Implied Volatility (05:09)

By Lawrence G. McMillan

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.

The Predictive Power of Option Premiums (03:10)

By Lawrence G. McMillan

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.

Option Trading: Theory vs. Practice (19:02)

By Lawrence G. McMillan

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.

The 90 Percent Rule (16:14)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 16, No. 14 on July 27, 2007. 

What Is A “90% Day?”

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.

Is Implied Volatility A Good Predictor of Actual Volatility? (09:02)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 9, No. 2 on January 27, 2000. 

The question posed in the title above is one that should probably be asked more often than it is. Somehow, it has become something of a consensus in the option trading community that implied and historical (actual) volatility will converge. That’s not really true – at least not in the short term. Moreover, even if they do converge, which one was right to begin with – implied or historical? That is, did implied volatility move to get more in line with actual movements of the underlying, or did the stock’s movement speed up or slow down to get in line with implied volatility? In this article, we’ll look at some examples of what really happens with respect to implied and historical volatility, and we’ll try to draw some conclusions regarding this comparison.

THE BASICS: Review and Explanation of Concepts: Volatility (03:22)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 3, No. 22 on November 17, 1994. 

Volatility

Volatility is merely the term that we use to describe how fast a stock, future, or index changes in price. When we speak of volatility in connection with options, there are two types of volatility that are important: historical volatility, which is a number that can be calculated mathematically by seeing how fast the stock has been changing in price over the past 10 days, 20 days, or any other time period that we want to examine. The other type of volatility that is important for option traders is implied volatility. Implied volatility is what the options are "saying" about future volatility: if it is high, then the options are predicting that the underlying instrument is going to become more volatile in the (near) future; if it is low, then the options are predicting that the volatility of the underlying will decrease. Thus there may be a difference between the historical and implied volatility. If the difference is large enough, then one can use options strategies to create a position with an "edge" — the "edge" being the differential between these two types of volatility.

August, The Volatility Month (03:14)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 3, No. 14 on July 28, 1994. 

We often write about volatility since it is the variable which most directly determines the price of an option. Oh, sure, the other variables are important — stock price, strike price, and time to expiration — but those are determinant things since we always know their value at any given time. However, volatility is the big question mark, the one variable that dances to its own beat, that can make or break a strategy even if the stock or futures price behaves as one expected.

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