This article was originally published in The Option Strategist Newsletter Volume 5, No. 19 on October 11, 1996.
We often refer to implied volatility and its uses. However, it's been some time since we actually discussed the use of implied volatility as a predictor of market movement. Consequently, we have received number of subscriber requests for this information and have decided to satisfy those requests with this article. The gist of this article is to use implied volatility as an impetus for directional trading — i.e., to use it to predict where the underlying market is going to go, and then to make an outright buy or sell in that market. This is as opposed to trading volatility itself, which is a neutral strategy (that theoretically doesn't try to predict the direction of the underlying market at all). This latter concept results in the type of strategy offered under "Trading Volatility".
All indicators were in synch this week, as $SPX finally broke out to new all-time highs. The breakout started with a "90% up day" last Friday, which put the Index on the brink of new all- time highs, and it carried through with $SPX higher each day so far this week. We have targets extending as high as 2205 at this time.
Equity-only put-call ratios finally got with the bullish program, and both have not only rolled over to buy signals, but both have made new relative lows for this year.
This article was originally published in The Option Strategist Newsletter Volume 12, No. 17 on September 11, 2003.
The CBOE has announced a new computation of $VIX. It is enough of a change that a totally new index is being created, and will be released on September 22nd. The “old” $VIX – the one that we know now and have always known – will still be maintained, but the symbol will change to $VXO. Similar changes will be made to $VXN, and it will computed differently in the future as well. In this article, we’ll describe the changes and make some comparisons between the new $VIX and old $VIX (now to be known as $VXO). In this article, when we use the term “$VIX”, it refers to the new index, whereas “$VXO” will refer to the “old” $VIX.
This article was originally published in The Option Strategist Newsletter Volume 7, No. 6 on March 26, 1998.
There are only two types of volatility – historical (also called actual or, sometimes, statistical) and implied. Historical tells us how fast the underlying security has been changing in price. Implied is the option market’s guess as to how fast the underlying will be changing in price during the life of the option. It’s easy to see that these might rightfully be completely different numbers. For example, take the case of a stock that is awaiting approval from the FDA for a new drug application. Often, such a stock will trade in a narrow range, so historic (actual) volatility is low, but the options will be quite inflated – indicating high implied volatility that reflects the expectation of a gap in the stock price when the FDA ruling is made.
Stocks had a violent downside reaction to the Brexit vote in Britain. But while the damage was severe, it was short-lived. Over the past four days, a huge rally has emerged that has nearly wiped out the Brexit losses.
$SPX is now back inside the 2040-2120 trading range that had been containing the markets through April, May, and the first half of June. So, the $SPX chart is in a neutral state once again.
The market remained jittery throughout the week in anticipation of the European "Brexit" vote, and the event didn't disappoint. On the heels of the decision for the United Kingdom to leave the European Union, the S&P 500 sold off tremendously Thursday night. Hence, the market is once again teetering on the important support level of $SPX 2040. Although today's price action is indeed a bit scary, from a longer term perspective the bulls remain in control so long as that support level holds.
This article was originally published in The Option Strategist Newsletter Volume 13, No. 6 on March 25, 2004.
We have written about volatility many times in the past, but the “best” use of $VIX is that it spikes up to a peak when the market is collapsing, and then comes slicing back down when the crisis – whatever it is – has passed. Recently, in Volume 13, No. 4, we showed the entire history of $VIX, including the hypothetical history back into the 1980's. It is evident from that chart that spike peaks in $VIX are major buying opportunities. On a short-term basis, minor $VIX peaks are also good buying opportunities. The reason that this is true is generally that traders rush in to overpay for put options (insurance) when the market is collapsing. Imagine how expensive hurricane insurance would be if you waited until the clouds were on the horizon before purchasing it. The same thing applies in the stock market. When put premiums are cheap, as they were for the last eight months, no one wanted to buy them, but when the market broke down – exacerbated by terrorist fears – many rushed in to buy what had become relatively expensive puts.
This article was originally published in The Option Strategist Newsletter Volume 19, No. 02 on January 28, 2010.
Over the years, we have written many times about the problems in predicting or estimating volatility. However, it is necessary to attempt the task, because it is so crucial in determining which (option) strategies can be used.
Over the past few days, volatility has exploded, but the decline in the Standard & Poors 500 Index ($SPX) has been muted. This is unusual, but not completely unprecedented. We’ll take a look at what this might mean for movement in the broad market, as well as why this is happening. As you might expect, there is more than one theory about what’s causing this aberration.
The market was marching along towards new highs (albeit slowly) when some modest selling was accompanying by a big increase in volatility. The combination now has the market on its heels.
$SPX ran into resistance in the "usual" area between 2100 and the all-time highs of 2135. It has broken support at 2090 and 2080, and now support at 2040 looms large.
Equity-only put-call ratios have continued to remain on buy signals, despite the recent pullback in the broad market.
