This article was originally published in The Option Strategist Newsletter Volume 5, No. 2 on January 25, 1996.
It's been almost a year since we addressed this topic. If this article is the springboard for a market like we had last year, then you won't need portfolio insurance. However, it never hurts to know about it, especially with the market being at such lofty levels, and many investors sitting on large unrealized gains in their stock portfolios.
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".
This article was originally published in The Option Strategist Newsletter Volume 4, No. 2 on January 26, 1995.
One of the most important features of options is that they can remove some or all of the risk of stock ownership (or futures, where futures options are concerned). This is particularly attractive to stock owners who want some form of "insurance" against a steep or prolonged market decline.
There are several ways in which options can be used as an insurance policy for one's portfolio of stock. One might sell calls, or he might buy puts, or he might do both. In any case, these option transactions would profit if stocks fell and that profit would offset some or all of the losses incurred by stocks owned during the market decline. These concepts are not complicated and are used by many stock owners, particularly professional money managers.
This article was originally published in The Option Strategist Newsletter Volume 4, No. 11 on June 8, 1995.
One of the facets of an option's description is when that option may be exercised. This is usually called the style of the option. For example, American style options may be exercised at any time during the life of the option (in reality, they may be exercised at the end of any trading day). The term, style, is applicable to all options although many investors are not too concerned with it. This is because all listed stock options and all listed futures options are American style, and thus the average investor who trades those types of options is quite accustomed to being able to exercise whenever he wants (or, if he has written the option, he knows that he can be assigned at any time).
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 3, No. 22 on November 17, 1994.
Traders in all markets often attempt to determine if a rally or decline has moved "too fast". If a rally has moved "too fast" or gotten ahead of itself, one often say that the stock or futures contract is overbought. Similarly, if a decline has been "too steep", then the underlying security is oversold. The hard part comes in determining what is "too fast" or "too steep". There are many technical indicators that attempt to measure the rates of advances and declines in order to determine overbought or oversold.
This article was originally published in The Option Strategist Newsletter Volume 6, No. 6 on March 27, 1997.
I was tempted not to label this article as a "basics" article, because the concept we're going to discuss is one that is probably not all that familiar to most option traders. It concerns the rate of decay of in- or at-the-money options versus that of out-of-the-money options. It's a concept that I realized I understood subconsciously, but not one that I had thought about specifically until I recently read Len Yates' article in The Option Vue Informer. Len is the owner and founder of Option Vue, creator of the software package of the same name and is one of the best option "thinkers" in the business (we are going to have a review of Option Vue when their new version is released).
This article was originally published in The Option Strategist Newsletter Volume 4, No. 22 on November 30, 1995.
Using options to protect your portfolio is, for most people, more of a theoretical exercise than a practical application. By that, I mean that most people think about using puts to protect their stocks — and they might even look at a few prices in the newspaper and figure out how much it would cost to hedge themselves — but when it comes right down to it, most people consider the put cost too expensive and therefore don't bother buying the protection.
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.
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.
