Volatility (Extremes)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 18, No. 22 on November 26, 2009.

No matter how you measure it, volatility is decreasing. There are several reasons for this – and we’ll discuss them in this article. In addition to traders’ perceptions about forthcoming actual volatility, there are some strategy-related influences, as well as seasonal influences, that are contributing to this most recent decline in volatility.

Let’s begin by noting that the CBOE’s Volatility Index ($VIX) is at or near its yearly lows and hasn’t been significantly lower since September, 2008, prior to the Lehman bankruptcy. The “old” $VIX – trading under the symbol $VXO since 2003 – has already closed at new yearly lows this week. $VIX is just slightly below 21, but $VXO is already approaching 19. While it is true that these volatility measures are based solely on the S&P 500 Index ($SPX) options that trade on the CBOE, they are and always have been a good measure of the overall mood and volatility of stocks in general.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 17, No. 22 on November 26, 2008.

Option traders generally welcome volatile markets, for more strategies can be employed over the entire spectrum of optionable stocks. However, this market is arguably more volatile than any in history and, as such, presents a few problems and opportunities that traders might not ordinarily have considered. In this article, we’ll take a look at some of those.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 13, No. 19 on October 15, 2004.

Despite a modest, recent rise in $VIX, the CBOEs Volatility Index remains very subdued – as it has since March of 2003, and especially for most of this year. There are some general relationships between the broad market and $VIX, and there is a good deal of price history to justify those relationships. However, there have been recent articles published in several forums that suggest many traders seem to think it will be different this time – that $VIX isn’t predicting the same sorts of things that have happened in the past. In this article, we’ll explore those suppositions and try to outline some things to look for – from both $VIX and from the broad stock market.

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.

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.

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.