Volatility

By Lawrence G. McMillan

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 15, No. 2 on January 26, 2006.

After a lengthy delay, the CBOE has announced that $VIX futures will begin trading on Friday, February 24th. We first wrote about these options last March (2005) when it seemed imminent that they would begin trading. However, there was a delay – a delay which is about over. In this article, we’ll lay out the specifications of the contracts once again, and refresh your memories on a few important points about how the contracts might trade.

First and foremost, it should be understood that these are options on the cash $VIX, much as there are options on $SPX or $OEX. These are not options on any of the Volatility or Variance futures. As a cashbased index option, they can be traded in a regular stock option account, with your favorite brokerage firm, just as index options can.

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 12, No. 11 on June 12, 2003.

Admittedly, option traders’ “hot” topics may sometimes be pretty boring to the average guy, but this question (above) has been the subject of much discussion amongst all manner of stock market analysts. Recently, the various volatility averages began to rise, even while the broad stock market was rising. This is something that hasn’t happened for a few years, and it also seemed to go against the “conventional” (and I should mention, incorrect) volatility analyses that one is often subjected to when watching financial TV these days. So, just what does this rise in volatility mean, coming as it does during a period of rising prices? That’s what we’ll explore in the feature article in this issue.

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 12, No. 12 on June 25, 2003.

In literally every issue of this publication, we discuss the levels of implied volatilities of various groups of options – stock options, index options, or futures options, for example. Of particular interest, in general, is how stock options are behaving, for they are the backbone of our volatility trading strategies. For example, if stock options are generally cheap, then we want to buy volatility. If they’re expensive, then we look for other strategies that take advantage of their expensiveness. Over all the years, we have not created a measurable index to treat the general level of stock option implied volatility, and that is an oversight that we intend to correct with this issue.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 21, No. 20 on October 26, 2012.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 19, No. 19 on October 14, 2010.

Each year about this time, we review and recommend a futures spread that has been quite profitable over the years: buying Feb Gasoline futures and selling Feb Heating Oil futures. We call this an intermarket spread since it involves a long position in one market and a short position in a different, but related, market.

This spread has generally been quite reliable in the past, but it can only be implemented in one form – with the actual futures contracts themselves (more about that1 later). We have traded this spread almost every year since 1994, although the entry and exit parameters have been altered a few times.

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.

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.