Volatility

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 15, No. 6 on March 30, 2006.

As our regular subscribers know, the CBOE recently listed cash-based options on its Volatility Index ($VIX). We have published several recent articles describing the details of these options, so we’ll review those only briefly in this article.

Clearly, these options can be used by speculators trying to predict whether $VIX will rise or fall over the lifetime of the options. However, perhaps a more broad-based approach is to use them as a stock portfolio hedge against a declining stock market. That will be the focus of this article.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 9, No. 16 on August 24, 2000.

It is somewhat common knowledge amongst option traders that the CBOE’s Volatility Index ($VIX) can be used as a predictor of forthcoming market movements. In particular, when volatility is trending to extremely low levels – as it is doing now – it generally means that the market is about to explode. In this article, we’ll put some “hard numbers” to that theory and we’ll also look at alternate measures of volatility (QQQ and the $OEX stocks themselves) to see what they have to say.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 21, No. 10 on June 1, 2012.

These days, there are more and more volatility indices and futures than ever. One can observe the same sorts of things about them that we do with $VIX futures – in particular, the futures premium and the term structure. We thought it would be an interesting exercise to see how these other markets’ futures constructs compare to that of $VIX. The $VIX construct, for a long time (see chart, page 12) has been that of large futures premiums and a steep upward slope to the term structure. Historically, that sort of construct has been associated with bullish markets, although it has persisted throughout the current market decline as well. How do these other markets line up in comparison to the $VIX futures construct?

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.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 11, No. 05 on March 14, 2002.

No, this isn’t an expose, despite the article’s title. Rather, it is an attempt to set the record straight about how volatility levels can be used as a predictive market tool. So much has been written and said about volatility in the last few weeks – in main-stream publications and on national television outlets. Much of it is erroneous. These errors are not really attempts to mislead the public, but are rather outgrowths of conventional misconceptions. The misconceptions may have arisen out of an over-reliance on near-term trends, while ignoring or being ignorant of what a longer-term volatility picture actually means.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 19, No. 18 on October 1, 2010.

Most of the time, we look at index options in order to make general observations about volatility. These observations, which evolve into opinions, often involve $VIX, $VIX futures, or $VIX options, all of which are based on the $SPX options. This is a reasonable approach, of course, since $SPX options are heavily traded, as are the $VIX derivatives, and therefore they reflect the greed, fear, and anticipations of literally millions of traders.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 14, No. 12 on June 22, 2005.

Before you declare me insane for even mentioning the words “volatility” and “increase” in the same sentence, let me point out that I am not saying that volatility will increase immediately. However, it will certainly increase sometime and that could happen as soon as the second half of this year. Remember, July 1st is the traditional low point for $VIX for the year. So, after that, $VIX generally increases – albeit in fits and starts – until October.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 18, No. 18 on September 24, 2009.

This is a question that has always intrigued me. We all see situations, for example, where stocks make a large gap move on earnings. Is it justified? Does the stock continue on in the same direction a week, month, or quarter later? Or does the knee-jerk reaction to news just provide a place for a reversal? These are all good questions, and so we have been working on a study to answer them.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 14, No. 5 on March 10, 2005.

One of the recurring themes in option-oriented media articles is that the $VIX Index is “too low.” Since many observers – media and traders alike – view $VIX as solely a contrarian indicator, this is a danger sign for the market. These observers figure that such a low $VIX implies that traders are, in general, too complacent, and thus the market is ripe for a beating. There are a lot of errors in these observations and opinions, and so we’d like to set the record straight. We have written articles about similar topics in the past, but with $VIX hovering near nineyear lows for such a long time (at least three months now), it is perhaps more timely now than ever.