This article was originally published in The Option Strategist Newsletter Volume 5, No. 9 on May 9, 1996.
The concept of volatility, and especially implied volatility is extremely important for option traders. We often refer to implied volatility, for it is the foundation of many of our strategies. However, when meeting the public, I find that many people don't have a clear concept of what implied volatility is, so this article will be educational for some readers, and merely review for others.
This article was originally published in The Option Strategist Newsletter Volume 4, No. 18 on September 28, 1995.
The concept of equivalent option positions is an important one, for it is often possible to substitute one strategy for another. In so doing, one might be able to accomplish additional goals while still preserving the same profit potential. These considerations might include decreased commissions, tighter markets, or better use of capital.
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.
This article was originally published in The Option Strategist Newsletter Volume 3, No. 21 on November 17, 1994.
Volatility is merely the term that we use to describe how fast a stock, future, or index changes in price. When we speak of volatility in connection with options, there are two types of volatility that are important: historical volatility, which is a number that can be calculated mathematically by seeing how fast the stock has been changing in price over the past 10 days, 20 days, or any other time period that we want to examine. The other type of volatility that is important for option traders is implied volatility. Implied volatility is what the options are "saying" about future volatility: if it is high, then the options are predicting that the underlying instrument is going to become more volatile in the (near) future; if it is low, then the options are predicting that the volatility of the underlying will decrease. Thus there may be a difference between the historical and implied volatility. If the difference is large enough, then one can use options strategies to create a position with an "edge" — the "edge" being the differential between these two types of volatility.
This article was originally published in The Option Strategist Newsletter Volume 5, No. 15 on August 8, 1996
Most stock options and a few index options are American style, meaning that they can be exercised at any time during their life. Most index options are not American style, but are European style, meaning they can only be exercised on the day they expire. Large institutions — many of whom sell index and sector options to hedge portions of their portfolios — prefer European style exercise because they then know they can't be called out of short positions prematurely. However, OEX options have always been American style. This makes them more interesting, but it means that one has to be on his toes when he is trading spreads in OEX — either debit spreads or credit spreads — if short options in the spread become deeply in-the-money.
This article was originally published in The Option Strategist Newsletter Volume 4, No. 20 on October 26, 1995.
Any spread that creates a debit in one's account, when it is established, is technically a debit spread. However, when the term "debit spread" is used, it generally connotes either a bull spread with calls or a bear spread with puts. These are types of vertical spreads, since all the options have the same expiration date but have different striking prices (credit spreads are vertical spreads also).
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.