Blogs

$VXST and UVXY Are Quite Low

By Lawrence G. McMillan

This article was originally featured in the 5/27/16 edition of The Option Strategist Newsletter.

As you can see from the right, $VXST (the CBOE’s short-term volatility index) is approaching 10. That seems incredibly low, and one would naturally think that it is a warning sign. But the $VXST chart of past two years (below) shows that it’s been at this level a lot – just not since August of 2015.

Lower Your Risk By Buying Options (02:24)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 2, No. 24 on December 22, 1993.

We have often stated that one can reduce the risk of stock ownership by buying call options instead. This, of course, is contrary to what many consider to be "conventional wisdom", in which option purchases are viewed as extremely risky things. As with most investments — and a lot of other things in life — it's a matter of application; every strategy can't be painted with a broad brush. We'll go over the way to make call option buying a lower-risk alternative to buying common stock, and then we'll apply it to a currently popular strategy involving the purchase of the highest-yielding Dow-Jones stocks at year-end.

When Markets “Levitate” (Preview)

By Lawrence G. McMillan

We have often made note of times when a particular market is so strong that it closes above or below its 20-day moving average for long periods of time.  These are rather rare situations.  While they are occurring, it seems that the market is going to keep going in that same direction forever. A few bullish cases have lasted so long that it seems that the market is “levitating” above its moving average.  The last time this occurred was February-April of this year (Figure 1, yellow area).

Weekly Stock Market Commentary 5/27/16

By Lawrence G. McMillan

The Standard & Poors Index ($SPX) broke out of the triangle that had formed on its chart (see Figure1), and that breakout was strongly on the upside. The bears had plenty of chances to violate the support at 2040 on a closing basis, but were unable to do so. So now we'll see if the bulls can do better with their chance.

Can the Bulls Seize Control?

By Lawrence G. McMillan

The bears are now paying for their failure to seize control last week. Yesterday’s rally was strong and was assuredly due to a number of bears “throwing in the towel.” Yes, I know there was a favorable housing report, but that certainly wasn’t enough to justify a rally of that magnitude. So, can the bulls seize control? They have not been able to engineer a follow-through to strong up days, either. Today is their chance. S&P futures are up 6 points in overnight trading.

The Big (Volatility) Short: The "Short Volatility" Trade For Retail

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 24, No. 8 on April, 23 2015.

One of the most successful investment strategies practiced by hedge funds (and other sophisticated investors) in the last ten years has been the “volatility short” trade.  It is rarely mentioned on TV or in the media, but that is not too surprising.  They would rather promote things such as the “Japan carry trade,” which wasn’t necessarily a profitable strategy at all unless a great deal of risk was taken.  Not to say that the “volatility short” didn’t have its own share of risk, but it’s a lot more certain to profit if a certain status quo is maintained.

In this article, we’ll look at the history of the “volatility short” trade and see where it stands today.  The long-term perspective on this trade may be a bit surprising, for it shows the tremendous toll that the $VIX futures premium takes on a long volatility position.

Weekly Stock Market Commentary 5/20/16

By Lawrence G. McMillan

The chart of $SPX (Figure 1) shows a couple of things. First, the Index is in a downtrend. It has declined more than 80 points from the mid-April highs, at 2110. But the other fact that we can see from the chart is that $SPX still hasn't been able to close below 2040.

As a result, the two red lines make a triangle on the chart. Usually, a breakout from a formation like this is strong, but it can come in either direction.

Volatility Trading: Trading The Futures Premium

By Lawrence G. McMillan

This article was originally featured in the 5/20/16 edition of The Option Strategist Newsletter.

One way to take advantage of these premiums is to establish the VXX/SPY put hedge. We have had a position on constantly for nearly two months now. These option-oriented positions aren’t making much money because $VIX is going nowhere, and so we are losing the time value. That is offset to a large degree by the “edge” that the position has in the futures premium.

Will The Psychological Barrier Hold?

By Lawrence G. McMillan

Yesterday, the market saw two distinct “halves.” In the first half, the market rallied fairly well – once again trying to prove that there is no follow-through to big moves. In the second half, the FOMC minutes spooked traders, and prices fell sharply. $SPX penetrated well below the 2040 level, reaching 2034.49 intraday. But then, to once again prove that there is no follow-through, $SPX rallied into the close. So $SPX has not closed below 2047 in weeks.

The Total Put-Call Ratio Trading System

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 19, No. 10-11 on June 3, 2010.

In some of our recent hotlines and daily commentaries, we have referred to the total put-call ratio as something that can be useful when extreme selling occurs.  It is not a sophisticated measure (as the equity-only is, for example), because it is merely the total of listed puts traded that day divided by the total of listed calls.   This includes all volume on the option exchanges regulated by the SEC – CBOE, AMEX, ISE, BOX, PHLX, NYSE – but not any futures options traded on futures exchanges. 

Trading or investing whether on margin or otherwise carries a high level of risk, and may not be suitable for all persons. Leverage can work against you as well as for you. Before deciding to trade or invest you should carefully consider your investment objectives, level of experience, and ability to tolerate risk. The possibility exists that you could sustain a loss of some or all of your initial investment or even more than your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and investing, and seek advice from an independent financial advisor if you have any doubts. Past performance is not necessarily indicative of future results.
Visit the Disclosure & Policies page for full website disclosures.