This article was originally published in The Option Strategist Newsletter Volume 12, No. 17 on September 11, 2003.
The CBOE has announced a new computation of $VIX. It is enough of a change that a totally new index is being created, and will be released on September 22nd. The “old” $VIX – the one that we know now and have always known – will still be maintained, but the symbol will change to $VXO. Similar changes will be made to $VXN, and it will computed differently in the future as well. In this article, we’ll describe the changes and make some comparisons between the new $VIX and old $VIX (now to be known as $VXO). In this article, when we use the term “$VIX”, it refers to the new index, whereas “$VXO” will refer to the “old” $VIX.
We got the breakout to new intraday and new closing highs that we were looking for. Now, the object for the bulls is to hold onto the gains. In that regard, we want to see a consecutive close above the old highs (2135) again today. This morning, $SPX looks to open about 10 points higher, so that is constructive. It’s been a long time since we’ve been at new all-time highs, but one thing about being here is that there is no natural overhead resistance. In the past, we’ve used the “modified Bollinger Bands” – the upper Bands, specifically – to estimate resistance. They also serve as targets for the mBB buy signal that is in effect.
This article was originally published in The Option Strategist Newsletter Volume 3, No. 22 on November 17, 1994.
Traders in all markets often attempt to determine if a rally or decline has moved "too fast". If a rally has moved "too fast" or gotten ahead of itself, one often say that the stock or futures contract is overbought. Similarly, if a decline has been "too steep", then the underlying security is oversold. The hard part comes in determining what is "too fast" or "too steep". There are many technical indicators that attempt to measure the rates of advances and declines in order to determine overbought or oversold.
The broad stock market has been able to consolidate its strong post-Brexit gains. There was a day and a half of selling this week, but a strong upward reversal by $SPX from 2074 on Wednesday leaves the bulls still in control.However, there is frustration for the bulls, too, because $SPX has not been able to assault the all-time highs. A promising Thursday rally failed at the 2110 level, reinforcing the 2110-2120 area as strong resistance.
This article was originally published in The Option Strategist Newsletter Volume 6, No. 6 on March 27, 1997.
I was tempted not to label this article as a "basics" article, because the concept we're going to discuss is one that is probably not all that familiar to most option traders. It concerns the rate of decay of in- or at-the-money options versus that of out-of-the-money options. It's a concept that I realized I understood subconsciously, but not one that I had thought about specifically until I recently read Len Yates' article in The Option Vue Informer. Len is the owner and founder of Option Vue, creator of the software package of the same name and is one of the best option "thinkers" in the business (we are going to have a review of Option Vue when their new version is released).
This article was originally published in The Option Strategist Newsletter Volume 4, No. 22 on November 30, 1995.
Using options to protect your portfolio is, for most people, more of a theoretical exercise than a practical application. By that, I mean that most people think about using puts to protect their stocks — and they might even look at a few prices in the newspaper and figure out how much it would cost to hedge themselves — but when it comes right down to it, most people consider the put cost too expensive and therefore don't bother buying the protection.
This article was originally published in The Option Strategist Newsletter Volume 7, No. 6 on March 26, 1998.
There are only two types of volatility – historical (also called actual or, sometimes, statistical) and implied. Historical tells us how fast the underlying security has been changing in price. Implied is the option market’s guess as to how fast the underlying will be changing in price during the life of the option. It’s easy to see that these might rightfully be completely different numbers. For example, take the case of a stock that is awaiting approval from the FDA for a new drug application. Often, such a stock will trade in a narrow range, so historic (actual) volatility is low, but the options will be quite inflated – indicating high implied volatility that reflects the expectation of a gap in the stock price when the FDA ruling is made.
Stocks had a violent downside reaction to the Brexit vote in Britain. But while the damage was severe, it was short-lived. Over the past four days, a huge rally has emerged that has nearly wiped out the Brexit losses.
$SPX is now back inside the 2040-2120 trading range that had been containing the markets through April, May, and the first half of June. So, the $SPX chart is in a neutral state once again.
While many other indicators have turned more bullish, that is not the case for the equity-only put-call ratios. They gave sell signals right after the Brexit vote, and they have remained on those sell signals.
This article was originally published in The Option Strategist Newsletter Volume 4, No. 4 on February 23, 1995.
If it seems that we preoccupied with volatility, it's because we are. It is the only variable factor in determining the fair value of an option; the others are known with certainty at any point in time — strike price, time remaining until expiration, stock price, dividends, and short-term interest rates. However, it has practical and real application as well. If you buy options when volatility is low, then you stand to gain doubly if volatility increases. Or, even if you're wrong on the direction of the underlying market, your loss will be reduced if volatility increases. Some examples may help to clarify these points.
Stocks staged an extremely strong rally yesterday, and S&P futures are up another 15 points in overnight trading. This whipsaw action has left traders and investors alike unsure of what comes next. But the rally improved things greatly from a short-term perspective, and may have had some effect on the intermediate-term as well.