Buy Volatility

Saturday, January 14, 2006 | 07:03 AM

Last month, we looked the the Death of Volatility.

One of my favorite secondary sentiment indicators, the VIX, begins trading options next month. Prior to this, you could only trade the VIX via futures. I suspect this will be a hugely popular product.

This could be the year that Volatility returns to the market Buying VIX calls is one of my favorite positions for 2006.

Here's an excerpt from the Barrron's commentary on the subject:


Vix_20060113201211_1 "CAN YOU BUY AND SELL fear and greed? In the option market these days, you can increasingly count the ways.

Come Feb. 24, investors may begin trading options on the stock-market "fear gauge," or Chicago Board Options Exchange volatility index (symbol: VIX). It won't be the first time that investors will be coaxed to trade something intangible. But because the VIX is such a celebrated benchmark, known even to people who can't tell covered from naked calls, VIX options can potentially become popular and liquid, which will give average investors an accessible way to bet on the rise or retreat of market fear.

On the surface, the new option is simplicity itself: You buy calls if you believe the VIX will rise, or puts if you see it headed down. But what lies beneath is more abstract. Calculated from index-option prices, the VIX measures the S&P 500's anticipated volatility over a coming 30-day period. It's a fear barometer because it rises when traders expect stocks to seesaw and bid up S&P options. So unlike options on a stock, VIX options are built on something more amorphous: market expectation of volatility.

There are, of course, other tools for trading volatility. But VIX futures require futures-trading accounts that many investors lack. They also feature potentially unlimited risk, while options allow one to bet a predetermined sum. There are also variance contracts tied to actual volatility -- as opposed to expected volatility -- but many individuals find these hard to fathom."


The New Fear Options
Barron's, MONDAY, JANUARY 16, 2006

Saturday, January 14, 2006 | 07:03 AM | Permalink | Comments (16) | TrackBack (2) add to | digg digg this! | technorati add to technorati | email email this post



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» Extreme Volatility from The Big Picture
Like our prior set of charts, the following VIX graph from Birinyi Associates discusses a measure of sentiment hitting an extreme measure -- they call it extreme volatility. How is that defined? Anytime the VIX doubles over 50 days:Over the last 50 tra... [Read More]

Tracked on Jun 15, 2006 3:28:16 PM

» Chart of the Week: Volatility Index from The Big Picture
Back in January 2006, I suggested that the period of long placidness in markets were coming to an end, and that it was a good trade to Buy Volatility. That turned out even better trade than I hoped/feared: Here's a nice looking graph from the National ... [Read More]

Tracked on Mar 27, 2008 11:31:45 AM



Coincidently, I was looking at some charts of the VIX last night after I saw Dr. MARC FABER mention that he liked being long it for 2006, as he believes this year would be the beginning of a pickup in Volatility...

The charts show alot more room to the upside than to the down...

If you or any Big Picture Readers would like they can check out the interview @ the link below...

It is a head to head exposition of divergent views on the global economy between Louis Vincent Gave of GavKal Research and Dr. Marc Faber of the Gloom, Doom, and Boom Report..

PS - Repsect for posting my artwork on the Essays and Effluvia Blog...


Posted by: Dave Singer | Jan 14, 2006 11:56:58 AM

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