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Options Trading Volatility
The talk these days in options trading seems to be all about volatility. Options trading volatility is nothing new. The prime reference for options trading volatility is the VIX. According to the CBOE web site, “The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world’s premier barometer of investor sentiment and market volatility.” One can forgive the CBOE for hyping their volatility measure as “…the world’s premier barometer of investor sentiment…” The VIX is, in fact, a widely used to guide investors and options traders. No matter what kinds of options trading one engages in what has nearly everyone spooked is what some refer to as volatile volatility.
Lacking a clear idea of where the economy and markets are going traders and investors are jumping into the market for fear of being left out of a rally. Then they jump out for fear that the market will plunge again. Amidst all of these fears options traders watch the VIX. VIX numbers above 30 tend to go with subsequent market declines where as lower numbers tend to predict stable markets. Whether trading steel options, buying puts on the financial select sector SPDR, trading gold options, or options trading the BP oil spill, it is the options trading volatility implied by high VIX numbers that has folks spooked. Long term investors who typically look for a substantial margin of safety in picking stocks are afraid that an unexpected market correction will wipe out the safety margin the day after they purchase. Options traders are likewise concerned that well thought out options trading strategies will go for naught in a crazy market. With the prevailing sentiment being one of doubt, one might think of a hall of mirrors where a reflection is infinitely returned, smaller and smaller, and smaller. Since no one is trusting fundamentals they are watching each other and the very volatile market.