VIX 01 (Jun 09 - Oct 11)

[b0rderc0llie]

Ya, the further months contracts have already priced in an increase in VIX. I'll just conduct an experiment on this

[LenaHuat]

Hi BC,

I dont follow this very closely. Intuitively, I may go for something a bit further out but that means that you may not be able to get that much bang for your buck.

Good Luck !

Take care,
Winston

Let me give my 'maiden' comment on this : Agree with Winston. Maybe up to March 2010.

[winston]

A Crystal Ball for Trading Pros By Jeff Clark

Yesterday, I showed you how to use Bollinger Bands to make quick, short-term trades and time your option bets. Today, I've got something a little different...

Watching the price action in Volatility Index (VIX) options is like staring into a crystal ball for the stock market.

The Volatility Index is a measurement of fear in the marketplace. When the VIX is high and rising, investors are scared and traders are bearish. A low and declining VIX indicates strong bullish sentiment and complacency among traders.

The VIX is a good contrary indicator, and it does help warn investors when the market is at extreme levels. But it's not of much use when stocks are range-bound, as they are now and have been for the past few weeks. Instead, the best clues now come from VIX options.

VIX options are difficult to trade. The half-dozen or so times I tried were all disappointing. It didn't matter if I got the direction right. It didn't matter if the VIX moved far beyond my upside or downside targets. It is remarkably difficult to profit trading options on the VIX.

But watching them trade can make it far easier to profit on the rest of the stock market. Let me explain...

VIX options are European-style contracts – meaning they can only be exercised on option-expiration day. This eliminates any possible "arbitrage" effect (the act of buying an option, exercising it immediately, then selling the underlying security for a profit). So VIX options will often trade at a discount to intrinsic value.

For example, on Wednesday, December 17, the Volatility Index closed near 21.50. At that level, the VIX January 30 puts are intrinsically worth $8.50. But they were offered at only $6. That's a $2.50 discount to intrinsic value...

If it existed on a regular American-style stock option, you could buy the put, exercise it, and liquidate the position all day long, picking up $250 for every contract you traded. The European-style feature prevents that from happening – because you can only exercise this contract on January's expiration day. But we can still benefit...

VIX options provide terrific clues about where most traders expect the Volatility Index to be on option-expiration day.

The current VIX option prices tell us even traders who are making bearish bets on the VIX expect the index to move higher into January. This sentiment is even more evident if you compare the VIX January 22.50 calls to the VIX January 22.50 puts. The calls closed last week offered at $3.90, while the puts were only $1.00. (I use my trading quote system to track these prices, but you can find them at quotes.freerealtime.com.)

VIX option traders clearly expect the index to move higher in January. And a rising VIX (rising volatility) usually accompanies a falling stock market. So if you're making short-term bullish bets, be careful as we head into the New Year.

http://www.growthstockwire.com/

[millionairemind]

VIX option traders clearly expect the index to move higher in January. And a rising VIX (rising volatility) usually accompanies a falling stock market. So if you're making short-term bullish bets, be careful as we head into the New Year.

http://www.growthstockwire.com/

US market corrected during January in the last 2 yrs. Lets see if next year will be any different.

[kennynah]

..

[winston]

The VIX, as the Chicago Board Options Exchange Volatility Index is known, slumped to a 16-month low [last week], retreating 1.2 percent to 19.47.

The gauge, which measures the cost of using options to protect against stock-market declines, is on track for the biggest yearly drop in its 20-year history after surging to a record 80.86 in November 2008.

Source: Bloomberg

[winston]

The VIX Got Nixed in 2009 By ADAM WARNER

After seeing the volatility index tank, consider buying S&P 500 or SPDR puts.

IF US MAGAZINE HAD A LIST of "Hot" and "Not" for financial products, the Chicago Board Options Exchange's Market Volatility Index (VIX), would have certainly made it to the "Hot" side at the end of 2008 thanks to the veritable explosion in overall volatility.

The debate was whether we should consider it an asset class unto itself, with the implication being we need to own it in some way to protect our portfolios.

Fast forward to now, the end of 2009, and it's very much "Not." I sincerely hope anyone who invested in something VIX-related had it merely as a small hedge.

The VIX has lost roughly half its value in 2008. But the VIX itself is just a statistic. Fortunately (or unfortunately), we can trade it now in many forms. But even when times are better to own volatility, make sure you fully understand that which you invest in.

You can buy futures on the VIX. These futures expire each month, 30 days ahead of the next cycle's "regular" expiration day. That places it on a Wednesday either just before or just after the current "regular" expiration day. For example, we have "regular" expiration on Feb. 19, so VIX January futures expire 30 days before that, or Jan. 20. That is the Wednesday after "regular" January expiration. February VIX futures expire on Feb. 17, which is 30 days prior to "regular" March expiration (March 19).

Confused? That's actually one of the easier concepts about this product -- it's just a matter of double-checking your expiration date.

The real issue that vexes most is that the futures don't always track the VIX itself. The VIX provides a handy estimate of volatility on S&P 500 options with a duration of 30 days. A VIX future prices a snapshot of the VIX on the day the future expires. Since the VIX estimates volatility 30 days beyond that, a trade on the future is a bet on where traders at a later date (futures expiration day) will estimate volatility in S&P 500 options 30 days beyond that. Thus there's no guarantee that a move in the VIX today will have any effect on a VIX future.

Really confused now? Well, suppose that instead of gauging market volatility, the VIX predicts an average temperature for the next 30 days (we'll call it the cash WeatherVIX). And the WeatherVIX future wagers on the forward weather forecast from the date that future expires.

For argument's sake, we'll say the WeatherVIX future expires in March. Suppose it's unseasonably warm today. The cash WeatherVIX will likely lift as weather traders will likely project unseasonal warmth ahead.

But what of the March WeatherVIX future? It's unlikely some current heat wave will have much effect on where we guess traders 2.5 months from now will predict temperatures 30 days forward from there. So the cash WeatherVIX will rise, while WeatherVIX futures do little to nothing.

It's the same with our actual VIX. A wild day today will lift the VIX, but it will have far more muted effect on a VIX future. The longer until the future expires, the less effect one-day actions will have.

So at the very least, if you have a notion to buy or trade VIX futures, use shorter durations. And as luck would have it, we can now do that in exchange-traded notes (ETN) form.

In late January of this year, a VXX was born. That ETN tracks a perpetual 30-day VIX future, so thus it's a one-stop shop that always tracks the near term. It's still early, but on an average day, VXX tracks about 40%-50% of the move in the VIX itself. But alas, VXX has many issues. In order to maintain a constant 30-day duration, VXX needs to internally roll either VIX futures or swaps each and every day.

By that I mean it must sell a short-term instrument and buy a longer-term one. If the VIX futures curve slopes upward (contango), that entails selling a relatively cheap nearer-term future or swap and buying a more expensive longer-dated future or swap. On a given day it's a small amount, but over and over again, it will really add up.

But it could work in reverse, right? What if the volatility-term structure slop/ed downward, that is, VIX futures traded progressively cheaper the further you went out in time. Wouldn't VXX benefit? The answer is presumably yes.

The problem is that's not how options tend to price. For the most part, the term structure slopes upward. Longer-dated volatility tends to trade more expensively than nearer term. The most notable exception occurred in 2008 when volatility in general spiked ferociously. VXX did not exist yet, so it's unclear how it would have performed.

What we can see is how VXX did in 2009, and it was not good. VXX has lost nearly 70% of its value since inception in late January.

So where does this leave us if we went to own volatility in some form?

I would not completely avoid VXX or VIX futures. Just know of what you trade. Know that VIX futures tend to keep a "show me" attitude towards very-short-term VIX blips and assume eventual mean reversion. And know that VXX may track a one-day move in a modestly predictable fashion, but over time will lose thanks to its structure.

Or perhaps just keep it as simple as possible. Buy S&P 500 (SPX) or SPDRs (SPY) puts. That's still the best way to either hedge a portfolio or simply bet on a market selloff and the likely increase in overall volatility.

http://online.barrons.com/article/SB126 ... 10147.html

[winston]

Volatility Is Back... Here's How to Profit by Karim Rahemtulla

The stock market kicked off 2010 with a bang, as the major indexes used strong manufacturing data to scoot to 15-month highs.

As always, though, the movement of the CBOE Volatility Index (^VIX) dipped under the radar. Based on options activity on the S&P 500, this widely watched - but poorly reported - gauge of fear and complacency among investors quietly slumped by more than 6%, edging toward the 20-point mark.


Using The Fear/Greed Index to Pinpoint Your Best Time to Profit

This means little to many investors. But savvy onlookers know that now is the time to pay more attention. In my column on volatility and the VIX a couple of months ago, I warned that a drop under 20 implies that investors are becoming more complacent about the market - and that it might be time to tighten your stop-losses, or lighten your positions as a result.

Moreover, a move toward 10-15 points is a signal to sell your positions, as it indicates that investors are buying significantly more S&P call options than puts. Such an imbalance suggests a high level of complacency, with a market correction usually imminent.

We're not quite there yet. But that doesn't mean you still can't make money at current levels. The question is: Do you know how?

What You Should Do When the VIX is Low

When the VIX is this low - and trending lower - you can capitalize by buying put options, especially longer-term ones. The reason is two-fold...

1. Time: Long-term put options give you plenty of time for a market correction to occur, thus making you money. For example, if you buy a two-year put on the S&P 500, you're betting that the index will fall at some point over the next two years - a pretty sure bet in my book.

2. Low Volatility: What makes the trade even better is the fact that the VIX is low. That's because when the VIX is low, it means stock volatility and options premiums are also low, which gives you cheaper entry points.

And when it comes to the price of options, it's the underlying volatility of the stock in question that is a crucial factor. (Others include time to expiration, the share price and risk-free rate of return, but volatility is the key driver.) Given that the volatility number is low - as it is now - option prices are correspondingly low.

Of course, it's also at this point that most people aren't interested in buying put options, since they're too busy salivating about profits from the long side. Hence the complacency factor. And it's tough to profit from a short-term trade, as history has shown that investors can be very complacent for a surprisingly long time!

So it pays to take a long-term approach...

Source: Investment U

[winston]

STOCK MARKET INSURANCE IS ON SALE AGAIN

Volatility, we hardly knew ye... Part II.

Back in September, we ran a chart of Wall Street's most common gauge of investor fear,
the "VIX." This index tracks the price people are willing to pay for protective stock options, aka "portfolio insurance." We pointed out how folks just aren't scared of risk anymore. They're becoming less worried...

Folks in the insurance industry can tell you an interesting thing about their business. Their customers are most willing to buy insurance against earthquakes and hurricanes right after a disaster... right when prices are high. This is when the threat is fresh in the buyer's mind. Most folks aren't much interested in buying insurance when things have been calm for a decade... when insurance is cheap.

This phenomenon is at work in the VIX right now. As you can see from today's chart, the VIX reached a "super spike" point around 80 in December 2008. As billions of government dollars salved the wounds of the housing crisis, the VIX drifted lower and lower all last year. And just in the last several trading sessions, the fear gauge dropped below the 20 level. Investors aren't much concerned with risk... and "insurance" is cheap.

Source: Daily Wealth

[kennynah]

take a peek.... you may just like what you see...