Friday, January 22, 2010


Now is a time you can play futures instead of options if you're worried about volatility. If you buy puts today and volatility comes in, you can actually lose money even if the market moves down. There is no vol on futures.


  1. You called this one. I failed to think about the effect of volatility on the option price of the puts that I bought on the VIX.

  2. I also think that in the future I would like to find an ETF or something to play volatility. Because I have learned from my trade in the VIX and SPX that the index options behave differently then equity options. On top of that the Spreads are huge and it is really hard to get filled on SPX options. In the future I will just use the SPY for plays on the index.

  3. Hey, live and learn, and you'll never reach a point where you've learned everything the market has to offer. As long as we don't repeat mistakes we're doing good. I think there is a VIX ETF, maybe VXX? I heard that ticker mentioned in a webinar last week. I've never played SPX options but I'm surprised the BxA spread is wide since that is the most played index. Maybe it's because of the availability of SPY. Equities are easier to play than futures for most people.

    I've learned that during periods of volatility the market maker widens their spread for two reasons. The first is if people are panicking they will pay what they have to, the second is that with market uncertainty that is causing volatility, the market maker is susceptible to more risk as well so they want to be compensated for it.

    Unfortunately the best time to buy protection is by having good timing. Like last week IWO bought SPY puts when SPY hit an all time high. That was a strong move and not just in retrospect for at that moment there was more premiums in calls than puts, and for technical reasons you think there will probably be a retracement before hitting new highs.

    So next time you think vol is high and will come in, whether its an individual name or the market in general, we should look to be net sellers of options. In this scenario the market could trade flat and we make money as long as vol comes in. Maybe trade that idea in the simulation account so you can follow how vega moves. Is that something you can look up in the ThinkBack tool? Does that give you all the input prices of the option or just the net price of the option on that day?

    Also, I ordered an Options Scenario Workbook that should be here before I see you next week. I don't know exactly what it will be like but the description sounded like something I wanted to do. It it actual hand calculations so you get a visual learning experience of just what is driving the options' price change in different scenarios.