Investment Moats

How do you get invested in market volatility $VIX

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There this site Vix and more which i came across as being a good guide to options and all things volatility of the market.

This week there is an article on how one can take advantage of volatility as a hedging function or as an opportunistic bet:

Fortunately, there are a number of VIX derivatives that allow traders to take positions on the VIX without owning the underlying. In no particular order, they are:

  1. VIX options – these include standard options as well as VIX binary options

  2. VIX futures – standard VIX futures contracts have a contract size of 1000 times the VIX; the recently added mini-VIX futures have a contract size of 100 times the VIX
  3. VIX ETNs – currently consists of two exchange traded notes: the iPath S&P 500 VIX Short-Term Futures ETN (VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ). The former targets one month VIX futures and the latter targets five month VIX futures.

In addition to VIX products, one can always trade options on the SPX (or SPY). A long VIX position is very similar to a long SPX straddle (or strangle); a short VIX position is very similar to a short SPX straddle (or strangle.)

[Read the full article at Vix and More >>]

Double Top VIX

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Recently, markets have been trending aimlessly, flirting between support and resistance. Granted this is the best market for Iron Condor trades, but the volatility could easily burst any legs within a week. I have not look at any condor trades but might start looking. I met up with an old pal of mine and he have been doing well writing covered calls on Citigroup.

Citigroup seems to be a good option for him since its cheap at USD 5 and writing 600 call contracts requires him to have 3k USD.

What does a double top in the VIX signify? I will say it could go either way. A triple top in VIX seems rare, but the MACD reading seem to show that upside to this is possible short term wise. A move lower could prove to be a catalyst for a sideways market or the freaking bottom everyone is trying to call here.

Understanding Options – Profit (loss) vs Price Graphs

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Option overview

An option is a right to buy or sell an asset for a specified price and time.Let’s say you want to by a TV on sale at Wal-Mart. You drive there only to find out that it’s "sold out". So you go to the clerk and ask for a "rain check".

This "rain check" is a guarantee that you will get the TV for the sale price when they are back in stock. There may be an expiration date on the "rain check" for 1 month from the out of stock date.This rain check qualifies as an Call option.

You have the right to purchase the TV for the sale price up to 1 month regardless of how much the TV goes up or down in price during that period. You are the buying this call option and Wal Mart is the seller. The only difference of this rain check versus a real option is that there is NO value on this option and it is probably non-transferable.

Now, let’s use this same concept for a stock.

For instance, you want to buy Microsoft stock and it is trading at $50 a share. Instead of buying the stock, you decide to purchase a "right to buy the stock at 50" which will expire on 1/15/01. You would be willing to pay $3 for this right to buy Microsoft before 1/15/01 at $50.

On the other side of this deal, there is someone who is willing to sell you this right for you to buy Microsoft from him for 50. He wants $3 for granting you this contract.

Comparison table: Stock option VS Rain check for TV

 
 

Option components:

 
Stock
 
 

Rain check for TV

Expiration Date
 
1/15/2000
 
 

1/15/2000

Strike (exercise) price
 
50
 
500
Call (buy) or Put (sell)
 
call
 
call
Option price
 
3
 
NO VALUE (non transferrable)

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Butterfly Spread explained

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The butterfly spread is a neutral strategy that is a combination of a bull spread and a bear spread. It is a limited profit, limited risk options strategy. There are 3 striking prices involved in a butterfly spread and it can be constructed using calls or puts.

Long Call Butterfly

Long butterflies are entered when the investor thinks that the underlying stock will not rise or fall much by expiration. Using calls, the long butterfly can be constructed by buying one lower striking in-the-money call, writing two at-the-money calls and buying another higher striking out-of-the-money call. A resulting net debit is taken to enter the trade.

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