The Volatility Index (VIX)
Volatility Index is an innovation that provides options traders with the opportunity to achieve spectacular returns rarely present in other options markets.
The index is based on the implied volatility present in 30-day S&P 500 options. In truly efficient markets, this can reliably be seen as the market’s expectation of near-term volatility. Thus, once the index is created, traders can implement a view of volatility isolated from other variables common to option pricing, such as underlying asset prices, dividends, and even days to expiry.
The VIX’s volatility becomes a tradeable commodity and allows a straight purchase or sale of volatility,
The VIX has a well-defined historical correlation with the S&P. History shows that equity markets rise at a far slower rate than they fall. As such, the historical volatility of the S&P is inverse to its price.
This makes the perfect timing tool for equity markets. When the VIX is low, the markets rally, and when the VIX is extended, it signals a market pullback.
The VIX trades in a tight range of between 10 and 45 (reflecting volatility as a percentage)
Every equity index will experience the usual humdrum of the trading day. This may continue into weeks and months, but out of the entire option delivery month, there may be one day that volatility skyrockets to outrageous levels and the market undergoes a significant move.
VIX Options
The VIX is a market indicator derived from options that are derivatives of derivatives; the proposition becomes even more interesting when options on this asset are introduced.
VIX options maintain a volatility variable in their pricing. As a result, the VIXX exhibits volatility as high as 80% and provides ample trading opportunities.
Few other options markets exhibit such high implied volatility, and options on the VIX provide better trade set-ups than trading the VIX itself on a percentage basis.
The high volatility creates a hefty premium. These characteristics of the VIX options market will ensure that risk profiles within the VIX options market shift quickly. However, at the Options Hunter, we often look at the weekly, out-of-the-money options with limited time to expiration to reduce the premium cost.
An alternate to the VIX index options is to use the VXX, an ETF designed to mimic the VIX. This ETF trades like a stock and the options are therefore stock options.
The Options Hunter approach is a simple buy-out-of-the-money options strategy, which defines risk and offers unlimited upside to the trader instead of an option seller that is a defined gain combined with unlimited risk to the trader.
The VIX is also a useful tool for measuring where the underlying market is moving. Periods of low volatility often occur when the market like the ETF SPY is moving higher. When volatility is moving up from a downtrend the market is usually descending.
What are Weekly Options and Why Do we use them.
Trading Weekly Options can result in extreme profits, and those profits can also be incredibly volatile.
How do Weekly Options Differ from Monthly Options?
Weekly options and monthly options are similar—the primary difference between the two lies in the expiration dates. Monthly options expire every month on the third Friday of the month, whereas weekly options expire almost every Friday and is issued on Thursdays.
Traders who were previously limited to just 12 options expirations each year with monthly options can now capitalize up to 52 expirations by adding the tool of trading weekly options to their trading portfolio.
Weekly Options are More Cost-Effective than Monthly Options
Weekly options are less expensive than shares of the stock and cheaper than standard monthly options. This is because the time duration (premium) is minimal with weekly options, as traders have only a couple of days to wait for the underlying stock to make the predicted move. Do not be scared off by the quickness of these weekly options trading opportunities. The increased volatility within the weekly options trade holding period presents an increased profit-taking opportunity, more so than an increase in risk.
Weekly Options Listings Feature Popular Stocks and Indices
Weekly options listings change every week, mainly because the weekly options expiration period is limited. The CBOE is always in a constant process of listing attractive weekly options to increase trading volume. Therefore, traders have seen a significant rise in the popularity of weekly options over the last few years. High-volume stocks are the most likely going to make it to the new weekly options list each week. Additionally, the weekly options listings may also include stocks that are slated to announce big news in the near term.
Weekly Options Maximize Profit Potential
Weekly options allow traders to profit during any kind of market environment. The short-term nature of weekly options trades calls for efficiency in a fast-paced stock market that can be highly unpredictable for long-term investments. With weekly options trades, traders can benefit from buying cheaper options and then selling them for more than purchased within a short period of time.
Regardless of the price movement, it is always possible to see triple-digit returns with weekly options buying. Unlike stocks that only benefit investors if the stock price increases, weeklies let traders benefit regardless of the stock price direction.