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December 2, 2011  Fri 11:41 AM CT

VIX: SEE CHART GET CHAIN FIND STRATEGIES
I find it interesting and informative to see who exactly is successful in the option markets. There are so many different players with widely varying motivations and strategies, and observing which ones are doing well in any given environment can give the rest of us some important guidance.

The market makers almost always do well, of course, but that is not a model that we can follow. Many option funds don't last very long, and many of the players from 2007 aren't around anymore either. This is actually a two-sided issue.

The many option and/or volatility sellers that were around then went out of business with the financial crisis of 2008. But many of those who buy options and/or volatility and did great in 2008 had awful years in 2009 and 2010, which lead to their slow-grinding demise through asset loss.

Then there were some prominent funds or managers that just disappeared. One of them is Larry McMillan, who is known as the author of the best-selling "Options as a Strategic Investment." He still offers a number o f services, but a fund he was managing seems to have vanished.

And an "award-winning" Australian fund with well-known managers called Pengana Volatility seems to have disappeared over the last couple of years.

A recent article in the Wall Street Journal reported that the Newedge Volatility Trading Index fell 3.5 percent in August and was up just 0.3 in September. The index "tracks funds that trade volatility and volatility-related products."

I know for a fact that these funds are not big and are  powered by Ph.Ds and guys who were successful on the floor. In other words they know there stuff or at least they should. One has to assume that they were largely short volatility, at least going into August.  But the long term track record of these funds and this Index isn't very good either.

On the other side of the fence are the tail-risk or "black swan" funds such as Universa Investments, which is advised "The Black Swan" author Nassim Taleb. Such funds do well when markets plummet--like today--and were up 20-25 percent through August.

But such funds lost money in 2009 and 2010 and, as I said, some had to close shop altogether. Taleb himself gave up his own fund back in 2005 because he couldn't deal with the steady diet of losses that such funds produce.

Volatility sellers were doing quite nicely since November 2008, but that changed in the last few months. One prominent fund that I follow lost more than 43 percent as volatility spiked in July and August. That would be obviously be a devastating loss for a retail trader, one that would require a 75 percent return just to get back to even.

Naturally, all of this can be a bit depressing and begs the question: If most of the pros aren't making money, how are the retail traders supposed to fare any better?

There are a number of answers, and we at optionMONSTER do our best to provide the education and services needed to accomplish that goal. One answer that I return to again and again is to be dynamic.

Most option traders get stuck in a rut of trying to one thing really well. Professionals are often even worse, as they were trained that there was one right way to do things. I think most traders gravitate toward the strategy that worked when they first started doing well.

But the times they are a-changin'--and all the time too. I recently counseled one trader to take different approaches to different VIX levels, and this seems like a good approach.

So using different strategies or trades for different environments may not feel natural, but it may be the best way to success. And as a first step, right now is a good time for spreads, not outright buying or selling.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Nov. 9.)
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