Learn the trade here. Make it on tradeMONSTER

Options Trading News

January 1, 2013  Tue 10:48 AM CT

VIX: SEE CHART GET CHAIN FIND STRATEGIES
Much of the talk about hedging into the so-called fiscal cliff has involved the use of options or volatility funds to take the edge off any market plunge. But one of the beauties of being a retail trader is the ability to simply sit on the sidelines, which is one way to go into the New Year.

Although I am not an advocate of the "cash is king" thesis, there are times when doing nothing is the most prudent course. I prefer to buy puts or long-volatility products to play situations when I think that volatility expectations are too low, but sometimes that can't be justified.

I had a conversation the other day about the possibility of just moving everything to cash from now into the beginning of the year. Most institutional investors and traders don't have that option, which is actually one reason that it is appealing.

It is also appealing if you don't like the idea of paying for protection. If the market pulls back, you get a great opportunity to get back in; if it doesn't, then nothing is lost.

But there are two issues here. The first is that the markets could surge, leaving you behind if you're in cash. The second is the psychological factor: If the market is 5 or 10 percent lower, will you be able to jump back in and take advantage of a "great buying opportunity"? On the other side, if the market is 5 percent higher, will you be able to buy back in, knowing that you have missed out on part of the run? Or will you then stay on the sidelines, risking missing out on any bullish follow-through?

This is why hedging with options can make more sense, depending on how you answer those questions. That way you stay in the market and, if you have structured your positions properly, you could profit if the market moves either higher or lower. Of course, with a position like that you do need volatility and you need to make sure you are not overpaying.

Yet there is still a lot to be said for sitting on the sidelines at a juncture such as this, especially during the holidays. And if you are one of those people who may have issues getting back into the market after the fallout, options can then be used to scale back into positions.

Options are great and they can give you necessary insurance and exposure. But sitting in cash can provide for truly happy holidays and peace of mind, something I wish for all in the coming weeks.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Dec. 12.)
Share this article with your friends


Related Stories

VIX

Videocast: VIX action all over map

August 1, 2014

As the market continues to sell off today, Group One's Jamie Tyrrell says VIX trading is busy but not showing clear direction.

VIX

VIX surges 27% as equities plunge

August 1, 2014

The CBOE Volatility Index surged more than 27 percent yesterday as equity indexes plunged in one of their worst sessions of the year.

VIX

Videocast: Caution in VIX trading

July 31, 2014

Group One's Jamie Tyrrell says there are usually more call sellers than buyers on the first big market selloff day, but today is different.

VIX

VIX, equities rise slightly after Fed

July 31, 2014

The major equity indexes and the CBOE Volatility Index closed higher but little-changed after the Federal Reserve announced its monetary policy yesterday.

VIX

Videocast: How VIX is trading Fed

July 30, 2014

As the market declines today, Group One's Jamie Tyrrell says all of the major volatility measures are rising ahead of the Fed's afternoon announcement.

TRADING WEEKLY OPTIONS

The fastest money in the market
View full report »

Premium Services

Education & Strategy

Why traders hedge with sector ETFs

Many people who are not familiar with options think that they increase risk, but their first and primary purpose is...

View more education articles »
optionMONSTER stockMONSTER tradeMONSTER