OptionsHouse

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

Video: Huge June VIX call buy

May 22, 2015

Group One's Jamie Tyrrell says one large player purchased 140,000 July 18 calls in the VIX, adding to heavy upside buying earlier in the week.

VIX

Video: Heavy June VIX call action

May 21, 2015

A day after the May VIX contracts settled at 12.80, Group One's Jamie Tyrrell says 250,000 June calls changed hands.

VIX

Video: VIX June 17-18 call action

May 20, 2015

Following this morning's May contract settlement, Group One's Dominic Savino says traders are now targeting the VIX June 17 and 18 calls.

VIX

Video: VIX going into expiration

May 19, 2015

Group One's Jamie Tyrrell says traders are expecting a quiet May settlement tomorrow morning but are active in the June contracts.

VIX

Video: Low premium in May VIX

May 18, 2015

Group One's Jamie Tyrrell says VIX options are showing little premium levels ahead of the May settlement on Wednesday morning.

Invest Like a Monster - San Diego: June 26-27

TRADING WEEKLY OPTIONS

The fastest money in the market
View full report »

Premium Services

Archived Webinar

Education & Strategy

Short synthetic stock

With the use of the calls and puts we can not only create Long Synthetic Stock, but Short Synthetic Stock as well...

View more education articles »