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

Videocast: Big April VIX call buying

March 27, 2015

GroupOne's Jamie Tyrrell says a major player bought 150,000 April 20 calls late yesterday even as VIX futures fell.

VIX

Videocast: VIX not showing panic

March 26, 2015

Despite the market's downturn this week, Group One's Jamie Tyrrell says traders apparently do not believe that the VIX will hit the 20 level.

VIX

Videocast: April, August VIX calls

March 25, 2015

As the market selloff accelerates midday, Group One's Mike Palmer says traders are buying protection through VIX calls in April and August.

VIX

Videocast: Looking for higher volatility

March 24, 2015

Group One's Jamie Tyrrell says investors are buying upside calls in the VIX and selling puts, looking for the volatility index to push higher.

VIX

Videocast: Buying April VIX calls

March 19, 2015

As the market pulls back from yesterday's rally, Group One's Jamie Tyrrell says traders are buying VIX April 22, 26, and 27 calls.

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

Premium Services

Archived Webinar

Education & Strategy

Short Gamma

Last week, we talked about long Gamma. We said that long gamma is acquired by purchasing options and when you...

View more education articles »