Last month, we looked the the Death of Volatility.
One of my favorite secondary sentiment indicators, the VIX, begins trading options next month. Prior to this, you could only trade the VIX via futures. I suspect this will be a hugely popular product.
Prediction: This could be the year that Volatility returns to the market Buying VIX calls is one of my favorite positions for 2006.
Here’s an excerpt from the Barrron’s commentary on the subject:
Come Feb. 24, investors may begin trading options on the stock-market "fear gauge," or Chicago Board Options Exchange volatility index (symbol: VIX). It won’t be the first time that investors will be coaxed to trade something intangible. But because the VIX is such a celebrated benchmark, known even to people who can’t tell covered from naked calls, VIX options can potentially become popular and liquid, which will give average investors an accessible way to bet on the rise or retreat of market fear.
On the surface, the new option is simplicity itself: You buy calls if you believe the VIX will rise, or puts if you see it headed down. But what lies beneath is more abstract. Calculated from index-option prices, the VIX measures the S&P 500’s anticipated volatility over a coming 30-day period. It’s a fear barometer because it rises when traders expect stocks to seesaw and bid up S&P options. So unlike options on a stock, VIX options are built on something more amorphous: market expectation of volatility.
There are, of course, other tools for trading volatility. But VIX futures require futures-trading accounts that many investors lack. They also feature potentially unlimited risk, while options allow one to bet a predetermined sum. There are also variance contracts tied to actual volatility — as opposed to expected volatility — but many individuals find these hard to fathom."
The New Fear Options
By KOPIN TAN
THE STRIKING PRICE
Barron’s, MONDAY, JANUARY 16, 2006