Buy Volatility

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.

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:


"CAN YOU BUY AND SELL fear and greed? In the option market these days, you can increasingly count the ways.

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
Barron’s, MONDAY, JANUARY 16, 2006

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Dave Singer commented on Jan 14


    Coincidently, I was looking at some charts of the VIX last night after I saw Dr. MARC FABER mention that he liked being long it for 2006, as he believes this year would be the beginning of a pickup in Volatility…

    The charts show alot more room to the upside than to the down…

    If you or any Big Picture Readers would like they can check out the interview @ the link below…

    It is a head to head exposition of divergent views on the global economy between Louis Vincent Gave of GavKal Research and Dr. Marc Faber of the Gloom, Doom, and Boom Report..

    PS – Repsect for posting my artwork on the Essays and Effluvia Blog…


  2. Ravi Purohit commented on Jan 14


    I completely subscribe to your views. This could be the year when investors/speculators try and figure out what next ? I am sure every i/s today must be wondering where to invest now ? Is the commodity bull-run sustainable, will crude oil keep going up, will bonds make a comeback (atlast ?), will US raise interest rates further, will the world see a repeat of a meltdown in USD (v/s Yen as seen in 1995) though this time it could be a host of currencies ? … the list of questions seems endless and yet we the i/s keep driving asset prices …. ?

    But, sir, i have a question ? What should one do to bet on volatility, in absence of VIX options/futures ? Can selling out_of_the_money options be an alternative strategy ?


  3. zanzibar commented on Jan 14

    Are these VIX options tradeable like stock options? Meaning you don’t need a futures account.

    I can’t seem to find the option chains. What are the tickers?

  4. zanzibar commented on Jan 14


    Faber has been forecasting increases in volatility for quite some time and it has not happened yet. I am sure any forecast will be right eventually.

  5. B commented on Jan 14

    Intraday volatility has already picked up this year. The markets are acting rather strange. I can’t remember when I’ve seen a day with TICK readings of +1000 and -1000 in the same day. We just had one. That means the lines are being drawn in the sand as I see it. Consistent with my work which says we are about to start the battle of bulls and bears some have been waiting for.

    We are also getting some queer readings with the VIX up and the indices up. That is typically an ominous sign…..right when we are about to hit a TD Sequential sell………BOOM!

    The Street is predicting smooth sailing in the first half on average with any trouble, if at all, limited to the second half. The market never does what the majority wants hence our Christmas rally in January and the tendency to believe the first week of January predicts an up year. Frankly, it’s all bullsh*t feed to individual investors with no back testing or validity or spin of stats to be positive when they are really negative. If that sounds like circular reasoning, that’s because Wall Street is full of it. Btw, we still have a Hindenberg Omen in effect for another couple of months. Yet all is forgotten because of our explosive two weeks. OE week should be a ball given some things I see. All anecdotal but the market is based on statistics. Never fight the odds.

    Will the Fed’s recently liquidity binge keep the markets up? Only if there is demand for such. Right now, the stats look like they are showing there isn’t any demand so the open market ops are likely somewhat futile.

    Btw Barry, I think you have another very well respected guru in your camp. I finally picked up my BW and browsed some of the investment stuff. I believe Bernstein over at ML has an anecdotal indicator which is based on taking the contrary view of the preponderance of WS expert predictions. Given you are the lone wolf, I’d say he’s likely in the same camp. As stupid as that indicator sounds, it picked the tech boom in the 90s, trouble in 98 and top in 2000 and oil over the last few years. Pretty doggone good anecdotal indicator. Also tells me global demand may crush crude/commodities in 2006. Hmm…PD just delivered crappy results. That would be very bad in my estimation. Because if they crater, that means a slow down would likely be alot worse than anyone would care to tolerate…..including me.

  6. PC commented on Jan 14

    You wrote:

    “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 is a general misconception that futures trading is risker than options trading. Futures trading only has “unlimited” risk if you refuse to cut loss on a losing position. You can also choose “how much” to bet with futures. So the risk control is fully in the hands of the trader.

    For those with discipline problem, then options seem better as you don’t need to cut loss – you only lose what you buy/sell on the option. However, options is more difficult to make money in the sense you have to get (1) the market direction right and (2) the options expiration period right in order to get the best bang for your dollar. With futures you only need to get the market direction right.

    Many people don’t realize that the majority of options expire worthless.

  7. TonytheTiger commented on Jan 15


    You don’t need 2 accounts anymore. You can now trade futures and stocks from the same account. I trade through Optionsxpress. I still have my old futures broker, only because he has 30 years experience and has become a good friend of mine.

    The ticker symbol for the VIX is “VIX”, you won’t find an option chain available yet, not till Feb.

    Future trading, option trading and stock trading, neither is riskier than the other. It all depends on your personal preferences and emotional state.

    I starter out trading futures and have done well. Not so good with stocks and now trade options on the Q’s, this is what I do full time.

    I disagree with PC, if you have a discipline problem, then stay away from options. That’s why most expire worthless.

  8. TonytheTiger commented on Jan 16

    These people that create these trading vehicles are not dumb. The VIX options will increase volitility to the indexes–one more ace in the hole. Besides, it is a great opportunity to take more money away from the masses.

    At this point in the game, most are greedy and are seeking opportunities to create more money in their lives. With the creation of the VIX options, there is a possibility of more upside in the indexes…..much, much more. Greed is running strong and the markets can become extremely overbought before they turn.

    There seems to be a fallacy about how to buy options. One of the biggest mistakes you can make, is to price them out before buying. You don’t want to do that. If your looking for bargains then go to the flea market on Sunday. Don’t even look at the price of the option, look at the price of the stock. When you feel it’s time to buy, then buy your options no matter what the price is- -of course getting out is another story.

  9. D.Wallener commented on Jan 16

    Encouraging retail traders to dabble in VIX futures – or worse, options on futures – is pretty dubious advice. VIX futures DO NOT track spot VIX, they are a forward contract on a hypothetical forward contract.

    Depending on how VIX is moving, they can flip from backwardation to contango and back to backwardation in a heartbeat. VIX futures are a derivative of a derivative of a derivative. Options on VIX futures add yet another layer of derivative pricing complexity on top of that.

    The advice in the comments about not looking at the price of an option before buying/selling is so completely misguided I’m at a loss as to how to even begin addressing it.

  10. TonytheTiger commented on Jan 17

    I don’t expect everyone to understand this philosophy in buying options. It has taken me 8 years to understand this myself. It leaves the emotions behind. I earn a good living doing this btw.

    Let me point out that i’m a short term trader, in and out from 1 day to 2 weeks. Sometimes making only 10 points profit and just recently, over a hundred points. There are many different ways to trade options. You have to find a system that works for you. You may think this way of trading is “misguided”…..and maybe you’re right, for some at least.

  11. Jason commented on Apr 12

    Can one buy the VIX index outright as well? Or only via options/futures?

  12. Obi Wan commented on Jun 11

    TonyTheTiger wrote on Jan 15 that trading the VIX will *increase* volatility. Is that true? The VIX is a resulting formula based from S&P options. I cannot see how buying the VIX can increase or decrease the value of S&P options, can you? By buying VIX, does it really increase the value of that “commodity” without affecting the S&P???

  13. The Big Picture commented on Jun 15

    Extreme Volatility

    Like our prior set of charts, the following VIX graph from Birinyi Associates discusses a measure of sentiment hitting an extreme measure — they call it extreme volatility. How is that defined? Anytime the VIX doubles over 50 days:Over the last 50 tra…

  14. Alok Swain commented on Oct 23

    How can one buy VIX, can one buy it like a stock, or does one have to buy VIX futures.

  15. Dave commented on Mar 4

    COMPLETELY CRAZY! I bough VIX call Options when the vix was 11. It is now 18 and the call options have not gone up. I am thinking the specialist is short them, and trying to hold them down since there is a big spread, and not a lot of interest in the far out November 13 calls. (I used to be a market maker and know saw many bad market makers use this strategy to hold down a stock) Anyway, They are November 13 calls, and they are trading at a 3.2 premium. The symbol is +VIXKO – check it our yourself.

    Now there are 2 more points in there, how come they are not trading at 5.2????

    Also, Can I execute the option and buy the vix and 13 and sell it at 18.61 right now???

    If so, cant everone and make two quick points for free???


  16. The Big Picture commented on Mar 27

    Chart of the Week: Volatility Index

    Back in January 2006, I suggested that the period of long placidness in markets were coming to an end, and that it was a good trade to Buy Volatility. That turned out even better trade than I hoped/feared: Here’s a nice looking graph from the National …

Read this next.

Posted Under