Volatile volatility may indeed be back.
While that’s bad news for stock investors, options traders love it.
For the past 18 months or so, implied volatility, the secret sauce for profitable options trading, has declined as the stock market has grinded higher. This cost many options traders mucho dinero in real
dollars and missed opportunity.
In the past week, implied volatility has spiked higher several times in reaction to falling stock prices. If this trend continues, options traders will once more have the�chance to make real money.
By midday Tuesday, the Chicago Board Options Exchange’s Market Volatility Index (VIX) was up 21%, or 4.5 points, at about 24.50.
For options traders, this is a sign that�implied volatility is up for all stocks in the Standard & Poor’s 500 Index.
For stock investors, the sharp rise in VIX means that the options market has markedly increased the cost of buying defensive�puts on major stocks.
If stock prices rebound, as they have in the past week after sharp declines, the strategy for options traders will be trying to buy “volatility” low and selling it high. If stock prices fail to snap�back, the game has changed, and volatility will likely increase as stock investors decide they need to hedge their portfolios.
Bottom line: the message from the options market is that the stock market is at a cross roads. The next few days will provide important clues.
VIX rockets back to levels of February
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