The Chicago Board Options Exchange (Cboe) Volatility Index (Vix) gives us an indication of investor expectations. If you look at a chart of the Vix and compare it to that of the Standard & Poor’s 500, it is clear that when the S&P 500 hits a peak, the Vix is at a low, and vice versa. A high Vix indicates that fear is dominating the markets, hence high volatility, whereas a low Vix indicates optimism among market participants.
At the end of the first quarter of 2010, the Vix was at around the 18 level, which is relatively low. In fact, if you look at the October 2008 peak of the S&P 500, you’ll see that the Vix was at a similar level. Is this any indication we will see a bearish rally in the markets? For whatever reason, the markets have been experiencing a healthy bullish rally when the underlying economic fundamentals have been weak. Those who understand the markets have been expecting a fast market reversal to happen for a while now. If you limit your trading to equities, opening long positions when all your indicators suggest that everything is overvalued could be like hopping on a fast train that’s close to the end of its ride. And until you see signs of a market reversal, you’re not going to be opening any short positions. The only option you have is to wait. In such a trading environment, option traders are the ones who can benefit the most. You can apply a number of strategies when you’re trading options, several of which are market-neutral. You have the opportunity to make money whichever way the market is moving.
In this, the May 2010 issue of Technical Analysis of Stocks & Commodities, you will find in-depth discussions of some of these market-neutral strategies. In the feature article, “Debit Or Credit?” by Giorgos Siligardos, you will learn the ins and outs of debit and credit vertical spreads. Here’s where you can find out which ones are better to trade. In “Introducing The Modidor Spread” by Jay Kaeppel, you will see how this modification of the iron condor can be applied to your trading. There is no one size fits all trading strategy; in fact, you may find that instead of using the modidor spread, the iron condor may be the better choice. But what is an iron condor? Our interview subject this month, Jared Woodard of CondorOptions.com, will tell you all about this market-neutral strategy. Check it out. And if you still think trading options is complicated, turn to “Triple Theta, Half The Time” by John Sarkett, and see how one family successfully trades options. That’s the “At the Close” piece. Invest your time and effort and you’ll see it pay off. Take a look!
Jayanthi Gopalakrishnan, Editor