Are We so Different?
Oscar Wilde once said, when talking about US/UK differences ” we have everything in common except language”. I think we have a commonality in stock market volatility.
VIX, VFTSE- What’s the difference?
VFTSE is simple market volatility. VIX is calculated on near the money SPX options prices. Our above charts show that for us UK traders VIX is a useful metric. There is an almighty gap in VIX from 4 days ago,reflecting option prices. VFTSE is based on the open and close. Traders holding long calls would have been sorry losers. Naked put owners fared equally poorly.This is when a novice gets ‘spanked’. It is also when the ‘common herd’ tell us how risky options are. So is parachuting when you don’t know what you are doing.
Sell When Vol is High, Buy When it’s Low
This is a rule of thumb but it’s not as simple as that. When options prices drop across the board, we have to think harder. Strangling or even straddling FTSE when vol is big is probably very profitable. Selling one side might be profitable. Trading smarter by comparing strategies is key. Option chains can and should speak to us.
Personally I look for 1. Key levels- highs and lows. 2. Strikes that fit my strategy. 3. Open interest at those strikes. 4.Prices,prices,prices. 5.Strategy deduced from prices. 6 Finally- Resulting credit (or even debit) that I can live with.
Example
I look at probable outcomes using Delta as a proxy for the chances of that strike being ITM. My own preferences, can therefore result in repetition. Markets tend to do the same things. Support and resistance,and volatility while implied, can guide us.
The smart mopney is in options trading-the dumb money is in the market-that’s all they can do-buy stocks-risking a lot to get a measly dividend and perhaps more QE to boost the share price to an already stupid high valuation that will never make sense.
Hence VIX is a very smart indicator and derivatives of it are traded big time.