High Vs Low VXO Trading Styles

mirriam macwilliams vxo







Back in September 2011, I’ve got some of our traders concerned with the high VXO.

Remember that when the VXO is in the teens (10+) the volatility in the market is low. Typically you will see the market prices rising.

When the VXO is between 20%-39% the volatility is high and when the VXO is above 40% then the volatility is at extremes. Stock prices are plunging and there’s lot of panic in the market.

Believe me it is nothing to be concerned about and something we might have to get used to.

Whenever the markets begin to drop in a very big way that is what is going to happen (more Put options are being bought versus Call options on the S&P 100). I then need to make certain adjustments in my trading because the IV’s on the stocks in our basket will begin to go up and the daily ranges will also begin to be wider.

So far from being gloomy it provides an opportunity to capture huge profits to the downside. Whether we will see another recession next year remains to be seen. I myself don’t trade such long time horizons. The longest time horizon for me is the Retirement Portfolio where I stay in the trade for a few months.

I was asked about whether banks would make good investments to the downside – they are for me! As far as styles of trading the Trend Method is king at these times. Also any type of Short Term trades, Earnings as well as the Cash Generating Methods are ideal.

So what happens to the IV’s when the VXO begins to drop? You can imagine that the IV’s on our positions will also begin to drop. That is why the Trend Method (as a longer style of trading) is best since the IV’s have a tendency to stay elevated. Other trading styles suitable for low VXO environment will also include my favourite Investing method and the Investing After Earnings methods.

Now you can see that options offer a wonderful opportunity to help us generate wealth regardless if the trading environment is rosy or gloomy. You just have to know when to apply the right trading methods to give you the best mileage.