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Strategies & Market Trends : Waiting for the big Kahuna

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To: rubbersoul who wrote (82201)	10/20/2008 9:38:58 AM
From: Gersh Avery	1 Recommendation Read Replies (1) of 94695

Vix represents the amount of premium priced in a set of options (puts and calls) on a collection of stocks. As fear enters the market place, the amount of premium in the price of options grows. As fear leaves the market the amount of premium lowers. Thus a move up in the vix shows that fear has entered the market. It's almost a numerical representation of the emotional state of the market. Premium: Say I own a call for stock X. X is currently priced at 50. The strike price for the call is 40. A flat value for the call would be $10. IOW That call option and $10 gets me that stock. If the market will buy the call from me for $11 then the premium would be $1. If the market suddenly suspects a reason for the stock to run up in value, then there would be a rise in premium. Jumps in option premiums represent an expectation of rapid movement in stock prices. As expectations for the entire market to make sudden sharp moves grows that expectation is reflected in the vix.

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