Aaron,
<<Do you look for surges in the VIX before you write premium?>>
The VIX measures implied volatility in a basket of OEX options that bracket the money. Volatility (technically, the standard deviation of the daily change annualized) suggests price change and price change usually happens faster going down than up. Stocks usually creep up but fall like rocks. Consequently, the VIX typically goes up dramatically during downdrafts and falls off as stocks slowly rise. For example, before the downdraft of the last couple of days, the VIX read something like 19%. It shot up to 25 or 26% on the downdraft. You typically see a low VIX and a low volatility pricing component in options ahead of downdrafts like yesterday and a high VIX (these days, high is, say, 28-30%) near bottoms. To capture the volatility premium after a downdraft, you obviously have to write puts in a down market, a very dangerous thing to do. Yesterday, I bought out-of-the-money calls when we were down about 150 Dow points and am obviously happy with the trade so far but, because I was long the calls, the rising market caused the VIX to decline and squeezed premium out of my calls. Nonetheless, they're doing okay. I measure wither the VIX is low or high with the standard deviation of a set of 22 22-days samples and define high or low as plus-or-minus a standard deviation.
Best,
--Steve
P.S. When I said "write high volatility and buy low volatitity," that's just an old rule of thumb among traders that's been around for years. |
