Sunday, December 8th, 2019

Straddle the Market with Options

 

The market goes up and the market goes down. Last week we wrote about the VIX frenzy as volatility rose to historic levels. We quoted Bloomberg regarding the 30 minute VIX frenzy.

Among the many scary things traders witnessed as stocks plunged last Monday, one of the most harrowing was the sight of the VIX, an index designed to measure investor fear, briefly going dark.

For almost 30 minutes as hundreds of billions of dollars were erased from equities, no signals were sent by the world’s most popular sentiment gauge as options prices turned erratic. When it switched on, the VIX jerked higher faster than anyone had ever seen, rising 82 percent on its first tick to 51, a level not reached since the financial crisis.

“Seeing the VIX at 50 was just chaotic,” said Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. in Milwaukee. “It’s not like there was a headline that a bank had filed for bankruptcy or a major corporation was teetering on the brink. Why did it move that much?”

Nothing could’ve kept the Chicago Board Options Exchange Volatility Index from jumping Monday morning: global markets were buckling, China’s stocks had plunged 8 percent and companies like General Electric Co. were in free fall.

What do you do when the market is volatile? There are profits to be made for sure but losses wait at every turn. Our suggestion is to straddle the market with options. Specifically think about the long straddle options strategy.

The Long Straddle

The long straddle is a time honored strategy in volatile markets.

A long straddle is buying both a call and a put on the same stock with the same expiration date. In a long straddle options strategy the worst a trader can do is lose the cost the premiums paid for the call and the put if the stock does not change price. However, this options trading strategy has potentially unlimited potential if the stock price changes significantly.

The long straddle is an ideal approach to an extremely volatile market in which traders do not know if the market will go up or down but are virtually certain that prices will change dramatically.

Sharp Swings in the Market

Our suggestion is to straddle the market with options, the long straddle, in light of current market volatility. USA Today reports on sharp swings as stocks surge on day and retreat the next.

The sharps swings on Wall Street continued Tuesday, with stocks surging as traders returned from the 3-day holiday weekend and sent the Dow up nearly 375 points.

The gains come after last week’s volatile downturn that saw all the major indexes drop more than 3%, capped off by the Dow’s 272-point drop on Friday after a mixed jobs data report did little to clarify what the Federal Reserve will do on interest rates at its September meeting.

Every morning traders wake up to news of events in China and Europe and the market reacts violently. It becomes a guessing game instead of a look at fundamentals. The long straddle is an ideal approach to this situation with the best other option to hold cash and avoid the market.

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