Over the past twenty-five years of trading failures and successes I have experienced is a habit that I have learned and implemented into my daily routine that has helped me become consistently profitable to review on a regular basis the VIX, or volatility index, on a daily basis.
Gavin posted a great article that explains volatility in more detail Here, and if you are an options trader (buy or sell) volatility is something to watch closely.
I’m referring specifically to Implied Volatility (IV) and how it affects the pricing of options.
When things look bleak in the stock market, sales and fear set in that make the VIX rise, as well as that Implied volatility on most options which are traded at that time.
This means that if there is more uncertainty, you will pay a price to buy the option you want.
There are many real world examples of how uncertainty in different types of markets affects prices.
Beef, timber, and house prices in the US are all great examples of how people are willing to pay a “premium” for the goods they want, and when things calm down or supply picks up again, prices will stabilize and the premiums will be abolished or reduced.
Option prices work in a similar way, but options don’t require a pandemic to add to the implied volatility.
Events such as profits, news, rumors, product approvals, and simply general market conditions can increase the implied volatility in options.
As an option seller, it is more beneficial to sell options when implied volatility is high, and as an option buyer it is more beneficial to buy options when implied volatility is low.
If you approach trading as a business, you need to make sure that you are assuring the correct pricing when buying or selling.
I usually check in at VIX three to five times a day, at least one morning, one noon and one evening.
Outside of market hours, there are VIX futures that are also traded for overnight access.
I have many habits and routines as a daily trader (some more complex than others) but the VIX review is definitely the one that comes out on top.
This is an indicator to keep an eye on as you can regularly watch the VIX to keep a 30,000 foot view of the markets.
While there are a number of factors that you need to consider before entering into any option, implementing volatility awareness as one of those factors that you consider can pay off in the long run.
About the author: Charlie Bassett is the founder of Bassett’s Assets, an investment firm specializing in the sale of stock option awards. He is also an instructor for OptionsTradingIQ.com. To book a coaching session with Charlie, send an email to [email protected]
Disclaimer: The information above is for For educational purposes only and not to be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.