A lot of traders have heard of the VIX and i’d be willing to bet that most of us option income traders use it. If we don’t trade it – we take a good look at it to get an idea of the ‘temperature’ of the market while trading our core strategies like the calendar spread, credit spreads, iron condors and more.
However, what a lot of option traders don’t realize is that there are numerous VIX products. In fact, there are 20 to 25 of these VIX related trading products available.
Some of these new VIX related products that are actually seeing a lot of trading ‘action’ is the VIX on Emerging Markets, VIX on Gold, VIX on oil, on Brazilian stocks, and more. These are products that basically ‘track’ the volatility for each of these individual indexes.
What these types of trading products can do is help traders get an idea of what the ‘sentiment’ is on each underlying. It can assist the trader in better tracking the underlying and then helping them to choose the appropriate trading ‘tool’ or trading strategy that best fits the current ‘Volatility’ environment that exists.
For example, let’s say that an option trader takes a look at the Volatility index on a particular ETF and notices that the VIX for that underlying is at a 52 week low point. That could indicate to the trader that should perhaps look for an option strategy that would benefit in a steady to rising volatility environment – such as putting on a weekly calendar spread or double calendar.
Another interesting development is that the CBOE is now tracking the volatility on 5 individual stocks – AAPL, GOOG, GS, IBM, and AMZN – which could be considered sort of ‘benchmark’ stocks that a lot of traders follow. This will allow traders – both of equity and options – to start looking at trading these stocks in a different way. Rather than just looking at price movement and where the actual stock is trading at – we can now start to look at these options from another angle – or dimension – the ‘volatility dimension’ and start to consider making trades or adjustments to trades based on that.
An example of how this could be used is for example let’s take AAPL and it is trading along and we own shares of it. Now, along with keeping up with the normal price chart for our position, we can also keep track of the volatility levels – and if say for example we come to find that the volatility level on AAPL is reaching some new longer term lows – that might be an indication that we might want to consider either hedging the position or maybe even selling off part of our position in anticipation of an upcoming corrective move.
You can learn more about these new VIX tools at the CBOE