How to Trade Options During Uncertain Times
10/03/2012 7:00 am EST
Juan Sarmiento of OptionsVet.com outlines his strategy for trading options during times of both low and high volatility.
Are you afraid that the markets are going to take a big chunk out of your profits? You are not alone. I can’t recall a time when there were more negative comments about US and global economy—yet the markets seem to shrug it off anyway.
As options traders, we have learned to read the VIX as the indicator of fear, but that does not seem to reflect the uncertainty that most of us feel personally. In fact, the VIX (or fear index) has not been this low in a very long time. We would have to go back to 2007 to find levels well below 20% in the VIX. If this is the “fear index,” we can say with almost certainty that the markets are in a state of denial or complacency that does not match the news coming from Europe, the unemployment data, or even the economic growth here at home. Even the Democratic party seems to agree that economically speaking, the Obama presidency still has a lot of work to do.
I have a list of well performing stocks, including Apple, Inc. (AAPL) among others, that keep on making new highs, and that we can call momentum stocks that I would like to trade. However, I am not much of a day trader, and I suspect that most retail self-directed investors/traders have a day job, but would like to trade here and there, and take a few risks without betting the ranch.
Let’s face it, AAPL has had a very nice run, and has the promise to bust their highs over and over again, as they introduce great, innovative products several times a year. And there are very few stocks like that. So what can we do? If we wait until the stock pulls back significantly, we might miss the train, but if we “chase” the markets, we might be buying at the top and end up with a very large loss.
Enter the PCCRC, the Put-Call Calendar Ratio Combination. This is my specialty. I have been trading options this way since 2005 with great results, even through the financial crisis and the now famous "Flash Crash." The PCCRC not only takes advantage of fast moving, momentum stocks on their way up, but if they reach a top and then begin go decline strongly, the PCCRC will also capture volatility increases.
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I have recently recorded a 28-minute video explaining this strategy, which is great for low volatility markets with the potential for a big spike in volatility. Now that the VIX is at historical lows, a spike in implied volatility of options might not be a out of the question. The PCCRC might be a way to be prepared for that spike in volatility while still taking advantage of momentum stocks that keep making new highs every week.
Here is the video:
Juan Sarmiento can be found at OptionsVet.com.