Options strategy to adapt GorillaPicks for options investing
Due to the recent lack of suitable GorillaShorts,
the Gorilla would like to recommend adding a supplementary strategy to
aid in reducing portfolio risk and improving portfolio returns. Since
the action of shorting can be the riskiest investment one can make, the
Gorilla would rather see subscribers partake in a pure portfolio hedge,
rather then depending on an individual company's decline. Therefore, the
Gorilla introduces the use of Volatility Index (VIX) options to protect
profits in an appreciated portfolio; to guard against the inevitable,
unpredictable, market corrections due to unforeseen events.
Since the introduction of a new type of index option on Feb. 24, 2006,
the Gorilla has been studying a new strategy that appears to work very
well for those looking to hedge their portfolio. VIX options: A type of
non-equity option that uses the CBOE Volatility Index as the underlying
asset. This is the first exchange-traded option that gives individual
investors the ability to trade based upon market volatility. Thus, trading
VIX options may provide subscribers with a supplementary tool to hedge
their portfolios against sudden market declines, as well as to speculate
on future moves in volatility.
Unlike standard equity options, which expire on the third Friday of each month, VIX options expire on a Wednesday each month. (VIXHV- August 12.50 Open Interest= over 70,000 contracts!) Thus, there is no question that these options are being used, and they are quite liquid.
A trader who believes that market volatility will increase (either on the market's way up OR down) now has the ability to profit on this outlook by using VIX options. Sharp increases in volatility generally coincide with a falling market (or a market in a strong advance!), so this type of option can be used as a natural hedge, rather than using typical index options. Unlike standard equity options, which expire on the third Friday of every month, VIX options expire on a Wednesday each month.
Therefore, investors now have a new instrument to add to their trading arsenal; one that isolates volatility, trades in a range, has high volatility of its own, and cannot go to zero. For those who are new to option trading, the VIX options are even more exciting. Most investors who focus on volatility trading are both buying and selling options, but new investors will often find that their brokerage firms do not allow them to sell options. By buying VIX calls or puts (or spreads), investors can now have access to trades based upon overall market volatility.
While the Gorilla cannot recommend specific strategies for individual subscribers, keep in mind that in times of low volatility, like we are currently experiencing, it is a good idea for investors to buy calls or implement call spreads by using VIX options. The biggest advantage of VIX options is its negative correlation to the S&P 500. Such a strategy enables an investor to diversify his/her portfolio and hedge against market drops, thus allowing for speculation that the VIX will rise again in the future, reverting back to its mean.
To view more information about Volatility Index options, please refer to the Chicago Board of Option's website. The Gorilla asks that any further questions be directed to the CBOE.
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