Forum Index
Economics, Portfolio Optimization, and Technical Analysis
 FAQFAQ   SearchSearch   MemberlistMemberlist   UsergroupsUsergroups   RegisterRegister 
 ProfileProfile   Log in to check your private messagesLog in to check your private messages   Log inLog in 
Log inFast Charts

Low Volatility Market

Post new topic   Reply to topic Forum Index -> Portfolio Optimization
View previous topic :: View next topic  
Author Message

PostPosted: Sun Nov 14, 2004 1:57 pm    Post subject: Low Volatility Market Reply with quote

The low volatility market (measured by the volatility indices, i.e. VIX VXN VXO and QQV) is a tough trading market. Consequently, I've kept most of my portfolio in cash over the past year, while volatility fell. I plan to use stops more often until volatility picks-up. For example, if OEX falls from 566 to below 560, next week, I won't sell the OEX Dec 560 puts until OEX rises to 560 or falls below 555. If OEX falls e.g. to 557, I may buy OEX Dec in-the-money calls and keep the puts. However, there are tradeoffs using stops, e.g. not taking advantage of fast rises or falls to lock-in gains, being "stopped-out" before a large gain is made, holding options too long and losing time value, having cash tied-up for longer periods of time, which creates greater risk and less flexibility, or a higher chance of being on the wrong side of a gap open, resulting in a large loss.

I use stops sometimes, mostly intraday, to limit potential losses. For example, if I'm holding GOOG puts and it falls 10 points, I may not sell the puts, because GOOG may fall over 20 points. If GOOG bounces five points, I may sell the puts, for a five point gain, in case GOOG rises higher. However, GOOG could then fall over 20 points after I sold the puts. Also, I'm holding the GOOG puts longer and time value works against option holders. Moreover, I could miss an excellent opportunity to sell for a 10 point gain and then not have the cash to buy the options back cheaper. If I'm holding options longer, then the odds are higher of being on the wrong side of a big gap open, which can trap me into a big loss and it may be tough to sell for that big loss. In a higher volatility market, there are normally opportunities to trade several times a day, and often gains can be made even if calls or puts were bought or sold too soon.

Of course, if I held the DIA calls I bought a month ago using trailing stops, I would have made huge gains on the eight point DIA rise (or 800 point Dow Jones rise) over the past three weeks. However, I expected a pullback to buy the calls again. Unfortunately, the Dow rallied almost vertically and there weren't any opportunties to buy DIA calls on pullbacks.

Back to top
Display posts from previous:   
Post new topic   Reply to topic Forum Index -> Portfolio Optimization All times are GMT - 8 Hours
Page 1 of 1

Jump to:  
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum

Powered by PeakTrader 2.0.8 © 2001, 2002