Options traders often see volatility as their ally. Unlike other traders, they aren’t scared of it – in fact, they reckon they understand its ways. But this year, volatility has been a faithless friend. Here one day, gone the next. Theo Casey examines some of the freaky results and considers what options players can do about it.
As I write on June 16, the CBOE Volatility Index is trading at 25.87 – down 10% on the day.
The Vix is the ‘fear gauge’ that measures the prices of in-, at- and out-of-the-money calls and put options on S&P 500 shares. The implied volatility it measures is inversely correlated with underlying equity prices.
It may seem natural, then, that today’s drop in the Vix is commensurate with recent gains in equity markets. Having rallied for six days on the trot, the S&P 500...