Note: This is part of newsletter sent on 22-September-2015 to my newsletter subscribers.
Until the China dilemma passes, it looks like VIX is here to stay.
And when VIX stays and is not willing to go down, then 2 things happen:
1. Option prices just DO NOT melt,
2. There is too much movement in markets.
So until VIX is not dropping what can you do?
Well some cash can be used in buying slightly OTM options. But remember – risk management is very important here. You should trade this with less than 1 or 2% of your capital. Option can expire worthless so risk management is very IMPORTANT.
Before you pack your bags from your office and go home read this:
Do it for next month though. Give your options some time. 🙂
Why we buy slightly out of the money options during volatile times?
Since VIX is high, the ATM options will be very costly and if VIX drops they can melt away fast. OTM options on the other hand will be cheaper and during volatile times will increase faster in percentage terms than the near the money options. But the most important reason is risk management. Just because the markets are volatile you should not buy ATM (At The Money) options.
Note for those who have taken my course: Due to too much volatility why not buy a few extra OTM options – this reduces profits slightly but eventually when a huge movement comes the whole trade can be in profit. And if the movement does not come and VIX drops, we profit anyways. 🙂
Try it – Do not try to make 30 points every month. When times are tough sacrifice some profits to buy extra protection.
Hope it helps during these volatile times.
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Dilip Shaw, Founder
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