Seizing Opportunity From Stock Market Volatility (Guest Columnist at Barron’s)

Steve Sears and I have a running joke that whenever I am tapped as a guest columnist for The Striking Price at Barron’s, we should both start buying VIX calls as inevitably something is going to come along and cause a volatility spike just in time to give me something topical to discuss.

This time around I thought China might be the culprit or Greece or Puerto Rico or the Fed or maybe even the NYSE. In fact, it was a cocktail of everything that has turned a relatively quiet Q2 into a much more menacing volatility environment in Q3. In Seizing Opportunity From Stock Market Volatility, which appears today in Barron’s, I turn my attention to small caps (RUT, IWM) and use IWM vs. SPY as a way to think about relative volatility in the context of exposure to China, the euro zone and a strong dollar. Focusing on the Russell 2000 Volatility Index (RVX) and VIX, investors have been attributing roughly the same level of uncertainty and relative risk for small caps as large caps, which I see as questionable when one considers the very different exposure each asset class has to global issues and the dollar.

Given that RVX futures (VU) are thinly traded, it probably does not make sense to be short VU and long VX, the VIX futures. Another way to translate the thinking above into a strict volatility trade would be to short an at-the-money straddle for RUT or IWM, while going long an at-the-money straddle for SPX or SPY. That type of trade is probably a stretch for most Barron’s readers, but I suspect is probably right in the wheelhouse of many readers in this space. For the Barron’s article, I came up with something simpler to execute, an IWM Aug 121/123 bull put spread, which has both volatility and directional components to it and is disengaged from volatility in SPX/SPY.

In the Barron’s article, I talk a little bit about selling volatility in a post-crisis market environment or following a significant volatility event, observing:

“Selling options on the downslope of a volatility spike is often only marginally less profitable than selling options at the top of a volatility spike.”

If any of this sounds a little bit like a corollary to some of my work on “disaster imprinting” then some readers clearly have very good memories.

Related posts:

• Availability Bias and Disaster Imprinting
• VIX Data to Support Availability Bias and Disaster Imprinting Hypothesis
• The VIX:VXV Ratio, Availability Bias and Disaster Imprinting
• Be Greedy When Others Are Fearful (Barron’s)

A full list of my (16) Barron’s contributions:

• Seizing Opportunity From Stock Market Volatility (July 11, 2015)
• How to Ride an Aging Bull (November 29, 2014)
• Investors' Best Options in a ‘No Fear’ Market (July 2, 2014)
• Low Volatility: How to Profit from a Quiet VIX (May 22, 2014)
• Emerging Market Stocks: Have They Hit Bottom? (March 28, 2014)
• How to Spot Risk Early (July 16, 2013)
• How to Insure Your Stock Portfolio (April 18, 2013)
• The Case for Options Trading (January 2, 2013)
• Calm Down and Exploit Others’ Anxieties (November 14, 2012)
• How to Trade Options Around Volatile Events (July 10, 2012)
• Be Greedy While Others Are Fearful (May 3, 2012)
• Ways to Turn Volatility into an Asset Class (January 12, 2011)
• There’s Opportunity in Uncertainty (November 18, 2010)
• Will Market Volatility Return to Crisis Levels? (September 15, 2010)
• The Perils of Predicting Volatility (May 20, 2010)
• Take a Longer View on Volatility (July 2, 2009)

Disclosure(s): none