Does the VIX Matter Still?

VIX is likely a familiar point of reference for anyone who uses options as an investment tool.  The VIX is basically a measurement of the entire market’s volatility. When volatility is up, option premiums are up in general.  Those of us who are option writers make more money per trade when the premiums are up, but we find more perceived risk in the market at the same time.  It becomes a balancing act of how much you can make versus how much you should risk.  (Isn’t that always the case.)  Since it takes less option selling to bring in the same total income in premiums, a put seller can reduce exposure by selling fewer naked options.

On the other hand, check out this Minyanville article that points out with higher volatility come fewer options being available and therefore fewer “speed bumps” for the market as a whole to hit on a good up day.  In other words, if you subscribe to his logic, this is the time to really start selling puts. 

I read the following criticism of using VIX from Wikipedia which is very important to remember:

“Often, when commentators discuss the option markets, the VIX is used to represent overall sentiment for equity options. However, to many practitioners, the relationship of the VIX to individual equity options can be easily overstated. It often appears that different dynamics drive the volatility of index options compared to that of equity options, and the two can often be uncorrelated. In particular, the VIX is limited to a 30-day period, while for most non-index equity options, the most liquidity is usually found in the 2 to 6-month maturities. In addition, volatility is often a function of market sector. For instance, volatility is usually assumed to be high in technology stocks, and low in utility stocks. Using a single number such as the VIX to represent the volatility for all equity options is usually overly simplistic.”

I’m sticking with my original plan of not getting in deeper than I can handle and if I can make more money while overall volatility is up I’ll take it.  If nothing else it will help soften the blow when we do have our next rough spell.

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