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Selling puts seems to be of such interest that there are even ETFs, such as Wisdom Tree's Put-Write ETF (PUTW) that offer an easy path for the inexperienced investor to compliment their portfolio with put-write exposure. Over the years I've written scores of articles with the goal of trying to help investors use options intelligently. My perspective has always been to lay the fundamental groundwork that investors need before they go "jumping in" to areas that are complex. I hope this article will add to the reader's knowledge base. If the reader knows more, they can make better choices. Let me start off with a qualification. Many investors use options on a "one-off" or "hit-and-run" style. They are using options as a trading vehicle ... not as an investing vehicle. I can't and won't address this type of option usage because I'm an investor not a trader. Instead, I will concentrate strictly on the investor that is looking to supplement their portfolio. These investors typically sell puts as a substitute for direct stock ownership; an adjunct to portfolio protection; a "wait and see" and similar objectives. They are not "in-and-out" but more permanent in nature. Additionally, let me add that I will contain this article to selling puts on the S&P 500. Personally I use SPX options on the S&P 500 because of some tax benefits. However, position size and some other factors of SPX make it impractical for many investors. The concepts are easily transferable to options on the SPDR S&P 500 ETF (SPY) which tracks the SPX index pretty closely. Furthermore, though the principles put forth here are restricted to the S&P, they can be extended to almost any stock. The Selling Point No, I'm not starting out with the point at which one should sell puts. Instead, I'm referring to how options are "sold" or marketed to investors. For we must, at some stage, reconcile what investors are told with reality. The allure of selling puts is derived from the perception that they are less volatile and offer some downside protection as opposed to outright ownership of the underlying. This is mostly true. Selling puts can be less volatile and will out-perform in a steadily down market or a steadily flat market. At least in theory. The Theory The basic theory that attracts investors rests on the prospects of pocketing extrinsic value. If there were no extrinsic to pocket then one might just as well own the underlying. Now the amount of extrinsic varies with the strike, the expiry and volatility. So, though no one rule is universal, ATM puts extrinsic value ... with average volatility and weekly expiry ... usually ranges around .40% to .50% of the underlying price(and can be much higher at extreme volatility). So, if SPY is trading at, say, $290, one can expect the average weekly ATM extrinsic premium to be around $1.20 to $1.45. So if we extrapolate the potential gain using the .50% number and assuming the market is flat for one year ... one can make 26% by collecting .50% x 52 weeks. Pretty good considering investing in the underlying returned nothing. So, we start with a potential upside of 26% but we have to modify the potential return by accounting for losses incurred when the market drops. But 26% is a big cushion for absorption. The problem with this theory is there is no such thing as a steadily flat market ... or a steadily up market ... or a steadily down market. Markets are not steady. They unpredictably move in whatever direction they are headed in fits and spurts ... ups and downs ... zig-zags. I've been tracking the S&P weekly for the last four years. During this period the S&P has moved upward from $1,968 to $2,914 ... a gain of close to 50%. By all accounts a bull scenario. So, with a strong bull one would assume that down-movements that would otherwise erode the cumulative extrinsic would be modest. But if we looked at a chart .... not the usual chart of the actual S&P climb ... but rather of its weekly "fits-and-spurts" the picture is not as clear. Here's a chart that details how the S&P has performed ... weekly ... over the last four years ... from October 2014 through last week. So, looking at this chart at first blush and without further calculation, it is unclear if the S&P is net up, down or flat. Imagine ... in a strong bull market ... up 50% in 4 years ... a weekly chart doesn't look like that's the case. There are certainly many down weeks and many large down weeks. Now, if we further analyzed this chart ... not for its end gain of 50% .. but for how it got there ... we'd find the following: Number of Weeks If we broke this down even further we'd find: 1) over 1/3rd of the time (36%) the market is down, 2) When the market is down, almost half the time the drop is more than 1%. 3) 20% of the time the market is down it falls by more than 2% And remember ... this is on a weekly basis. So, even in a strong bull, down movements are common and substantial. It's just that up movements are more plentiful and overcome the down movements. What these charts also highlight is every strategy ... put writes, or not ... is dependent upon how successfully the investor manages the up and down swings as well as the over-riding direction. For surely, if one positions on the assumption of a down market and the market is actually headed upwards they will under-perform. Even if they guess the direction correctly, is a drop a reversal or a buying opportunity? Is a rise a bull indicator or a "dead cat"? Do they react emotionally and go the wrong way? What should one do? Should they go out-of-the money ---OTM; at-the-money ---ATM or in-the-money ---ITM? For surely, results will vary widely depending upon the accuracy of these decisions. So, let's take a look. At the Money (The Bad) Selling puts ATM means that on each expiry one simply rolls forward the put at the current price. If the market goes up, one chases the strike up and if the market goes down, one chase the strike down. Seems simple, but is it advantageous? Fortunately we can look to the performance of the Wisdom Tree Put-Write ETF (PUTW) for a simple comparison. Here goes: What we see is that PUTW was less volatile. But, most importantly, it also under-performed ... and under-performed substantially. Back in June 2016, I wrote an article on PUTW. In that article I explained that it suffered from a flaw ... that it is susceptible to volatility swings and can be "whip-sawed" in up/down markets. I suggested investors considering PUTW need to supplement their positions after a drop to avoid the "whip-saw". Now, I can't manipulate PUTW data to a "what if scenario" --- it is what it is. So, instead, let me go to my previous 4 year chart of the S&P weekly. Here's what an ATM strategy, sold weekly (PUTW uses monthly but it's conceptually the same) would have looked like: As is evident, the result parallels the performance of PUTW. So we see consistent result that would lead one to examine why such a huge nonperformance. Is the concept of selling puts wrong or is the execution wrong? But before I go into a deeper examination of the issue, let me be fair and illustrate that in a down market put-writes would outperform the underlying as this hypothetical chart reveals (for this purpose I simply reversed the actual S&P values ... starting at $2,914 and dropping to $1,968) Selling Puts ATM in a down market will do better than owning the underlying. But it still loses. Hold The Strike (the Good) The problem with selling ATM puts is the "whip-saw". One must move away from the thought that the market will be "steadily" anything and accept that it will zig-zag up or down. So, 36% of the time the hoped for extrinsic gains will be reduced. Over half those times it will not only be reduced, but completely wiped out and thrown into losses. This raises a dilemma ... if in a bull scenario, the investor losses substantial extrinsic value ... and extrinsic value is all they have to gain ... what does one do? The answer to this dilemma is to Hold The Strike. What this means is that if there is a drop, do not chase the drop by selling the next put ATM at the lower price. Sell the put ITM at the previous strike and hold it there --- as long as necessary --- until the strike is recovered. You'll earn a little less extrinsic but avoid the "whip-saw". So, if SPY is at $290 when you sell the first ATM strike and it falls to $$288 ... do NOT roll the put ATM at a $288 strike but hold it at $290 strike. Most importantly ... keep holding that strike until SPY recovers and then go back to ATM ... until such time as it drops, again. It may recover in a week, a month or a few years. But just keep at it. What this does is recover any loss of extrinsic value that occurs on a drop when the inevitable bounce occurs. Here's a chart that shows the results of a "hold the strike" put-write strategy, employed weekly over the last four years. Wow !!! Let's make sure we read this right: 1) The S&P ended up $947 to $2,915 a 50% gain 2) ATM (such as PUTW) ended with just a gain of $440 ... up 22% 3) Hold the strike gained $1,568 ... up almost 80% Now I certainly realize that this must be astonishing to many readers. It's impossible to put all the numbers in plain sight or share the algorithms. So, instead, let me give you some simple resultant math. ATM: The total amount of potential extrinsic was $2,744 ... or an average of $13.45 per week. There are no gains if S&P rises above the strike. However, there are intrinsic losses on dips that were NOT recovered (whip-sawed) that totaled $2,304. So, the net gain was only $440 ($2,744 extrinsic gain less $2,304 intrinsic loss on down weeks). ATM-Hold the Strike:The total amount of extrinsic was $1,568 ... about $7.68 per week. Though the full $13.45 extrinsic is earned on every ATM strike the extrinsic is reduced for every ITM "held" strike. So we have less extrinsic but more upward intrinsic. One loses $1,176 extrinsic as compared to selling ATM ... but the sacrifice of extrinsic means one recovers the down move loss on the bounce and that zeroes out the losses. So. with the down loss zeroed out ... one is left with 100% net extrinsic gain. The sacrifice of $1,176 in extrinsic regained $2,304 in intrinsic. So, that means a net gain of $1,128. That's the difference between up 22% and up 80%. And that's why hold the strike is so successful. Out of the Money (the ugly) I seem to always hear about selling deep OTM puts ... so deep that they have a 90% chance of winning. It's the "easy money" play. I need to address the "90% win" mentality. As we saw from the previous weekly up-n-down chart ... over the last four years ... in a raging bull market .. the win ratio would have actually come in at around 93% for DOTM put-writes. Right around where the "easy money" player was planning. Hurrah !!! ... or maybe not. Let's see what would have happened for weekly DOTM put-writes over the last four years after accounting for the 7% of the time they lose. I've illustrated 2% and 3% DOTM. Now I won't go into detail other than to make these observations: 1) 2% DOTM shows a net loss but 3% DOTM a gain of $50. That $50 gain represents ONE SPX option and translates to $5,000 in actual monetary gain. However, it is not without a price ... the exposure is between $200,000 and $300,000 if one uses cash secured puts and utilizes about $75,000 in margin, otherwise. 2) One could do better if they entered at different points, but the future will even that out. 3) Trading costs are not included. Assuming just $7.95 per trade ... 204 trades .. and it reduces the gains by over $1,500 for a net gain for the 3% DOTM of around $3,500. Had the "easy money" player just put the $75,000 in margin in a CD would have returned more. Not to mention the huge differential in favor of putting a cash secured $200,000 in a CD for four years 4) However, all the dynamics change in a positive way simply "holding the strike" on every over-run. I guess there's a difference between "easy money" and "smart money" In The Money (more good?) In all three of the strategies so far presented the investor is simply trying to earn extrinsic value. S&P rises earn nothing more. Now, that leads to whether one should try to gain some upward intrinsic as well. In essence, sacrificing even more extrinsic by going ITM and looking to gain from upward movement. If someone could actually have placed the strike exactly at the most opportune level ... week in and week out ... they would have increased their overall gain by about another 45%. Nice to dream about ... impossible to achieve. However, this begs the question ... how far ITM should one go? Frankly, I don't know. That said here's a chart that shows the results if one went 1% ITM and held the strike. So, what one sees is that ATM "hold" is still the most lucrative. Next in line is going 1% ITM and "holding". Third place is outright ownership of the underlying and in last place is ATM. Now, of course, there must be some optimum level that will improve the ITM and move it further up the chart and perhaps some level that will overtake ATM "hold". My guess is that the optimum level lies somewhere between 1/2% and 3/4%. But I haven't found the precise level. And, of course, none of these charts account for applied intelligence and adjusting the strike up or down based upon one's market acumen. Keep in mind that this is general principles only. Even so, unless one has market foresight that is better than average, playing with and trying to improve on fundamentals can be a mistake. But, let me stress, no matter what ... whatever one does ... they MUST "hold the strike". Summary What I've tried to do here is illustrate various put-write strategies. Of course they are based upon past results in a bull market. By illustrating these different strategies it becomes apparent that the flaw in selling puts is failure to account for "whip-saw". But this failure can be easily overcome by "holding the strike". Now, I won't argue that one could do better "timing the market". There are always "experts" that can brag about how they make perfect decisions and have a 6th sense about these things. However, studies have shown that for most investors, timing the market is dilutive and not accretive to returns. I'm hoping to speak to a broader audience than the "trader". With all that said, this article leaves out another strategy for put-writes. A strategy that requires more than an "add-on" to an otherwise long enough article. Though I don't like cliff-hangers, readers will have to wait till my next article to round it out. Ken Reel is a well known and respected Seeking Alpha Contributor with over 100 articles. He has worked in the financial service industry for 40 years. Ken's area of expertise is risk management and complex financial products. He has been a frequent speaker, on behalf of many financial firms, to financial professionals across the country. He has extensive experience in statistics and actuarial science.

Here are 10 important things about VIX options. VIX options settle in cash and trade in the European style. European style options cannot be exercised until expiration. The options can be opened or closed anytime before expiration. You don’t need to worry about ending up with an unwanted position in VIX after expiration. If your VIX options expire In-The-Money (ITM), you get a cash payout. The payout is the difference between the strike price and the VRO quotation on the expiration day (basically the amount the option is ITM). For example, the payout would be $2.50 if the strike price of your call option strike was $15 and the VRO was $17.50. Expiration Days: VIX options do not expire on the same days as equity options. The Expiration Date (usually a Wednesday) will be identified explicitly in the expiration date of the product. If that Wednesday is a market holiday, the Expiration Date will be on the next business day. On the expiration Wednesday the only SPX options used in the VIX calculation are the ones that expire in 30 days. Last Trading Day for VIX options is the business day prior to the Expiration Date of each contract expiration. When the Last Trading Day is moved because of a Cboe holiday, the Last Trading Day for an expiring VIX option contract will be the day immediately preceding the last regularly scheduled trading day. The exercise-settlement value for VIX options (Ticker: VRO) is a Special Opening Quotation (SOQ) of VIX calculated from the sequence of opening prices during regular trading hours for SPX of the options used to calculate the index on the settlement date. The opening price for any series in which there is no trade shall be the average of that option's bid price and ask price as determined at the opening of trading. Click here for Settlement Information for VIX options. For example: Table courtesy of projectoption.com. Contract Expirations: Up to six 6 weekly expirations and up to 12 standard (monthly) expirations in VIX options may be listed. The 6 weekly expirations shall be for the nearest weekly expirations from the actual listing date and standard (monthly) expirations in VIX options are not counted as part of the maximum six weekly expirations permitted for VIX options. Like the VIX monthlys, VIX weeklys usually expire on Wednesdays. VIX Options Trading Hours are 8:30 a.m. to 3:15 p.m. Central time (Chicago time). Extended hours are 2:00 a.m. to 8:15 a.m. Central time (Chicago time). CBOE extended trading hours for VIX options in 2015. The ability to trade popular VIX options after the close of the market provides traders with a useful alternative, especially from overseas market participants looking to gain exposure to the U.S. market and equity market volatility. VIX options are among of the most actively traded contracts the options market has to offer. VIX options are based on a VIX futures, not the spot index ($VIX) quote. Therefore VIX options prices are based on the VIX futures prices rather than the current cash VIX index. To understand the price action in VIX options, look at VIX futures. This can lead to unusual pricing of some VIX strategies. For example, VIX calendars can trade at negative values. This is something that can never happen with equity options. Hedging with VIX options: VIX can be used as a hedging tool because VIX it has a strong negative correlation to the SPX – and is generally about four times more volatile. For this reason, traders many times would buy of out of the money calls on the VIX as a relatively inexpensive way to hedge long portfolio positions. Similar hedges can be constructed using VIX futures or the VIX ETNs. VIX is a mean-reverting index. Many times, spikes in the VIX do not last and usually drop back to moderate levels soon after. So, unless the expiration date is very near, the market will take into account the mean-reverting nature of the VIX when estimating the forward VIX. Hence, VIX calls are many times heavily discounted whenever the VIX spikes. VIX options time sensitivity: VIX Index is the most sensitive to volatility changes, while VIX futures with further settlement dates are less sensitive. As a result, longer-term options on the VIX are less sensitive to changes implied volatility. For example, between September 2nd and October 10th 2008, the following movements occurred in each volatility product: Product Sep. 02 - Oct. 10 Change VIX Index +218% October VIX Future +148% November VIX Future +67% December VIX Future +47% Table courtesy of projectoption.com. So, while trading long-term options on the VIX might give you more time to be right, volatility will need to experience much more significant fluctuations for your positions to profit. Option Greeks for VIX options (e.g. Implied Volatility, Delta, Gamma, Theta) shown by most brokers are wrong. Options chains are usually based on the VIX index as the underlying security for the options. In reality the appropriate volatility future contract is the underlying. For example, August VIX options are based on August VIX futures, not VIX spot. Related articles: VIX - The Fear Index: The Basics Using VIX Options To Hedge Your Portfolio How Does VIX Work? 10 Things You Should Know About VIX Holiday Effect In VIX Futures

I appreciate the email. Those are very wise words. Too bad this email came after three devastating losses the newsletter experienced in 2016 (150%, 78% and 69% losses before commissions). Unfortunately, it looks like they didn't really learn any lessons from those losses. The newsletter members already booked two more devastating losses of 96% and 89% in the first five months of 2017. Definition of insanity is "doing the same thing over and over again and expecting different results". From the FAQs of this newsletter: As we mentioned here: Oftentimes you'll find this in a credit spread newsletter where the big loss just hasn't happened yet (it will). Here is the problem with weekly credit spreads: most of the time, they will do fine, but if the market really does go south the position will be in trouble well before the short options go in-the-money. If the market drop is fast and severe (e.g., flash crash) there will be nothing you can do - the trades will be blown out with no way to recover, your entire investment will be gone. We warned about those "easy gains" several times. This is what we wrote in Can You Really Make 10% Per Month With Iron Condors? article: Here are some mistakes that people do when trading Iron Condors and/or credit spreads: Opening the trade too close to expiration. There is nothing wrong with trading weekly Iron Condors - as long as you understand the risks and handle those trades as semi-speculative trades with very small allocation. Holding the trade till expiration. The gamma risk is just too high. Allocating too much capital to Iron Condors. Trying to leg in to the trade by timing the market. It might work for some time, but if the market goes against you, the loss can be brutal and there is no another side of the condor to offset the loss. Unfortunately, many options gurus present those strategies as safe and conservative. Nothing can be further from the truth. As mentioned (correctly) in the above email, weekly credit spreads are very volatile and aggressive. You should allocate only small portion of your options account to those trades. Related articles: Can You Really Make 10% Per Month With Iron Condors? Why Iron Condors Are NOT An ATM Machine Why You Should Not Ignore Negative Gamma Get Real Trade Iron Condors Like Never Before Want to learn how we reduce our risk? Start Your Free Trial

This is a critical issue that many traders don't fully understand. To understand the real risk this lady is taking, I would like you to take a look at Victor Niederhoffer. This guy had one of the best track records in the hedge fund industry, compounding 30% gains for 20 years. Yet, he blew up spectacularly in 1997 and 2007. Not once but twice. Are you Aware of Black Swan Risk? This is how Malcolm Gladwell describes what happened in 1997: "A year after Nassim Taleb came to visit him, Victor Niederhoffer blew up. He sold a very large number of options on the S. & P. index, taking millions of dollars from other traders in exchange for promising to buy a basket of stocks from them at current prices, if the market ever fell. It was an unhedged bet, or what was called on Wall Street a “naked put,” meaning that he bet everyone on one outcome: he bet in favor of the large probability of making a small amount of money, and against the small probability of losing a large amount of money-and he lost. On October 27, 1997, the market plummeted eight per cent, and all of the many, many people who had bought those options from Niederhoffer came calling all at once, demanding that he buy back their stocks at pre-crash prices. He ran through a hundred and thirty million dollars — his cash reserves, his savings, his other stocks — and when his broker came and asked for still more he didn’t have it. In a day, one of the most successful hedge funds in America was wiped out. Niederhoffer had to shut down his firm. He had to mortgage his house. He had to borrow money from his children. He had to call Sotheby’s and sell his prized silver collection. A month or so before he blew up, Taleb had dinner with Niederhoffer at a restaurant in Westport, and Niederhoffer told him that he had been selling naked puts. You can imagine the two of them across the table from each other, Niederhoffer explaining that his bet was an acceptable risk, that the odds of the market going down so heavily that he would be wiped out were minuscule, and Taleb listening and shaking his head, and thinking about black swans. “I was depressed when I left him,” Taleb said. “Here is a guy who, whatever he wants to do when he wakes up in the morning, he ends up better than anyone else. Whatever he wakes up in the morning and decides to do, he did better than anyone else. I was talking to my hero . . .” This was the reason Taleb didn’t want to be Niederhoffer when Niederhoffer was at his height — the reason he didn’t want the silver and the house and the tennis matches with George Soros. He could see all too clearly where it all might end up. In his mind’s eye, he could envision Niederhoffer borrowing money from his children, and selling off his silver, and talking in a hollow voice about letting down his friends, and Taleb did not know if he had the strength to live with that possibility. Unlike Niederhoffer, Taleb never thought he was invincible. You couldn’t if you had watched your homeland blow up, and had been the one person in a hundred thousand who gets throat cancer, and so for Taleb there was never any alternative to the painful process of insuring himself against catastrophe. Last fall, Niederhoffer sold a large number of options, betting that the markets would be quiet, and they were, until out of nowhere two planes crashed into the World Trade Center. “I was exposed. It was nip and tuck.” Niederhoffer shook his head, because there was no way to have anticipated September 11th. “That was a totally unexpected event.” Well, guess what - unexpected events happen. More often than you can imagine. The market bottomed right after Niederhoffer was margin called. By November, the market was back near highs. His 830 puts went on to expire worthless - meaning his trade, had he been able to hold on, turned out to be profitable. But his leverage forced his liquidation. He was oversized and couldn't ride the trade out. Niederhoffer had shorted so many puts that a run-of-the-mill two-day market selloff sent him out on a stretcher. If he had sized the trade correctly, he would have survived the ride and took home a small profit. But the guy was playing on tilt, got greedy, maybe a bit arrogant, and lost all of his client's money. Karen is managing over 300 million dollars now. Her annual returns are in a 25-30% range. Are those good returns, based on the risk she takes? Not in my opinion. I believe that betting 300 million dollars on naked options is a disaster waiting to happen. I'm sure that most of her investors are not aware of the huge risks she is taking. Niederhoffer's story should be a good lesson, but for most people, it isn't. Unfortunately, people desperately want to believe there is a way to make money with no or little risk. Personally, I have hard time to understand why Sosnoff is promoting those strategies. But this is a different story. As a side note, this article is not an attempt to bash tastytrade. It is an attempt to show a different side of the coin and point out some historical cases. If we don't learn from history, we are doomed to repeat it. tastytrade advocates selling premium based on "high IV percentile". They ignore the fact that IV is usually high for a reason. Personally, I consider selling naked options before earnings on a high flying stocks like NFLX, AMZN, ULTA, TSLA etc. as a very high risk trading. tastytrade followers consider those trades safe and conservative. Matter of point of view I guess. Some tastytrade followers argued that PUT Write index performed better than SPX. And it is true. But those are completely different strategies. The original purpose of PUT Write index (or any naked put strategy) is to buy stock at a discount and reduce risk. As long as you sell the same number of contracts as the number of shares you are willing to own, you should be fine, and in many cases to outperform the underlying stock or index. The problem with Karen Supertrader and Niederhoffer was that they used too much leverage. They sold those naked options just to collect premium. Same is true when you sell strangles before earnings. Related articles: Karen SuperTrader: Myth Or Reality? Karen Supertrader: Too Good To Be True? Do You Still Believe in Fairy Tales? Selling Naked Put Options The Spectacular Fall Of LJM Preservation And Growth James Cordier: Another Options Selling Firm Goes Bust June 2016 update: Turns out Karen is under investigation by the SEC. Read the details here and here.

I have had quite a few requests to present some introductory material on the VIX, so with that in mind I offer up the following in question and answer format: Q: What is the VIX? A: In brief, the VIX is the ticker symbol for the volatility index that the Chicago Board Options Exchange (CBOE) created to calculate the implied volatility of options on the S&P 500 index (SPX) for the next 30 calendar days. The formal name of the VIX is the CBOE Volatility Index. Q: How is the VIX calculated? A: The CBOE utilizes a wide variety of strike prices for SPX puts and calls to calculate the VIX. In order to arrive at a 30 day implied volatility value, the calculation blends options expiring on two different dates, with the result being an interpolated implied volatility number. For the record, the CBOE does not use the Black-Scholes option pricing model. Details of the VIX calculations are available from the CBOE in their VIX white paper. Q: Why should I care about the VIX? A: There are several reasons to pay attention to the VIX. Most investors who monitor the VIX do so because it provides important information about investor sentiment that can be helpful in evaluating potential market turning points. A smaller group of investors use VIX options and VIX futures to hedge their portfolios; other investors use those same options and futures as well as VIX exchange traded notes (primarily VXX) to speculate on the future direction of the market. Q: What is the history of the VIX? A: The VIX was originally launched in 1993, with a slightly different calculation than the one that is currently employed. The ‘original VIX’ (which is still tracked under the ticker VXO) differs from the current VIX in two main respects: it is based on the S&P 100 (OEX) instead of the S&P 500; and it targets at the money options instead of the broad range of strikes utilized by the VIX. The current VIX was reformulated on September 22, 2003, at which time the original VIX was assigned the VXO ticker. VIX futures began trading on March 26, 2004; VIX options followed on February 24, 2006; and two VIX exchange traded notes (VXX and VXZ) were added to the mix on January 30, 2009. Q: Why is the VIX sometimes called the “fear index”? A: The CBOE has actively encouraged the use of the VIX as a tool for measuring investor fear in their marketing of the VIX and VIX-related products. As the CBOE puts it, “since volatility often signifies financial turmoil, [the] VIX is often referred to as the ‘investor fear gauge’”. The media has been quick to latch onto the headline value of the VIX as a fear indicator and has helped to reinforce the relationship between the VIX and investor fear. Q: How does the VIX differ from other measures of volatility? A: The VIX is the most widely known of a number of volatility indices. The CBOE alone recognizes nine volatility indices, the most popular of which are the VIX, the VXO, the VXN (for the NASDAQ-100 index), and the RVX (for the Russell 2000 small cap index). In addition to volatility indices for US equities, there are volatility indices for foreign equities (VDAX, VSTOXX, VSMI, VX1, MVX, VAEX, VBEL, VCAC, etc.) as well as lesser known volatility indices for other asset classes such as oil, gold and currencies. Q: What are normal, high and low readings for the VIX? A: This question is more complicated than it sounds, because some people focus on absolute VIX numbers and some people focus on relative VIX numbers. On an absolute basis, looking at a VIX as reformulated in 2003, but using data reverse engineered going back to 1990, the mean is a little bit over 20, the high is just below 90 and the low is just below 10. Just for fun, using the VXO (original VIX formulation), it is possible to calculate that the VXO peaked at about 172 on Black Monday, October 19, 1987. Q: Can I trade the VIX? A: At this time it is not possible to trade the cash or spot VIX directly. The only way to take a position on the VIX is through the use of VIX options and futures or on two VIX ETNs that are based on VIX futures: VXX, which targets VIX futures with 1 month to maturity; and VXZ, which targets 5 months to maturity. An inverse VIX futures ETN, XXV, was launched on 7/19/10. This product targets VIX futures with 1 month to maturity. As of May 2010, options have been available on the VXX and VXZ ETNs. Q: How can the VIX be used as a hedge? A: The VIX is appropriate as a hedging tool because it has a strong negative correlation to the SPX – and is generally about four times more volatile. For this reason, portfolio managers often find that buying of out of the money calls on the VIX to be a relatively inexpensive way to hedge long portfolio positions. Similar hedges can be constructed using VIX futures or the VIX ETNs. Q: How do investors use the VIX to time the market? A: This is a subject for a much larger space, but in general, the VIX tends to trend in the very short-term, mean-revert over the short to intermediate term, and move in cycles over a long-term time frame. The devil, of course, is in the details. Bill Luby is Chief Investment Officer of Luby Asset Management LLC, an investment management company in Tiburon, California. He also publishes the VIX and More blog and an investment newsletter. His research and trading interests focus on volatility, market sentiment, technical analysis, ETPs and options. Bill was previously a business strategy consultant. You can follow Bill Twitter. This article was originally published here.

Absolute momentum is often referred to as trend following or time-series momentum. We highly recommend those who want to go further in depth in to momentum trading strategies to pick up Gary Antonacci’s book, DualMomentum Investing: An Innovative Strategy for Higher Returns with Lower Risk. We will start by creating a benchmark global equity portfolio that is equally allocated to US large cap stocks and International stocks. The benchmark portfolio is rebalanced annually. Our analysis period is 1971–06/2019 which includes three substantial bear markets (1973-1974, 2000-2002, and 2008-2009), along with one of the most prolific bull market runs in recent history from 1982–1999. Historical data represents index data. You cannot invest directly in an index. Indexes do not include fees, expenses, or transaction costs. All examples are hypothetical. Past performance does not guarantee future results. Since 1971 our benchmark portfolio has produced double digit annual returns with a Compound Annual Growth Rate (CAGR) of 10.56%, enough to grow $10,000 to $1,299,946. Global equity markets have provided a substantial risk premium to investors who have been able to stay the course. But staying the course is the issue for most investors as even a globally diversified equity portfolio has experienced drawdowns approaching or exceeding 50% on multiple occasions. Drawdown measures the maximum amount of money lost from equity peak to valley. Taking our data back further, during the Great Depression US stocks experienced a drawdown exceeding 80%. Very few investors have the stomach lining to accept these kinds of drawdowns without abandoning a buy and hold investment plan. Painful losses in 2008 are still present in the minds of many evidenced by several studies showing how few investors have actually participated in the US stock market rally since 2009. The conventional wisdom for dampening equity market risk is adding a permanent allocation of bonds to a portfolio. 60% stocks and 40% bonds is still the benchmark portfolio today. Unfortunately, permanently allocating a portion of a portfolio to low risk bonds lowers expected returns, particularly in today’s historically low interest rate environment. This makes sense since conventional wisdom tells us that less risk equals less expected reward. An alternative to buy and hold first discovered in the 1930's is what many in finance call momentum. Momentum refers to the tendency for assets that have recently outperformed to continue outperforming in the near future. For example, if US stocks have outperformed International stocks over the past year this is likely to continue in the near future. In 1937 Cowles and Jones shared their findings that “taking one year as the unit of measurement for the period 1920 to 1935, the tendency is very pronounced for stocks which have exceeded the median in one year to exceed it also in the year following.” Hundreds of academic papers have confirmed the existence of momentum for decades, even centuries, across asset classes and around the world. Momentum is persistent and pervasive yet largely misunderstood and unused by investors of all size. Instead of equally allocating to a permanent allocation of US large cap stocks and International stocks, our first example of momentum investing will invest in whichever of the two had the highest return over the prior twelve months. The position will be held for one month, and then reassessed. Researchers often refer to this method as relative strength momentum. The findings of Cowles and Jones from 1920-1935 have continued to persist nearly eighty years after their discovery. Our relative strength momentum model increased returns by almost 3% per year. Now, instead of a $10,000 investment growing to $1,279,888 it grows to $3,943,884 over the same period. Many investors are unaware of how seemingly modest improvements in annualized return can make a meaningful difference over a long period of time to ending wealth. But we still have to deal with the pain factor (drawdowns), and our data shows that relative momentum does nothing to reduce bear market risk as maximum drawdown was essentially unchanged. We already know very few investors can take the punishment of a 55% drawdown and are normally advised to reduce equity market exposure in exchange for lower returning assets such as cash and bonds. Studies have shown how investors feel the pain of loss twice as strongly as the pleasure from an equivalent gain. Jason Zweig’s research found that financial losses are processed in the same part of the brain that responds to mortal danger. This is something we can’t ignore because the right investment plan for a prudent investor is the one they can stick with for the long term even if that results in a lower expected return. Investing heavily in equities and hoping that 50%+ bear market drawdowns won’t happen again is risky. The reason stocks tend to produce high long term rewards is because of their inherent risk. Bear markets will occur again, to think otherwise is ignoring history. More recently, researchers have been studying the benefits of combining relative momentum with what many practitioners call absolute momentum, or time-series momentum. Many commodity trading advisors (CTA’s) have been practicing absolute momentum in the form of trend following for decades with significant success. Absolute momentum acts as a risk management tool where you compare returns of an asset to itself instead of relative to other risk assets. For example, if US Stocks have a negative excess return over the prior twelve months there is also a strong likelihood of negative returns continuing in the near future. Buying tends to attract more buying just as selling attracts more selling. A sensible rules based approach is to then seek safety in the form of cash or high quality intermediate term bonds until stock returns again become positive over the prior year. So we will now combine relative momentum with absolute momentum where each month we chose among the two equity markets, and if neither have positive excess returns (asset return minus the risk free return of treasury bills) over the past year we will allocate to bonds for the next month instead. No predictions, opinions, or forecasts necessary. The fact that our model has no discretionary inputs is an important and refreshing distinction from traditional active portfolio management. Philip Tetlock spent two decades quantifying “expert” predictions finding that the vast majority performed worse than random chance when it came to predicting the likelihood of an outcome. Our dual momentum approach of combining relative and absolute momentum has outperformed our equally allocated global stock market benchmark by about 5% annually since 1971. This now grows a $10,000 investment to $10,722,164. But perhaps more important to most investors is that dual momentum reduced the maximum drawdown by more than half due to the effect of our absolute momentum rule partially sidestepping the three major equity bear markets of 1973-1974, 2000-2002, and 2008-2009. Dual momentum has shown the ability to be used as a simple rules-based method to produce higher returns with less risk than buy and hold. So what does this information mean to you? We wrote this paper to provide a simple example of one of our favorite methods we use within client portfolios. Most of our clients aren’t interested in every detail, only enough detail to increase investor confidence. As an independent investment advisory firm we have the freedom and flexibility to implement compelling research for our clients. Advisors captive to sales-based production requirements are often incentivized to provide proprietary products instead of conducting robust investment research that can benefit both the client and the advisor over the long term. This simple dual momentum method could also be a fantastic strategy for a portion of one’s 401k or other employer retirement accounts. On average, less than 2 trades occur per year so total time commitment may be around 5-10 minutes per month with most months requiring no action. More complex methodologies could certainly be pursued, but we believe simple beats complex over the long term. Leonardo da Vinci once said “Simplicity is the ultimate sophistication.” Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

When the loss has been reported, this is how it looked like: And then the fund suffered another, 54.6% fall to $1.94 a share on Feb. 6—a two-day total decline of 80%. “It may be the biggest two-day drop for a mutual fund ever,” says Gretchen Rupp, a Morningstar analyst who covers the fund. Like mountain climbing itself, the reality proved far scarier—especially for a fund with “preservation” in its name. “The fund sold naked put options on S&P 500 futures,” says Rupp. “It was leveraged and had above-average margin [borrowing] levels.” A put option is a contract that allows its buyer to sell a security at a specified price, the strike price. This allows the buyer to hedge a position or an entire portfolio; if the price of the security falls below a certain level, the option buyer will at least make money on the option. When an institution “writes” or sells a put option to a buyer, the seller is betting that the price will stay higher than the option price. When the seller doesn’t own the actual securities on which it is writing options, that is called “naked” option writing, and it amplifies downside risk. Standard & Poor’s 500 option prices are determined in part by market volatility; the more volatile the market, the more likely the option will hit its strike price and become profitable. LJM was betting that the market wouldn’t become too volatile—a strategy known as shorting volatility. “The VIX [volatility index] spike on Monday was the sharpest spike in history,” Rupp says. The VIX more than doubled from 17 to 37. So leveraging the fund’s bet against it proved disastrous. According to LJM’s prospectus, the fund’s investment objective is to seek “capital appreciation and capital preservation with low correlation to the broader U.S. equity market.” Nothing in that statement proved true on Feb. 5. “This fund should never have been marketed to fund shareholders as a tool for capital preservation,” Rupp says. As someone mentioned: "Short volatility strategies, selling options and collecting premium, have been critically described as picking up dimes in front of a steamroller," wrote Don Steinbrugge, the founder and CEO of Agecroft Partners, a hedge-fund consulting firm, in a blog post. "They generate very good risk adjusted returns until volatility spikes and then have the potential to lose most of their assets if not properly hedged." This is not accurate. Those strategies can produce very good returns if used properly. What most experts are missing is the simple fact that the problem is not the strategy. The problem is leverage. Strategies don't kill accounts. Leverage does. I did some simulations of how those strategies would perform on Feb.5 without leverage. Using different strikes and expirations, the fund would be down around 10-15%. Not pleasant, but survivable. I can’t even imagine how much leverage they used to be down 56% in a single day. LJM Preservation and Growth Fund was not the first to fall into the leverage trap. We all still remember the story of Karen Supertrader who suffered significant losses due to excessive leverage. I described what happened there in my articles Karen The Supertrader: Myth Or Reality? and Karen Supertrader: Too Good To Be True? Another famous case of excessive leverage was Victor Niederhoffer. This guy had one of the best track records in the hedge fund industry, compounding 30% gains for 20 years. Yet, he blew up spectacularly in 1997 and 2007. Not once but twice. Are you Aware of Black Swan Risk? This is how Malcolm Gladwell describes what happened in 1997: "A year after Nassim Taleb came to visit him, Victor Niederhoffer blew up. He sold a very large number of options on the S. & P. index, taking millions of dollars from other traders in exchange for promising to buy a basket of stocks from them at current prices, if the market ever fell. It was an unhedged bet, or what was called on Wall Street a “naked put,” meaning that he bet everyone on one outcome: he bet in favor of the large probability of making a small amount of money, and against the small probability of losing a large amount of money-and he lost. On October 27, 1997, the market plummeted eight per cent, and all of the many, many people who had bought those options from Niederhoffer came calling all at once, demanding that he buy back their stocks at pre-crash prices. He ran through a hundred and thirty million dollars — his cash reserves, his savings, his other stocks — and when his broker came and asked for still more he didn’t have it. In a day, one of the most successful hedge funds in America was wiped out. Niederhoffer had to shut down his firm. He had to mortgage his house. He had to borrow money from his children. He had to call Sotheby’s and sell his prized silver collection. A month or so before he blew up, Taleb had dinner with Niederhoffer at a restaurant in Westport, and Niederhoffer told him that he had been selling naked puts. You can imagine the two of them across the table from each other, Niederhoffer explaining that his bet was an acceptable risk, that the odds of the market going down so heavily that he would be wiped out were minuscule, and Taleb listening and shaking his head, and thinking about black swans. “I was depressed when I left him,” Taleb said. “Here is a guy who, whatever he wants to do when he wakes up in the morning, he ends up better than anyone else. Whatever he wakes up in the morning and decides to do, he did better than anyone else. I was talking to my hero . . .” This was the reason Taleb didn’t want to be Niederhoffer when Niederhoffer was at his height — the reason he didn’t want the silver and the house and the tennis matches with George Soros. He could see all too clearly where it all might end up. In his mind’s eye, he could envision Niederhoffer borrowing money from his children, and selling off his silver, and talking in a hollow voice about letting down his friends, and Taleb did not know if he had the strength to live with that possibility. Unlike Niederhoffer, Taleb never thought he was invincible. You couldn’t if you had watched your homeland blow up, and had been the one person in a hundred thousand who gets throat cancer, and so for Taleb there was never any alternative to the painful process of insuring himself against catastrophe. Last fall, Niederhoffer sold a large number of options, betting that the markets would be quiet, and they were, until out of nowhere two planes crashed into the World Trade Center. “I was exposed. It was nip and tuck.” Niederhoffer shook his head, because there was no way to have anticipated September 11th. “That was a totally unexpected event.” Well, guess what - unexpected events happen. More often than you can imagine. But when we give our hard earned money to professionals to manage them, we expect better. LJM Partners had a solid long term reputation. Till Feb.05. As Warren Buffett said - "It takes 20 years to build a reputation and 5 minutes to ruin it. If you think about that, you’ll do things differently.” If you liked this article, visit our Options Trading Blog for more educational articles about options trading. Related articles Karen SuperTrader: Myth Or Reality? Karen Supertrader: Too Good To Be True? How To Blow Up Your Account James Cordier: Another Options Selling Fund Goes Bust

Buy the Winners Eugene Fama, Father of the Efficient Market Hypothesis (EMH), has referred to momentum as "the premier market anomaly" which represents "the biggest embarrassment for Efficient Market Theory". And it's also very simple. So simple that it's under appreciated. Source: http://systematicrelativestrength.com/2015/10/26/buy-winners-2/ In 1937 Cowles and Jones shared their findings that “taking one year as the unit of measurement for the period 1920 to 1935, the tendency is very pronounced for stocks which have exceeded the median in one year to exceed it also in the year following.” The key here is that it doesn't work 100% of the time. Listen to Jim O'Shaughnessy discuss this here. Jim was comfortable writing "What Works on Wall Street" because he knew the tendency of humans to abandon strategies as soon as they went through a drawdown or period of relative underperformance. Human nature is unlikely to change, and this is a key belief to why simple strategies can continue to persist in a world of competitive markets. Since nothing works (meaning always producing profits and/or outperforming a benchmark) 100% of the time, the weak hands will eventually drop out. This is why I believe in combining together a few simple strategies where you have done a high degree of due diligence, and then follow them faithfully. When the next strategy of the month is in favor, you treat it with a high degree of caution and skepticism before even considering adjusting your plan. We all want to believe that the perfect strategy is out there that we just haven't found yet. I found it interesting as I read Ben Carlson's book that the largest Ponzi Scheme in history, run by Bernie Madoff, did not promise investors excessively high returns. It promised very good returns, but with almost no risk. Bernie was not stupid, he knew very well that humans desperately want to believe in the idea of making very good returns with little or no risk. From Ben's book: "The beauty in Madoff's scam was the fact that he never promised home runs to his investors. Over an 18-year period, Madoff claimed to offer 10.6 percent annual returns to his investors, fairly similar to historical stock market gains. But the annualized volatility was under 2.5 percent, a fraction of the variability seen in the stock market, or the bond market for that matter. And what do investors want more than anything? If you answered a stock market return profile minus the stock market risk profile, you answered correctly. Investors want to believe this is possible." Michael Covel had a discussion around this topic with Ewan Kirk of Cantab Capital during one of Michael's Trend Following podcasts. I'm going to paraphrase about a five minute clip of the podcast which can be heard here. I highly recommend it. The podcast Covel: Losses are statistically inevitable. There are still a number of people out there, some astute and some not, that still don’t want to imagine losses as a part of the game. Kirk: Yep, people are desperate to invest in something that never loses money. And that, of course, is why Bernard Madoff existed. Everyone is desperate to invest in something that never loses money. I’d like to invest in something which never loses money. I’d love to come up with a strategy that never loses money. Of course, we all want that. The reality is that maybe the best you can look for over a long period such as 20 or 30 years is a Sharpe ratio of .8, .9, maybe 1. Take a simulation of a 20% volatility with a 20% return per year. Every 2 years you will have a drawdown of 15% statistically, and a 20% drawdown every 4 years. And you don’t have to run very many simulations before you get a 40% drawdown that can last five years. Remember, this (simulation) is something that is guaranteed to make 20% per annum over a long enough period of time. The expectation of losses should be something everyone should build into their investment process at all times. Summary The enemy of a good plan is the dream of a perfect plan. Drawdowns and losses are part of the game but your human nature of survival will put up a fight against rationality when drawdowns occur. The human brain is capable of incredible optimism as well as pessimism. Be aware of it, and have expectations that are statistically valid. Not just past performance. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 achieving multiple industry achievements including qualifying membership in the Million Dollar Round Table for 5 consecutive years. Membership in this prestigious group represents the top 1% of financial professionals in the world. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse is managing the LC Diversified portfolio.

Good question. When I trade Weeklys, I do start the trade on Monday and typically exit Wed or Thurs. I look to earn 30 to 40 cents on a 5-point index iron condor. The initial premium tends to be in the vicinity of 80 cents. These options are reasonably far OTM. However, the sales are not naked short like yours. The fact that you prefer to sell naked options changes the risk profile: You do not buy protection, so your short option is much farther OTM than the one I sell. That increases the chances you will have a profitable trade. Your potential loss is gargantuan. I agree that it will not happen often, but in my opinion, it happens often enough to make the sale of naked options too dangerous. If you do not get overconfident and trade this strategy in small position size, then it can be viable for the account of an experienced trader. Why experienced? Because risk management is the key to the trader’s success. The trade If we sell a low-delta, far OTM option, collecting 10% of the margin requirement; or, if we sell a 5-point iron condor for $0.50 – then we have an opportunity to earn that 10%. To earn 10%, we must allow the options to expire worthless. That involves extra risk because each day comes with the tiny possibility of market-moving news. I know that works for many traders, but I never do that. I prefer to eliminate all risk one or two days early and avoid overnight risk for that extra day. So I would be happy to pay 20 cents in the above scenario, reducing profits to a still very acceptable 6% before commissions. Risk We can look at risk as the probability of losing money and I agree that the probability is well on our side. We can also consider risk to be the money at risk, or the sum that could be lost. That is how I prefer to think about risk. From your perspective, risk is low. From mine, it is very high. So is this high risk or not? The answer must be an opinion based on fact, but remains an opinion. That means intelligent people can disagree. For me, short-term options come with far too much negative gamma. Translating that to English for the newer option traders: When we sold an option or spread that looks and feels ‘safe’ because it is somewhat far OTM, when time is short, it does not take much of a move in the underlying asset to push that short option ITM. And that is the high risk of which I speak. When we collect a small cash credit, the potential loss is high. The problem is that too many rookies traders do not know how to react. Some exit far too early in a panic. Others sit frozen with inaction and wind up taking the maximum possible loss. Earnings Potential If you can earn 10% per week and compound those earnings, after one year, $1,000 would become $142,000. I’m sure do not expect to win every week, but I hope that you recognize that it is impossible to earn such reruns with low risk. My conclusion is that your plan is fine for the experienced, disciplined trader who is skilled at managing risk. However, it is far too dangerous for the inexperienced trader. Related articles: Should You Trade Weekly Options? The Options Greeks: Is It Greek To You? The Risks Of Weekly Credit Spreads Options Trading Greeks: Gamma For Speed Options Trading Greeks: Theta For Time Decay Why You Should Not Ignore Negative Gamma Want to learn how to reduce risk and put probabilities in your favor? Start Your Free Trial

Put selling is a good strategy, but position sizing is the key. Just don't sell too many contracts. Here is some further reading: Selling Naked Put Options Selling Puts: The Good, The Bad And The Ugly How To Blow Up Your Account The Spectacular Fall Of LJM Preservation And Growth Karen SuperTrader: Myth Or Reality?

Options, used wisely, can and do hedge market risks. Many strategies, from the basic covered call to uncovered puts, covered strangles, collars and even butterflies or condors, all can be used as risk-neutral hedging strategies. The percentages go way up in your favor when you combine conservative strategies with short-term expiration (for short positions), proximity (or underlying price to strike and of underlying price to resistance or support) and identification of reversal signals with confirmation. That’s basically the way that options can be used to move the probabilities in your favor. Are there differences between probabilities and odds? It’s the same thing, but gamblers like to think of winning and losing as playing the odds, and they invariably believe they can overcome the averages. Even a roulette bet on black or red, often thought of as a 50/50 bet, is not quite that favorable. With the zero and double-zero in mind, the odds of winning on a black or red bet are 47.4%, not 50%. There are 18 black, 18 red and 2 green outcomes, so black or red is an 18 out of 38 probability (18 ÷ 38 = 47.4%). This means that if you bet on either red or black consistently, you will eventually lose. The odds are slightly better with weekly options, but it’s only a 50-50, or an even bet. First introduced in 2005, weekly options exist for a short term only, just 8 days. They are set up every Thursday and expire the following Friday. At first glance, weekly options are very cheap. But it could also be a sucker bet, just like the seemingly favorable rules on many casino games. For example, you can buy a weekly call option and accept the odds of the underlying price moving high enough by next Friday to make it profitable (meaning intrinsic value outpaces time decay). The same observation works for weekly puts, but in the opposite direction. You are giving up the advantage of a longer term in exchange for a cheaper premium. But for a long position, this seems like a long shot, to use the terminology of gambling. For short options, the odds move very nicely in favor of the trader. Because time decay will be rapid, opening a short weekly option can be very profitable. The dollar amounts are not huge, but the annualized return can take you to double digits. In fact, on average, options lose one-third of remaining time value between the Friday before expiration and Monday. This is because three calendar days pass but only one trading day. This is a fact often overlooked by traders: Time decay takes place every day, whether the market is open or not. This represents a great value. Going short, either with calls or puts, is a great advantage using weekly options. A few suggestions for increasing the odds (probability) in your favor: Build in a buffer when possible. This is a distance between the option’s strike and current price of the underlying. By keeping the position out of the money, you receive less for the position, but you also reduce exposure to exercise. As the underlying moves toward the money, the OTM call or put can be closed or rolled to avoid exercise. But there is a good chance that time decay will outpace intrinsic value. Pay attention to resistance and support. The most advantageous timing to open a short option is when the underlying price moves above resistance (timing to open a short call) or below support (open a short put). Assuming the price does what it usually does – retrace back into range – this timing maximizes your probability. This is especially true if the move outside of the trading range occurs with a price gap. Look for reversal signals and confirmation. Pay attention to traditional Western signals like double tops or bottoms or island clusters; candlesticks; volume spikes; moving average convergence; and momentum oscillators. Only act when you find the signal and confirmation; this increases your chances for success. Pay attention to strength or weakness in the trend. The best reversals happen when a previously strong trend reaches a plateau, slows down, and then turns in the opposite direction. Weekly options can be summarized with the long and short attributes in mind. Long traders must fight against time decay and time. Short traders benefit from time decay and time. With the four guidelines in mind, what otherwise could be 50-50 odds are moved nicely in your favor. Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

Since its introduction in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VX futures were introduced in 2004, and in 2006 it became possible to trade VIX options. Options and futures on volatility indexes are available for investors who wish to explore the use of instruments that might have the potential to diversify portfolios in times of market stress. Much of the information below is taken directly from the CBOE website. What is VIX Index? The CBOE Volatility Index® is an up-to-the-minute market estimate of implied (expected) volatility that is calculated by using the midpoint of real-time S&P 500® Index (SPX) option bid/ask quotes. More specifically, the VIX Index is intended to provide an instantaneous measure of how much the market thinks the S&P 500 Index will fluctuate in the 30 days from the time of each tick of the VIX Index. CBOE calculates the VIX Index using standard SPX options and weekly SPX options that are listed for trading on CBOE. Standard SPX options expire on the third Friday of each month and weekly SPX options expire on all other Fridays. Only SPX options with Friday expirations are used to calculate the VIX Index.*Only SPX options with more than 23 days and less than 37 days to the Friday SPX expiration are used to calculate the VIX Index. These SPX options are then weighted to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index. How Do I Trade VIX? VIX cannot be traded directly. However, traders can trade VIX futures, trade VIX options and also some other VIX related products, like VXX. Expiration VIX derivatives generally expire on Wednesday mornings. If that Wednesday or the Friday that is 30 days following that Wednesday is a CBOE holiday, the VIX derivative will expire on the business day immediately preceding that Wednesday. Last Trading Day The last trading day for VIX options is on the business day (usually a Tuesday) immediately before expiration. If that day is a CBOE holiday, the last trading day for an expiring VIX option will be the day immediately preceding the last regularly scheduled trading day. Settlement value The final settlement value for VIX futures and options is determined on the morning of their expiration date (usually a Wednesday) through a Special Opening Quotation ("SOQ") of the VIX Index using the opening prices of a portfolio of SPX options that expire 30 days later. VIX Options Pricing Please note that VIX options prices are based on VIX futures not the VIX spot. The VIX options are European exercise. That means you can’t exercise them until the day they expire. There is no effective limit on how low or high the prices can go on the VIX options until the exercise day. VIX trading hours are: 7:30am to 4:15pm Eastern time. Practical implications: Since VIX options are based on VIX futures, they bahave very differently from "regular" options. For example, calendar spread can have negative values - this would never happen with regular calendars. The Relationship of the SPX and the VIX The chart below shows the daily closing prices for the S&P 500 and VIX during the third quarter of 2012. The blue line and left scale represent the S&P 500 while the red line and right scale represent VIX. This chart is a typical example of how the S&P 500 and VIX move relative to each other on a daily basis. The table below examines price behavior from January 1, 2000 to September 28, 2012. During this time period the S&P 500 closed higher on 1692 trading days, and of those days, VIX closed lower on just over 82% of the time. Also, during this period, the SPX closed lower on 1514 trading days, and of those days, VIX closed higher over 78% of the time. Altogether, during the period covered in the table, VIX moved in the opposite direction of the S&P 500 about 80% of the time. S&P 500 Up VIX Index Down Percent Opposite 1692 1390 82.15% S&P 500 Down VIX Index UP Percent Opposite 1514 1187 78.40% Source: Bloomberg The conclusion from those tables is simple: VIX usually goes up when SPX goes down, and vice versa. That’s why many investors have (for better or worse) seen an “investment” in VIX as a kind of hedge against market risk. If you are not a member yet, you can join our forum discussions for answers to all your options questions. VIX Futures Curve A futures curve is a curve made by connecting prices of futures contracts of the same underlying, but different expiration dates. It is displayed on a chart where the X axis represents expiration date of a futures contract and the Y axis represents prices. The concept of futures curve is similar to that of yield curve, which is used for bonds or the money market and displays interest rates of different maturities. VIX futures curve is made of prices of individual VIX futures contracts. The first point (the left end of each curve) on the chart on this page is the spot VIX Index value; the others are futures prices. Contango vs. Backwardation When a futures curve is upward sloping from left to right, it is called contango (we say that a market is in contango). In contango, near term VIX futures are cheaper than longer term VIX futures. Contango is very common in VIX futures, especially when the spot the CBOE Volatility Index® is very low. Contango can be interpreted in the way that the futures market expects the VIX (and volatility in general) to rise in the future. The opposite situation, when near term futures are more expensive and futures curve is downward sloping, is called backwardation. Backwardation is less frequent than contango in VIX futures, but not uncommon. It typically occurs when the spot the CBOE Volatility Index® spikes up (to levels such as 35-40 or more) and the market expects volatility to calm down somehow in the future. VIX Term Structure (or VIX Futures Term Structure) is also the name frequently used for VIX futures curve. Conclusion VIX is a very complicated product. Please make sure you understand how it works before trading it. Related articles Using VIX Options To Hedge Your Portfolio VIX Term Structure 10 Things You Should Know About VIX VIX - The Fear Index: The Basics How Does VIX Work? How To Lose $197 Million Trading VIX Top 10 Things To Know About VIX Options Want to join our winning team? Start Your Free Trial

A principle of quantitative investing is that the more data you have, the better. Below is an example of trend following the S&P 500 with a combination of 6 to 12 month absolute momentum since 1930. Individuals interested in recreating this simulation on their own can contact me directly at jblom@lorintine.com. A hypothetical rules-based backtest this long includes the greatest crash we’ve ever seen in US stocks where the S&P declined 80% during the great depression. Some may get distracted by the discussion on how the markets were “different” then vs. now. The objective here is only to see how well a simple model holds up on as much historical data as possible. We’re looking for robustness. Portfolio 1: Momentum (Either in the S&P 500, bonds, or a combination of both based on absolute or "time series" momentum) IVV1930: This is a custom built dataset of S&P 500 total returns where index data is used prior to modern day investable products like the iShares ETF, IVV, which are used when they became available. Click on all images for greater clarity. Every statistic is improved, except best year, which is expected, because during positive outlier years the best a single asset trend system can really be expected to do is match the buy and hold return. The most notable improvement is the reduction in volatility and drawdown, which is a common trait of simple trend following systems like this. 35% is still a large and very uncomfortable maximum drawdown, which is why diversification is always recommended and how we actually implement these concepts in our firm for our clients. I find it interesting to actually zoom in on the great depression period because backtesting does a great job of simulating everything about past performance EXCEPT how it would have actually felt to live through it. Cliff Asness says it well in his description of what he calls time dilation: "Well the single biggest difference between the real world and academia is - this sounds overly scientific - time dilation. I’ll explain what I mean. This is not relativistic time dilation as the only time I move at speeds near light is when there is pizza involved. But to borrow the term, your sense of time does change when you are running real money. Suppose you look at a cumulative return of a strategy with a Sharpe ratio of 0.7 and see a three year period with poor performance. It does not phase you one drop. You go: “Oh, look, that happened in 1973, but it came back by 1976, and that’s what a 0.7 Sharpe ratio does.” But living through those periods takes — subjectively, and in wear and tear on your internal organs — many times the actual time it really lasts. If you have a three year period where something doesn’t work, it ages you a decade. You face an immense pressure to change your models, you have bosses and clients who lose faith, and I cannot explain the amount of discipline you need." Based on my decade of experience in working with investors, I can imagine the fear being so strong during this kind of period that investors would have bailed on the trend system even when it was doing its job of preserving capital. Certainly there was something else in the world that was making money during this period for investors to compare performance to and chase after the fact returns. When it comes to stocks, as prices go lower and therefore future expected returns increase…for some reason investors become less interested. Perhaps this would be different if stock prices were quoted in yields instead? I don't know, but behavioral biases are actually part of the academic explanation of why trend following has held up for so long, including well after its discovery. In more recent history, we saw a similar stretch in markets from 2000-2009, now referred to as “the lost decade” for the S&P 500. Trend following performed extremely well during this period, probably even better than should be expected during the next bear market due to how relatively stable both the up and down trends were during this period and also how strong the performance of US aggregate bonds was as a risk-off asset. Trend following does tend to under perform during strong bull markets like we've seen since 2010, so investors must manage expectations accordingly. The only way to get 100% of the upside is to accept 100% of the downside. Also, trend following is going to generate turnover that will make it less tax efficient than buy and hold and should therefore be favored in tax advantaged accounts for high income earners. All of these things are what we can assist clients with in designing a comprehensive asset allocation plan that suits your personalized situation and needs. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse oversees the LC Diversified forum and contributes to the Steady Condors newsletter.

Keep in Mind, Stocks Rose 1,100-fold During This Period From Morgan’s article: The S&P 500 rose 1,100-fold over the last 70 years, including dividends. But look what happened during that period: May 1946 to May 1947. Stocks decline 28.4%. A surge of soldiers return from World War II, and factories across America return to normal operations after years of building war supplies. This disrupts the economy as the entire world figures out what to do next. Real GDP declines 13% as wartime spending tapers off. A general fear that the economy will fall back into the Great Depression worries economists and investors. June 1948 to June 1949. Stocks decline 20.6%. A world still trying to figure out what a post-war economy looks like causes a second U.S. recession with more demobilization. Inflation surges as the economy adjusts. The Korean conflict heats up. June 1950 to July 1950. Stocks fall 14%.North Korean troops attack points along South Korean border. The U.N Security Council calls the invasion “a breach of peace.” U.S. involvement in the Korean War begins. July 1957 to October 1957. Stocks fall 20.7%. There’s the Suez Canal crisis and Soviet launch of Sputnik, plus the U.S. slips into recession. January 1962 to June 1962. Stocks fall 26.4%. Stocks plunge after a decade of solid economic growth and market boom, the first “bubble” environment since 1929. In a classic 1962 interview, Warren Buffett says, “For some time, stocks have been rising at rather rapid rates, but corporate earnings have not been rising, dividends have not been increasing, and it’s not to be unexpected that a correction of some of those factors on the upside might occur on the downside.” February 1966 to October 1966. Stocks fall 22.2%. The Vietnam War and Great Society social programs push government spending up 45% in five years. Inflation gathers steam. The Federal Reserve responds by tightening interest rates. No recession occurred. November 1968 to May 1970. Stocks fall 36.1%. Inflation really starts to pick up, hitting 6.2% in 1969 up from an average of 1.6% over the previous eight years. Vietnam War escalates. Interest rates surge; 10-year Treasury rates rise from 4.7% to nearly 8%. April 1973 to October 1974. Stocks fall 48%.Inflation breaks double-digits for the first time in three decades. There’s the start of a deep recession; unemployment hits 9%. September 1976 to March 1978. Stocks fall 19.4%. The economy stagnates as high inflation meets dismal earnings growth. Adjusted for inflation, corporate profits haven’t grown for eight years. February 1980 to March 1980. Stocks fall 17.1%. Interest rates approach 20%, the highest in modern history. The economy grinds to a halt; unemployment tops 10%. There’s the Iran hostage crisis. November 1980 to August 1982. Stocks fall 27.1%. Inflation has risen 42% in the previous three years. Consumer confidence plunges, unemployment surges, and we see the largest budget deficits since World War II. Corporate profits are 25% below where they were a decade prior. August 1987 to December 1987. Stocks fall 33.5%. The crash of 87 pushes stocks down 23% in one day. No notable news that day; historians still argue about the cause. A likely contributor was a growing fad of “portfolio insurance” that automatically sold stocks on declines, causing selling to beget more selling — the precursor to the fragility of a technology-driven marketplace. July 1990 to October 1990. Stocks fall 19.9%. The Gulf War causes an oil price spike. Short recession. The unemployment rate jumps to 7.8%. July 1998 to August 1998. Stocks fall 19.3%. Russia defaults on its debt, emerging market currencies collapse, and the world’s largest hedge fund goes bankrupt, nearly taking Wall Street banks down with it. Strangely, this occurs during a period most people remember as one of the most prosperous periods to invest in history. March 2000 to October 2002. Stocks fall 49.1%. The dot-com bubble bursts, and 9/11 sends the world economy into recession. November 2002 to March 2003. Stocks fall 14.7%. The S. economy puts itself back together after its first recession in a decade. The military preps for the Iraq war. Oil prices spike. October 2007 to March 2009. Stocks fall 56.8%. The global housing bubble bursts, sending the world’s largest banks to the brink of collapse. The worst financial crisis since the Great Depression. April 2010 to July 2010. Stocks fall 16%. Europe hits a debt crisis while the U.S. economy weakens. Double-dip recession fears. April 2011 to October 2011. Stocks fall 19.4%. The U.S. government experiences a debt ceiling showdown, U.S. credit is downgraded, oil prices surge. June 2015 to August 2015. Stocks fall 11.9%. China’s economy grinds to a halt; the Fed prepares to raise interest rates. ____________________________________________________________ I like Morgan’s article, it reminds us that economic uncertainty has always been a regular part of the past along with frequent corrections (10%+ declines) and deep bear markets (20%+ declines). His intention is to help us have a long term perspective. Many times throughout the past seven decades, “this has never happened before”. Yet the US continued to show its strength and resiliency. For some, this is effective. For others, they need something more to help them follow their plan. Dual Momentum In the equities portion of our dual momentum model, we rotate among US Large, US Small, and International stocks based on twelve month relative strength momentum[2]. When all three asset classes have negative absolute momentum[3], we switch into bonds. The idea here is to earn the risk premium in stocks with less exposure to the downside volatility and bear market drawdowns that frequently have occurred in the past and will frequently occur in the future. We emphasize less in an effort to promote proper expectations. Empirical data suggests that dual momentum can be used to earn higher returns with less risk than buy and hold, but it’s not a Holy Grail. Holy Grail strategies tend to fall apart in real time because they were over fit to a limited amount of past data with no economic argument to support why they work. Researchers refer to this as data-mining. With dual momentum, we believe having a proven rules-based method in place to exit equities ahead of the majority of major bear market declines can be all that is needed to help investors have the confidence to stick with their strategy for the long term. And the right strategy for every investor is the one they will stick with. This is key. Since Morgan is using data since 1946, we thought it would be fun to look at showing our dual momentum equities model during this same period (note: international is excluded in this example due to lack of data prior to 1970 although we use it in our actual trading model). Here are a few things to take notice of on both the chart and in the statistics. On the chart, it’s important to notice that our dual momentum approach did NOT outperform an equal weighted buy and hold portfolio in the first thirty years, but slightly lagged or matched buy and hold for most of the period. Thirty years is the investment time horizon for many investors, not seventy. If only relative strength momentum would have been used during this period, outperformance would have occurred. Absolute momentum, or trend following momentum, will take you out of the market at times when doing nothing would have ended up being the better short term outcome. We call these whipsaws, and they are expected as a short term price to pay for risk management that can allow us to sidestep the majority of painful bear market drawdowns. Over the long term, relative strength and absolute momentum tend to contribute fairly equally to excess returns. If the future ends up looking more like this specific period of the past, we still would prefer dual momentum’s slight underperformance as a small cost to pay for the psychological comfort of knowing a plan is in place to protect capital against 50% drawdowns. The total outperformance of dual momentum in the last seven decades comes in the more recent four decades where three separate bear markets of 50%+ losses occurred for buy and hold investors. Two of these occurred in the last fifteen years. This is when absolute momentum does its job of taking us out of equities in the early stages of bear markets. Even during the first thirty year period, dual momentum still produced lower volatility and maximum drawdown[4], and a higher Sharpe Ratio. The period of 1946-1972 produced an annualized return of 12.1% for buy and hold and 11.78% for dual momentum, while over the entire duration dual momentum produced both higher returns and less risk. We make clear to our clients that beating the market isn’t a financial goal, and it would be intellectually dishonest for us to suggest we can guarantee anything about the future. What we can guarantee is that we have vigorously researched a robust investing plan supported by decades of historical data and third party validation. When combined with disciplined execution and realistic expectations, we believe the probabilities are highly in favor of a successful long term investing experience. Investigate carefully Choose wisely Follow faithfully Fama/French (2008): Momentum is “the center stage anomaly of recent years…an anomaly that is above suspicion…the premier market anomaly.” [1] The Credit Suisse Global Investment Return Yearbook shows how both US and World ex-US (in USD) equity risk premiums have far exceeded those of bonds and bills since 1900 forming the portfolio theory basis for focusing on equities in our dual momentum model. [2] Relative strength momentum compares total returns of one asset class to another over an applicable lookback period. The asset class that has risen the most is held for the next month. [3] Absolute momentum is defined as having a total return less than the risk free rate (such as US T-bills) over the applicable lookback period. [4] Maximum drawdown measures total peak to trough loss suffered prior to reaching new equity highs. Maximum drawdown is much more important to most investors than the more frequently mentioned measure of risk known as standard deviation or annualized volatility. Past performance doesn’t guarantee future results. The concepts of dual momentum were pioneered by the research of Gary Antonacci. We recommend using his best-selling book and blog as an additional resource for studying momentum. This is a hypothetical model intended to show the efficacy of dual momentum, and is not intended to represent specific investment advice. Data is gross of any applicable taxes and transaction costs, and investors should always consult with their tax advisor before investing. All investments carry risk, may lose value, and are not FDIC insured. We provide the hyperlink to Morgan Housel’s article as a convenience and do not endorse nor guarantee the accuracy of any information he has presented. Feel free to contact us if you’d like to discuss your specific situation further. We welcome every opportunity to discuss how we could add value to your financial life. Related Articles: Buy The Winners: The Power Of Momentum Momentum – The Premier Market Anomaly

Introduction In November of 2012, CBOE and C2 issued Information Circulars IC12-093 and IC12-015 announcing the expansion of the number of Weeklys that can be listed for certain securities. CBOE and C2 may now list up to five consecutive Weeklys in a class provided that an expiration does not coincide with one that already exists. According to CBOE, "Weeklys were established to provide expiration opportunities every week, affording investors the ability to implement more targeted buying, selling and spreading strategies. Specifically, Weeklys may help investors to more efficiently take advantage of major market events, such as earnings, government reports and Fed announcements." Not every stock or index has weekly options. For those that do, it basically means that every Friday is an expiration Friday. That opens tremendous new opportunities but also introduces new risks which can be much higher than "traditional" monthly options. Basically, just about any strategy you do with the longer dated options, you can do with weekly options, except now you can do it four times each month. Let's see for example how you could trade SPY using weekly or monthly options. Are they cheap? Lets buy them SPY is traded around $218 last Friday Aug. 19, 2016. Looking at ATM (At The Money) options, we can see that Sep. 16 (monthly) calls can be purchased at $2.20. That would require the stock to close above $220.20 by Sep. 16 just to break even. However, the weekly options (expiring on August 26, 2016) can be purchased at $1.08. This is 50% cheaper and requires much smaller move. However, there is a catch. First, you give yourself much less time for your thesis to work out. Second and more importantly, the weekly options are much more exposed to the time decay (the negative theta). The theta is a measurement of the option's time decay. The theta measures the rate at which options lose their value, specifically the time value, as the expiration draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day. When you buy options, the theta is your enemy. When you sell them, the theta is your friend. For the monthly 218 calls, the negative theta is -$4.00. That means that the calls will lose ~1.8% of their value every day all other factors equal. For the weekly calls, the negative theta is a whopping -$7.70 or 7.1% per day. And that number will accelerate as we get closer to the expiration day. You better be right, and you better be right quickly. Buying is too risky? Maybe selling is better? If this is the case you might say - why not to take the other side of the trade? Why not to use the accelerating theta and sell those options? Or maybe be less risky and sell a credit spread? A credit spread is when you sell an option and buy another option which is further from the underlying price to hedge the risk. Many options "gurus" ride the wave of the weekly options trading and describe selling of weekly options as a cash machine. They say that "It brings money into my clients account weekly. Every Sunday my clients access their accounts and see + + +.” They advise selling weekly credit spreads and present it as a "a safe option strategy because we’re combining an option purchase with an option sale resulting with a credit into your account". This short term option trading strategy can work very well... until it doesn't. Imagine for example someone selling a 206/205 put credit spread on Thursday June 23, 2016 with SPY around $210.80. That seems like a pretty safe trade, isn't it? After all, we have just one day, what could possibly go wrong? The options will probably expire worthless and the clients will see more cash in their account by Sunday. Well, after the market close, news about Brexit took traders by surprise. The next day SPY opened below $204 and the credit spread has lost almost 100%. So much for the "safe strategy". Of course this example of weekly options trading risks is a bit extreme, but you get the idea. Those are very aggressive trades that can go against you very quickly. Be Aware of the Negative Gamma So what is the biggest problem with selling the weekly options? The answer is the negative gamma. Condor Evolution. Source: http://tylerstrading.blogspot.ca/2010/09/condor-evolution.html The gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price. When you buy options, the gamma is your friend. When you sell them, the gamma is your enemy. When you are short weekly options (or any options which expire in a short period of time), you have a large negative gamma. Any sharp move in the underlying will cause significant losses, and there is nothing you can do about it. Here are some mistakes that people make when trading Iron Condors and/or credit spreads: Opening the trade too close to expiration. There is nothing wrong with trading weekly Iron Condors - as long as you understand the risks and handle those trades as semi-speculative trades with very small allocation. Holding the trade till expiration. The gamma risk is just too high. Allocating too much capital to Iron Condors. Trying to leg in to the trade by timing the market. It might work for some time, but if the market goes against you, the loss can be brutal and there is no another side of the condor to offset the loss. The Bottom Line So is the conclusion that you should not trade the weekly options? Not necessarily. Short term option trading can be a good addition to a diversified options portfolio - as long as you are aware of the risks and allocate only small portion of the account to those trades. Just remember that those options are aggressive enough to create quick profits or quick losses, depending on how you use them. Related articles: The Options Greeks: Is It Greek To You? The Risks Of Weekly Credit Spreads Options Trading Greeks: Gamma For Speed Options Trading Greeks: Theta For Time Decay Why You Should Not Ignore Negative Gamma Make 10% Per Week With Weeklys? Want to learn how to reduce risk and put probabilities in your favor? Start Your Free Trial