The Bulls’ Confidence is tested – Vol explodes higher!

Where oh where has the volatility gone? That was what traders were bemoaning just one week ago when 30-day Implied Volatility in the SPY was 10.6% and Historical (actual) vol was an anemic 5.15%.


The VIX index told the same story as well. Closing Thursday at 12.51%, the ‘fear index’ was indicating there was little to fear. But with Friday’s 2.58% pummeling in the S&P 500 index, the VIX shot almost 40% higher to a 17.50% reading. Simply overnight the complacency and confidence that long, bullish traders possessed vanished! The width of the selling was remarkable with 8 of the 9 sector ETFs dropping at least 2% or more.


In the recent days, any market weakness has been met by bargain hunters. The e-mini futures on the S&P 500 index – which can be viewed on the OH platform, often move faster than the cash equities themselves and lately shown that they can reverse a downtrend in the blink of an eye. However, today each attempt to recover losses throughout the afternoon were met by eager sellers and the futures and the cash indices closed near their lows for the session.


The big question is now what? Bullish long stock only investors have not had much to worry about and lose sleep over the past month. But for them, today’s market action is a painful reminder of the power and ferocity of potential market down drafts. There is an option for stock investors who desire to stay invested but maybe concerned about the risks of straight stock ownership.

In late August we presented an options strategy webinar outlining the Long Call as a Stock Replacement strategy. This basic strategy allows investors to remain invested in the potential upside of the market, using less capital than a straight stock purchase with the added benefit of a downside hedge. There is a cost of course, the call option will have extrinsic time value in its premium which will decay. If you missed the live session an archived version is available on-demand in our library of educational content found at Shortly after our session on September 3, 2016 I was pleased to see this same strategy featured in a Barrons’ article. You can view that article here.

Even with the increase in implied volatility, today’s market selloff may make using the Stock Replacement Strategy worthy of your consideration. Learn how to set up, execute and manage the trade using the OptionsHouse platform at our archived educational session here.

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