Use the VIX to trade Option Volatility
Volatility Trading using the VIX
The adage buy low and sell high was originally used in reference to price, but can also be applied to the practice of trading volatility. In fact, even as an option trader looking to trade market price as opposed to volatility, ignoring measures of potential explosiveness while entering or exiting a market could mean financial peril. While many traders, whether beginner or pro, understand the concept of buying options during times of low volatility and selling them during times of high volatility, emotions often lead a well planned strategy astray.
Unlike traders that are looking to profit from a directional move in price, volatility traders are more interested in the pace at which the market is moving than the direction. However, I argue that it is important to chart both price and volatility. Doing so provides trades with a better understanding of the 'big picture'.
Want more? Check out the October 2008 issue of Technical Analysis of Stocks & Commodities magazine!