Embracing Whiplash

The first two weeks of March have given us a rather nasty bout of whiplash. We check futures before bed and theyʼre down. We wake up at 5 and theyʼre up. By the open…

We find some comfort in an extra shot of espresso, but the lack of trend is taking its toll on our sleep. The Dow Jones Industrial Average (DJIA) has closed up or down by triple digits on seven of the last ten trading days. Notably, four of these moves exceeded 250 points.


Despite the gyrations, the CBOE Volatility Index (VIX) is still only 16.6, well below both Januaryʼs rise to 22 and last Octoberʼs spike above 26. In other words, the Chicago based traders who make markets in the S&P 500 Index options, which in turn determine the level of implied volatility, are far less stressed than we are! The trading community is effectively telegraphing a view that the broad market will continue to yo-yo up and down rather than break out in one decisive direction. We may have whiplash, but they clearly do not.

Traders not only embrace volatility, they live for it. Volatility, or “vol” is their lifeblood. It provides opportunities to get in and out, presumably at a profit. We generally take a longer-term view, but we can still borrow a page from their playbook: Trade the range.

We are combing our portfolio for stocks which, like the broader market, are gyrating more than usual. We are looking to make opportunistic options trades, buying calls on down days and puts on up days (if the VIX were higher, we would sell puts on down days and sell calls on up days). Because we are buying options, we generally focus on slightly in-the-money strikes, thereby minimizing both time decay on our P&L and premium paid to the Chicago crowd.

Hereʼs what weʼre eyeing today as the DJIA falls 260 points. Happy trading.

  1. BankAmerica April 15 calls at $1.12 stock at $16.00
  2. Google April 535 calls at $22.00 stock at $545.00
  3. News Corp 16 calls at $0.75 stock at $16.50