Volatility in August?

BetOnMarkets.com - The Smarter Way to Trade

There is an old saying, sell in May and go away until Labor Day.

The latter is around the corner but it seems like the market is already waking from its summer slumber a little earlier then expected. Perhaps, like the weather, things have become a little out of kilter.

The volatility index (VIX) derived from the S&P 500 stock index options, has been at or near a five year high for the last couple of weeks. This index is a good measure of broad based fear in financial markets and last peaked as the dotcom bubble burst at the seams says Betonmarket's Michael Wright.

The financial instrument most directly effected by this occurrence is the options market, with buying options becoming a more expensive strategy, while selling options becomes potentially more profitable due to the increase in the premiums at which these options trade. The gist is that selling options becomes more rewarding because of the increased risk and buying options becomes more expensive because of the decreased risk.

While the market has been swinging wildly in both directions, the overall direction has been negative, with the SP500 losing all gains from as far back as May 2007. One of the main culprits for this bit of volatility is the earnings season, which has seen more missed estimates than beats.

Over the last few years it has become almost a norm that companies declared record earnings and forecasted for higher earning for the following quarter. This season however more and more companies are starting to miss their previously glowing earning predictions, and to make things worse are starting to predict slowdowns and lower earnings. At the same time there is a credit worry regarding the hybrid mortgages which were issued over the last few years, like the flex adjustable rate mortgages which resets itself every 3 or so years after the low teaser rate has run out.

There are also other repercussions such as the hedge funds who invest in these mortgages. Bear and Stearns, a giant US hedge fund had two funds collapse, and had to notify investors that they won't be getting any money from its investment due to its collapse.

All this has been affecting public confidence to a point where traders are sitting in front of their computers with itchy fingers, ready to sell at the slightest sign of a pullback.

With Betonmarket.com the average trader can potentially capitalise in the situation and do something that is the equivalent of selling options. With the charts still looking bearish a no touch higher trade could be an interesting proposition. This no touch trade is similar to selling options and compensates a trader if a predetermined level is not reached within a set time period.

One trade to take advantage of current conditions is a No touch 100 points higher than the current spot price on the S&P 500 which yields around 10% ROI within 20 days. This means that if the S&P 500 doesn't rise 100 points over the next 20 days you win.

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