The VIX is unusually high due to all of the fear in the market.  This should make you consider option plays that capitalize on this occurrence.  There are a few plays that certainly make this possible, but not without some consequences (of course).

The first and easiest to understand is short options.  Selling a high volatility option nets you significantly more premium when the VIX is this high.  The consequence is easy to see, you're being paid more because you're taking on significantly more risk.  A stock like GE moving 6, 8, 10% in a day make it look like yesterday's tech stock. Companies blowing up left and right or requiring bail outs make your perceived risk much higher than in a 10-15'ish VIX environment.  I find there are still some times when I feel the risk is worth it.  A good example is on an index.  Yes, the indexes seem to thrash about wildly these days, but indexes don't go out of business. In a short put situation, assignment means you're buying even lower and can write bloated calls against your new holding.  Of course, do not sell puts in any situation where you're not comfortable owning the underlying.

Butterflies are also short vega option plays.  As volatility falls, the butterfly shows a profit.  The catch here is that a butterfly has a relatively small profit zone.  The profit is big (sometimes 10 to 1 risk/reward), but the distance between profit and total loss can be as small as a few percentage points in the underlying.  The good news is, the risk is usually tiny.  You can put on some butterflies for a dime or 0.15.  This might make you feel better if you're not thoroughly convinced that the market is settling down.  In a wild market, as we've seen, a stock can move a few percentage points in a matter of hours or minutes and in no time you're showing a full loss.  The other drawback is that this is a 4 option play, so commissions can be double a "normal" spread and quadruple that of selling options.

A short calendar spread is very short vega.  It makes sense considering a long calendar spread is very long vega.  A rise in volatility on a calendar spread increases profit, so obviously the inverse is true making a short calendar a candidate if you're expecting volatility to drop substantially.  The draw back to this play is that theta is brutal.  Your profit zones to the right and left of the strike are also relatively small.

Since selling options takes you short vega, selling a straddle is a great way to have lots of vol crush power on your side.  And only one of the options can be assigned, so you have a slight built in hedge in case things go very badly.

Disclaimer: I do not recommend any of these position types, this is strictly pointing out some option position types that may be relevant given the current market conditions.  Always trade on paper until you understand how these positions respond in a real market environment.

Definition: the practice of extorting money or other property, especially by a public official, by the use of threats

Sound a little bit like what's happening to us through this bail out plan?  The threat is financial armageddon.  The threat is that without it, your retirement goes bye-bye.  Such a shame.

Back to the market, I'm investigating some additional "free butterfly" items.  I've been looking for items that are in a relative range with high volatility.  My best candidate right now is gold.  GLD is in a bit of a range, and at the present, seems to be in the middle of a range.  I'm going to add this to my watch list as when extremes are hit on the range, I'll open a vertical spread.  Why a vertical?  Because I don't really want to own gold.  My long stomach is feeling a bit full at the moment.

Any other ideas for issues to try flys with, please add a comment. 

Two of my option plays have really surprised me.  First, the $22.50 short calls on C are now in the money.  If these are assigned, that's fine, I made money on premium.  It isn't exactly how I wanted it to play out, but it's not a bad situation at all given financials.  I may even be in the black on financials this year thanks to option income.  The second is my short $20 puts on GE.  I shorted these puts during the first big down turn a couple of weeks back.  Since then, GE went back up to over $26 making the juicy premium collected on GE seem like easy money.  Of course, nothing is easy or goes as expected as GE looks like it may be flirting with $20 per share if things keep going the way they are.  Admittedly, I'm scrambling for a plan.  I don't mind getting assigned at $20 because I think it's a wonderful price for a well diversified and massive company.  But the question becomes, do I want any more?  If GE dips below $20, is it a good time to sell some 17.50's or 15's?  Or do I just write calls like I did with C?

I normally already have my mind made up for these situations, but again, this seemed like easy pickings for premium just a couple of weeks ago.  It's probable that this will still turn out to my advantage (i.e. puts expire worthless), but it's always important to have a plan long before the unexpected happens.

Many of the option forums I frequent have many a topics of "I have position X and it's way in the red, how do I adjust?".  Shame on you.

This would be one of those years where the "sell in May and go away" proverb was very effective.  For whatever reason, the "rule" has become less and less effective in recent decades.  If you take the rule since the beginning of the Dow, it looks like a rule you should certainly follow.  Slice that backtest into something more recent and it looks random at best.  This may be evidence of one of the oldest trading systems getting discovered and fading away.

But regardless of that, if you did sell in May this year, you missed out on a 15.36% (1969 point) decline on the Dow.  The Nasdaq did better only shedding 7.2% or 161 points.  And as we've seen recently, 161 points is a daily gyration for the Nasdaq <grin>.  Finally, our well diversified friend, the S&P 500 lost an even 11.0%. Ready for a real kick in the pants though?  The small cap Russell 2000 gained 2.2% since May 1st.

What does this mean?  Typically larger cycles (i.e. bull to bear, back to bull) have sector subcycles and then of course, smaller sector subcycles within.  But as I mentioned in a post earlier this year, large caps had been outperforming small caps for over a year and growth had been outperforming value.  This is backwards from the norm, but totally in line with the end of a bull and beginning of a bear.  Most speculate that this is because people start getting defensive.  So they hang up their high flying small cap for a GE, CPB or WMT.  This inflates the price of the stalwarts. This usually marks the beginning of the end of the bull cycle.  Smalls have already been underperforming, but they get taken out to the toolshed for another shellacking.  Then the stalwarts start to crumble as fear sets in.  Then quietly as the big boys are free falling, the VIX makes multi year highs, bankruptcies follow, unemployment shoots up, growth stalls or goes negative ... small caps start to get a bid.  Before the major averages pull out of the tail spin, small caps are showing gains.  This usually gives birth to the new bull.

So is it different this time? 

As Stephen Colbert pointed out, "if we were on the brink of financial collapse yesterday, we are 'brinkier' today".

So is today the day when the financial world stops?  The financial "neck" is so constricted that commerce stops?

When the market goes up to stupid heights, I'm skeptical ... now that we're brinkier today, I'm also skeptical that things are as bad as it's made out to be.  When times are good, I don't question that they're good, I question how GOOD they're made out to be.  Likewise with this crisis.  I see their ideals falling like dominoes.  People who just days ago said "this is capitalism at work" have jumped on the "I'm a fan of free markets ... BUT!" wagon.  I guess some of them just get the memo a few days later than others. 

So sit back and have a cup o' joe and watch the wheels go 'round.

The rejection of massive new spending to bail out irresponsibility is a breath of fresh air.

<standing o!> 

Last week, Buffett plopped down 10 billion to invest in Goldman.  Now he's acquired a 10% stake in BYD (Hong Kong battery maker).  When everyone is talking defense, getting out of the market and the beloved Cramer is saying raise cash, the most successful investor is buying.  Is this the best time to buy?  Who knows, we only have past figures to determine whether or not something is cheap.  At this point, it takes some brains and some guts to get in.  Since I have a little more guts than brains, I keep loading up on well diversified indexes.  As someone put it (unfortunately, anonymously), you could do worse things than to buy indexes 20-30% off of their highs.  My strategy is to keep on buying on the way down.  I figured if the market keeps going down, I'll buy some more.  So I start loading up at 20-30% off, if it goes to 50, 60, 70% off, I'll get even more ... then hey, won't I look smart?  Maybe I could get a gig on CNBC talking about how I predicted and bought the bottom.  <cough>

Keep in mind, these are long term holdings (10, 20 maybe even 30 years).  This is not advisable if one has a shorter timeframe before they need the cash.

What about speculative buying?  The blog came about mostly to talk about trading systems, speculative plays and ETFs, but with the markets in a bit of volatile state, the pure speculation that is normally at the forefront of my mind has taken a back seat.  It's not dried up by any means, the positions I posted last week are still as they were. I believe that fresh cash has a somewhat rare opportunity and it's taking center stage in my market evaluation at the present time.

The gas shortage has caused most of the southeast, especially Atlanta (and I hear Charlotte is pretty bad as well) to reconsider our activities.  So now, even though I currently have enough gas to get to work this week, everyone in the household has curtailed activities that involve driving somewhere.  We're making conservative and likely prudent decisions to ensure that we can perform our responsibilities as we get through this crazy time.  To me this type of "tough" decision making is what separates responsible people from the vast majority that are irresponsible.  We don't go to football games, cruise the strip, visit a friend across town instead of conserving what we have to handle our responsibilities in the coming weeks.  So here again, I see those running out of gas at football games and other things that don't matter.  These are the same people that probably won't make it to work on Monday thinking they have an air tight excuse.

This can directly translate to the current financial situation.  Too many people made decisions for the day without any respect for the consequences that lie ahead tomorrow.  Like those that aren't going to make it to work Monday, they have a sob story and an "air tight excuse", but the bottom line is that they acted irresponsibly and need to suffer the consequences.  While we continue to reward bad behavior, the markets, the economy and the country will continue to suffer. We're going to lose, or may already be losing our edge as we spend our efforts giving candy to the crying babies.  It warmed my heart to see some people taking to the streets to oppose this bailout.  Even if the alternative is a lot of pain for this country, I'm in favor of it.  It's time that people developed a sense of fear. Hopefully this fear will turn into more responsible decision making in the future instead of hopes of being bailed out again.

And on a lighter note, for those not in the southeast, I may snap some photos of the gas lines and stations with no gas (which is the vast majority of them).  You see the pictures from the 70's and it seems strange, and the first few times you see stations with the gas prices blanked out, it's very strange.  Now it's strange to see stations with gas.  The unfortunate thing is that people are getting mean and rude.  Slight panic is setting in and people are going to bizarre extremes to make sure their tank gets filled.  What's worse is that people are topping off, which only adds to the problem.

So my weekend plans consist of planning a way to get fuel at some point this week, seeing where my money ends up and how I can access it (thanks to the WaMu failure), and seeing how much of my tax dollars go to undeserving people.  Certainly not your typical weekend.

My bank failed.  However, we're lucky to have JPM come in and keep the day to day operations up and going.  I was half hoping to experience the FDIC in action for a life experience.  Call it sick, and you're probably right.  Of course, we did not keep amounts that were uninsurable in there, so at worst I would've been out some time and maybe a few bounced check fees?  As it stands, none of that is going to happen.

But another big icon falls.  As in the tech boom and subsequent bust, names that had become ubiquitous seemingly overnight were crumbling and becoming memories. Me and a friend recently spoke of WebVan.  This wasn't a company that crumbled that long ago (2002?), but half of the people at the table gave puzzled looks.  So it will go with Lehman, WaMu, IndyMac.  It will all be something we can point back at as experience.

<rant> 

Previously, I talked about my severe dislike of the short ban.  I don't think shorting is a good idea for me personally, but it's a function of the market.  Is it possible to measure success when it comes to the effectiveness of this plan?  The market is a measly 300 points away from the intra day low which was set right before they announced the short ban.  We're one weak session away from where we were before the ban was enacted.  So I would ask anyone who thought this was a good idea if they still think this a good idea.  We still had our weekly bank failure, the poorly run companies are still poorly run and still going down in value.  Only now no one can hedge themselves (assuming options are too complicated for most to fool with).

So I submit my opinion on the matter.  This did not help and the risk taken far outweighed the virtually non-existent reward.  Confidence was severely shaken in the concept of a free market and all for nothing.  I always get a kick on people blaming the shorts for making markets go down and I think it's a poor excuse to help a bull sleep ... and now we get to see first hand that it is truly bunk.

What's next from our clueless leaders? 

</rant> 

OK, it's a rhetorical question.  Whoever follows Cramer gets what he or she deserves.  I was shaking my head this morning as I saw the Cramer blip to "raise cash" and go into "gold".  This is the type of advice I would expect from someone who managed OPM.  On the other hand, the man who has stayed steady to his philosophies for a lifetime is putting up at least 5 billion of his own money to buy up financials ... quality financials of course, while there's blood in the streets.  While there's talk of not HAVING a Wall Street.

Well, I was a little early, but I've been wading into financials and still hold some C stock that was assigned at 22.50.  I've been selling calls on it since.  I'm also selling XLF puts that are way out of the money.  I'd like to say I'm as wise or insightful as Buffet, but not a chance ....

I was told by a radio person long ago that advertisers target audiences based on the volume of the commercial.  And I mean how "loud" they are, not how many.  Think about the difference between a Ford commercial versus a Mercedes Benz commercial.  Or maybe an ad for a monster truck rally (this SUNDAY! SUNDAY! SUNDAY!) versus an ad for the symphony orchestra and you start to understand the point.

So who has the loudest voice on financial TV and what is his target audience, versus who has the much quieter and reserved demeanor, but casts a much heavier line. Anecdotal coincidence?