Since 2006, a new commodity has been made available to traders, that is options contracts on the VIX itself (The option volatility index). There are many traders who are looking to capitalize on the moves of implied volatility, now these new option contracts offer traders the ability to profit (or hedge against) directly from volatility.

As we know implied volatility in stocks tends to rise as markets go down, and it tends to fall as markets rise, and this can often be predicted with the use of technical analysis, if and when a breakout pattern is in place, other than that, there are also days in the trading calendar, earnings season, news release days and events that will make implied volatility jump. Implied volatility can be traded using FOTM (Far-Out-of-The-Money) options, ones with the highest Vega parameter possible, as these are the most sensitive to implied volatility changes.

Here’s a chart of the VIX itself, it is a rough mirror image of the actual stock market.

By trading the VIX directly one can take advantage of implied volatility spikes ahead of important news release days, earnings announcements and market breakouts, without having to look for FOTM options, it kind of simplifies things. Of course the VIX as a commodity, can be traded as part of more sophisticated strategies as well.

Some traders have found ways to combine both the VIX and old volatility strategies such as the Long Straddle, and overall achieve a better deal, you can however use these VIX options as part of simple directional trading ideas where you want to stay protected against an adverse rise in implied volatility, for example buying an OTM, cheap Call option in an effort to catch a major rally, if the expected market rally is interrupted by a downside correction (a temporary drop) it may make sense to profit from the subsequent spike in implied volatility.

Because VIX is based on the implied volatility of OTM options on the S & P 500, which is a benchmark index, it is fully reflective of the whole US markets activity.

Again, all trading ideas involving VIX options come down to the cost of premiums and comparing these numbers for different market scenarios, you can easily analyze these patterns using position simulation software tools offered by some option brokers or using the powerful tools offered here at Analyzetrade.com.

There are many trading ideas that can be ruined by an unexpected big move on the VIX, therefore it does make sense to investigate if a VIX option could be used to hedge against this risk. Option strategies, options strategies, stock options trading, put call ratio, trade options, option trade,best trading software, stock option software, option strategy, option trader, call option, put option, option.

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Author Bio: Option Software from Asio Investment Tools gives you the opportunity to practice on historical charts and test against actual market conditions-without risking a penny of your money! Intuitive, simple to use, Options Software http://cboe.com/LearnCenter/default.aspx” http://www.optionseducation.org/

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