Traders Hope Rising Volatility Index Stays True to '99 Form

Plus, a parting list of options resolutions from Michael Schwartz.
Author:
Publish date:

If you still put your trust in the

Chicago Board Options Exchange's Volatility Index

, or VIX, then steel yourself for another record year.

The VIX is creeping higher as the

Nasdaq

and other market indices are rounding out 1999 by hitting new heights.

The VIX was put together in 1993 by the CBOE as a way to measure the stock market's uncertainty. Generally, the VIX runs counter to the stock market. When it falls, the VIX signals complacency in the stock market. But to make that signal even more confusing, ever-contrarian options traders view complacency on the part of the investing herds as a danger sign.

So, a higher VIX -- above the recent range of 17 to 25 -- signals more worry on the part of the masses. And when the masses think one thing, options traders generally do the opposite.

"You can't get aggressively short with the VIX at these levels," said Greg Simmons with

Linear Capital Management

in Newport Beach, Calif. The index options hedge-fund manager said the VIX "kept me from shorting the market this year. I look at other technical indicators, but it's the one that's kept me from losing money on the short side."

If the VIX creeps down to the teens, Simmons said, he would be short. "The VIX is the ruler of the planet. If you were long this year and watched the VIX, you would have stayed long."

The

Philadelphia Stock Exchange's

options committee approved a change that will allow specialists to split customer orders according to an 80% to 20% ratio with the trading crowd. Traditionally, the ratio has been closer to 50-50, but the change may emerge as an incentive to bring more orders to the fourth-ranked option exchange.

Susquehanna

is among the first options trading firms to take advantage of the change, with the firm rumored to be working to divert to the PHLX more customer orders for the 100 most active options including such names as

America Online

(AOL)

and

Qualcomm

(QCOM) - Get Report

. A spokesman from the firm declined to comment.

The

Securities and Exchange Commission

has yet to approve the PHLX change, but the move was yet another by the struggling exchange to attract more order flow from major firms.

The PHLX earlier in December waived all customer transaction and comparison fees for options orders up to 250 contracts that are entered through the exchange's Automated Options Market system. The change is effective Jan. 3, 2000.

Separately, but in the same deliberate investment-style vein, here's a list of CIBC World Markets options strategist

Michael Schwartz's

parting comments to his staff for options trading in 2000.

Some of his Option Traders Millennium Resolutions:

"I will use options to reduce risk, not increase risk.

I will not be seduced by takeovers or rumors.

I will hedge my positions/portfolios.

I will take a longer-term view of the market with options.

I will take new positions very carefully.

I will explain them concisely and clearly to my clients.

I will not be greedy.

I will use options to overcome client objections and meet their objectives.

I will not make extraordinary claims of success.

I will not approach inexperienced clients with complicated strategies.

I will not use options strategies without an investment opinion on the underlying stock.

I will learn how to think in decimals.

I will not follow recommendations from unknown sources on the Internet."

And finally, "I will never purchase options representing more stock than I can afford to buy."

And

I

will call Mike Schwartz if I am not certain.