V is for Volatility: Firing Line - TheStreet

V is for Volatility: Firing Line

With many options strategies, you can be right two out of three times and make money: market goes up, market goes down, and market stays flat.
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I need to take a respite from the oil, Congress, and White House cam this week.

By the eight-hour point in Thursday's grilling of

BP

's

(BP) - Get Report

CEO Tony Hayward I had had my fill of representatives trying to top each other for the best sound bite. I could feel the intelligence oozing out of me as each congressman turned oil drilling expert expressed their indignation and outrage. I get it.

Now let the guy get back to trying to cap the thing please...

But I digress. As usual.

It is time to put on my capitalist hat and do what all good capitalists would do in this situation: figure out how to profit.

There are currently two widely-held views of the overall market: things are getting better, things are getting worse.

I'll donate my Noble Prize for Economics winnings to my favorite charity...me.

Let me add a third view: the market is going to wander around for the next couple of months like a drunken sailor. And I'm speaking from experience...in both areas.

The correction from the April high was violent. The market sages predicted that this was the next leg down as the VIX spiked from the sleepy upper teens to the mid 40s. Cats and dogs living together, mass hysteria.

Except it wasn't. Over the coming weeks and months we saw multiple triple-digit gains and losses as the slightest news item drove the market. The market rightly sold off after the president touted great jobs numbers...for his company. The leak was capped. It wasn't. Hungary was going to default. It didn't. The U.S. scored! It was a tie.

Bottom line: we're not going to know which way this market ultimately is going until it gets there. There goes my Noble Prize. As an options trader, I really don't care which way the market is going because I can profit based on this uncertainty. With many options strategies you can be right two out of three times and make money: market goes up, market goes down, and market stays flat.

And options love volatility. The more volatility the more an options premium will command. The VIX has retreated from the upper 40's to the mid-20's which to me is a buying opportunity. A good rule of thumb is when vol is cheap you buy it and when vol is expensive you sell it. The mark of a Jedi Master of course is knowing exactly when it's really cheap or when it's very expensive. As you know, or should know, they don't ring a bell at the top or bottom of the market.

A young options Jedi such as myself can look to take advantage of the market wandering in several ways. Let's take a look at two recent market piñatas: BP and

Goldman Sachs

(GS) - Get Report

.

Break glass in case of emergency warning: BP (the American arm or ADR), could go bankrupt. Trading anything related to BP is not for the faint of heart. But on the other hand there is the potential for huge upside based on huge risk.

If an investor believes that BP is going to weather this storm at some point in the future, but not tomorrow, they could buy farther dated call options named LEAPs. To offset the cost of these calls an investor could sell front month upside calls. This strategy takes advantage of significant near-term volatility in BP. Again, I have no clue what is going to happen with BP in the short or long term.

The same strategy, called a calendar or diagonal depending on the month and strikes, could be employed by an investor on GS.

GS took some cuts and bruises recently with the Fabulous Fab and still has a hanging chad in the form of a SEC civil complaint. But GS is back down around levels not seen since this time last year. It's either cheap right now or the world is going to end. GS is the canary in the market coal mine and the Oracle of Omaha put a lot of his cash behind GS years ago just south of these levels.

Unlike BP, GS is probably going to make it. I say that tongue in cheek of course...their alumni roster reads like a who's who of over achievers. GS topped out around 240 a couple of years ago. An investor believing that the shine is going to return to GS eventually, but not tomorrow could also buy long term calls while selling the front months similar to the BP strategy.

Firing Line: Capitalizing on a depressed asset is not only American (especially if it's British), it's your God-given right. Unless of course Congress decides it's not. It's also your right to get crushed if you're wrong. Back to the spill cam.

At the time of publication, Buckley had bullish options positions in GS.

Matthew "Whiz" Buckley is the chief strategy officer of

Options University

, a provider of options education for options traders of all levels. . He is also the founder of Strike Fighter Financial, a business-consulting firm specializing in leadership development, risk management and strategic planning for Fortune 500 companies and related organizations. Buckley flew the F-18 Hornet for the U.S. Navy. He's a graduate of TOPGUN, has close to 400 carrier landings and flew 44 combat sorties over Iraq. After leaving active duty, he worked as managing director of strategy at a Wall Street firm and CEO of a financial media company. He is an internationally recognized speaker and combined his experiences in the military and corporate America in his book "From Sea Level to C Level."