Sunday, July 16, 2006

Stock Market Volatility on the Upswing

The CBOE Volatility Index (VIX) is heating up. The VIX measures the implied volatility of the S&P 500 options market over the next couple of months, and after trading in a historically low 10-15 range since 2004, it spiked up to 23 last month. It may break 20 again this week.

Assuming constant liquidity and spread, a market maker of index contracts should theoretically be able to make a higher return. And those theoretically higher returns are also available to everyone else who trades, too. I suggest you look at the most liquid contracts, for instance, the at-the-money DOW +/- contracts for the day. The hourly and touch contracts tend to dry up more quickly.

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