'Tis the season to increase the beltline with traditional holiday recipes! You all know what I'm talking about. This is the time of year that you pull yourself up to the table and eat that top-secret family recipe that you crave the other 11 months out of the year. So while you're whetting your appetite at the table, I've got another recipe that will whet your trading appetite. The recipe is called the Option Holiday Recipe. Here are the ingredients:

Price: When I say price, I'm referring to your directional bias. This could be up, down or sideways. If you are a Market Technician, you use trend, support and resistance. As the market trades sideways, you might want to look for market-neutral strategies. As the market is bullish or bearish you may skew your condors or butterflies, or sell your verticals in the appropriate direction.

Time: There are two things to consider with time: 1) Time decay. This is the one thing you can count on to make money day after day. It is the only constant in trading, for you know that an option will lose value each and every day; and 2) Time horizon. How long do you want to be in the trade? In this current volatile market, the most volatile market we have ever seen, a lot of trades have been shorter-term, and as such, one's ability to pick direction isn't as good. So make sure of two things: 1) you have positive time decay (theta); and 2) you trade based upon the time horizon or number of days you're comfortable with.

Volatility: To gauge volatility, use the VIX. When the VIX is high, you generally want to do those strategies that will benefit from a falling fix; these are negative vega. These strategies are verticals and anything that has to do with verticals- condors, butterflies, etc. When the VIX is low, consider those multi-month strategies that have a positive vega- calendars, diagonals, and double diagonals.

One question that I have been getting right now regarding the VIX is what is high and what is low? Look at the range that the VIX is trading in, otherwise known as support and resistance. Below you will see a chart of the VIX and its trading levels. Low would be in the range of 45-50 and high would be in the range of 75-80.

Putting it all Together:

Price: Pick a strategy based on directional bias.
Time: Make sure it's theta (time-decay) positive.
Volatility: Pick the strategy that allows you to profit from rising or falling volatility.

That, my friends, is the holiday recipe that keeps giving all year long!

Happy Trading!

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