The least talked-about Greek is "Vega." But with volatility rampant, Vega holds the key! Simply said, Vega is an estimate of how much the theoretical value of an option changes price when implied volatility changes by +/-1%. Higher implied volatility would mean higher option prices. That is acceptable because with higher volatility comes greater price swings in the stock price. Positive Vega means that the value of an option position increases when implied volatility increases, and decreases when implied volatility decreases. Negative Vega is just the opposite; the value of an option position decreases when implied volatility increases, and increases when implied volatility decreases. That's a mouthful! An easier way to remember it might be to think of it this way: long calls and long puts both always have positive Vega because it measures volatility's impact on those options. Short calls and short puts both always have negative Vega.

For example, the Vega on both the USO MAR 25 call and put is .03, which means that if the implied volatility of the 25 call or put goes up by 1%, the extrinsic value of both the 25 call and put will go up by $0.03. This is because the call and put at the same strike in the same expiration month usually have the same extrinsic value, their Vega will most likely be the same. From thinkorswim's Analyze page (you could also use the Trade page) we have selected "Vega" and "extrinsic" from the information layout to demonstrate.

You can see Vega is highest for ATM options, and is gradually lower as options are ITM and OTM. The Vega of ATM options is higher when either volatility is moved up or there are more days to expiration. With more days to expiration and higher volatility it is implying a greater chance of stock movement. The options' extrinsic value has to rise to take that increased stock range into account. This is why the Vega will be larger for options with more days to expiration.

thinkorswim, Inc. and its employee, Tony Battista, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Being a career-long options trader, I have been one of the traders enjoying this goose in the VIX as it permits me to rake in some greater premiums when I am selling them. But a funny thing is happening to quite a few of the names I like to play with, like CITI, UYG, XLF and even GE...they are trading so inexpensively that the options premiums barely warrant a trade. What to do?

With CITI currently at $1.20, I consider that an option's price and if I so desire I would just trade the stock. I would say the threshold for most stocks is around $3 or anywhere less than the ATM fee these banks charge. Once they get south of that number it seems to be counterproductive to trade the options from a transaction standpoint, particularly if I am a seller, which I am more times than not. Even selling puts on a name like BAC only gets you $0.30 on the strike just below the money, so what's the point? I love selling puts to get a stock but from a transaction standpoint, it has to make sense.

In some ways it is frustrating because it negates all these wonderfully high volatility levels which produce the beautiful premiums. But that is precisely the reason the stocks are trading so low; the volatility is indicating some may not survive. I find myself trading many more stocks than I have in the past only because they are trading and priced like options. My belief (hope) is someday I will be writing calls on them but we are going to need to see a jump in price for that to be warranted. Until then I am slowly accumulating more stock than I probably wanted and dreading a mundane 20 level in the VIX, but welcoming the accompanying rally. It is not that I am completely long, it is more my disdain for waking up to the same dismal economic news and the hopeless feel it is creating for a whole legion of investors. Good Luck!!

thinkorswim, Inc. and its registered employee, Steve Quirk, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

"Accentuate the positive, eliminate the negative, latch on to the affirmative, don't mess with Mister In-Between," was a song made famous by Mr. Bing Crosby and should be the theme song of every trader taking control of their own future in these volatile markets.

Why, you ask? Never before have retail traders had so many opportunities in front of them. ETF's, inverse ETF's, efficient/liquid option markets, futures, and an incredible broker are just a few. So as the market continues to melt, and as DC continues to re-arrange the deck chairs on the Titanic, let's take a closer look at three things that you can do to protect yourself in this market.

1- Covered Calls- If you still own stock, and with a VIX in a range between 40 and 55, option premiums are flat out incredible. If you have a stock you're betting on for the long term and you haven't been hedging that position through covered calls, reconsider. It can cut losses dramatically and can even produce gains.

2- Spread Trades- On this Daily Swim blog you have the best traders discussing certain defined risk strategies for certain market situations. Look in the archives and do your research. In a market that continues to fall, with a vicious bull rally around the corner, you want to put trades on that allow you room to be wrong in your technical analysis and still make money. For some, the bread and butter trades for the last couple months have been Calendar Spreads and Short Call Verticals. Calendars because the VIX is going nuts and short verticals because we are falling off a cliff.

3- Portfolio Hedges- If you find your overall account too bullish, either because you tried to pick the bottom or because the market has blown through your spreads, consider the following:

a. Inverse ETF's such as the SDS (double inverse of the SPY), DXD (double inverse of the DIA), QID (double inverse of the QQQQ), can help remove some of those unwanted bullish deltas. For example, if you have a position that is +200 SPY deltas and you find the market continuing to go down, you can buy 50 shares of the SDS to cut your delta position in half, or 100 shares of the SDS to become neutral.

b. Futures- this is a product that should be used with caution, it does have unlimited risk to it. Futures like the /ES (S&P 500 e-mini) can be one of the quickest ways to hedge against a fast moving market. One contract of the /ES equals 500 SPY deltas. If your deltas are completely out of control and you need a life preserver for your account, the /ES can be an immediate quick fix.

These are just a few reasons why it's a great time to be in control of your own trading. Think about how good you have it as a retail trader.

Trade Smart and Profitable.

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

thinkorswim, Inc. and its registered employee, Joe Kinahan, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Have we moved too far too fast? It's tough to say in the short-term. Remember, however, that stocks are still 50% below their October 2007 highs. The S&P 500 is holding over 800, nearly 17% above its recent lows, while the VIX is routinely sniffing 40. If you do have some reservations about this recent rally, one option play to consider right now would be covered calls. With volatility still relatively high, playing covered calls on stocks you already own at this point makes sense, especially if your stocks have experienced recent rallies. Let this current level of implied volatility assist you in reducing your cost basis and generating income while still holding your stocks for potential long term gains. Take advantage of the rich premiums. You haven't missed the boat just yet on selling pricey options.

Let's take a look at a candidate that has experienced some substantial short term rallies and are prime candidates for employing covered calls:

AMZN

Fueled by strong earnings in January, AMZN has rallied these past two months from $50.00 up to $72.40, a nearly 50% gain in only two months. If you own the stock, you are pretty ecstatic with those short-term returns. But now what do you do? Think about selling calls against your long stock position at this point. AMZN has had recent difficulties settling above $75.00. If you recognize this, consider selling the April 75 calls; you can collect $2.94 of premium, or $294.00 for every 100 shares of stock of AMZN that you own. AMZN April implied volatility is still a whopping 63%. With the stock currently trading $72.40 per share, you collect 4.06% (2.94/72.40) over the next 22 days before April expiration from the sale of the call. If you currently own AMZN stock, the sale of the call for $2.94 provides protection if the stock sells down to $69.44 while allowing for price appreciation up to $75.00 in the stock.

There are many of stocks of late that have seen incredible rallies in their respective stock prices. Take your pick amongst the financials. Do your homework, and you can find a plethora of covered call opportunities in this market. Happy Trading and see you next time.

thinkorswim, Inc. and its registered employee, Joe Mazzola, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.