How ETFs work

This article in etf.com does a very nice job of explaining how ETFs manage to track their net asset value (NAV). It is a two-tiered market.  Ordinary investors buy and sell on the exchanges.  If the value of an ETF (for example SPY), wanders too far off from the price of the underlying stocks (the S&P 500 in this case) then the 2nd tier of …

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Trading in IRA accounts, and avoiding “free riding”

As much as possible I try to trade in my IRA accounts—in order to defer taxes of course. It is a bit counter-intuitive to be doing more speculative activities in a retirement account, but this approach supports my goals:

  • Achieving good returns
  • With reasonable risks
  • While compounding growth

If your money is in Roth accounts, all the better, but most people interested in trading in their IRAs are restricted to traditional IRAs.

There are restrictions on what trades you can do in an IRA account.  For example, you can’t short a stock in an IRA account, but option restrictions have eased some over the years,  and market innovations like short ETFs (e.g., SH, SDS) have effectively bypassed some of the more onerous restrictions.   Brokers vary considerably in what they allow in IRA accounts, so pays to ask around.   Fidelity & Schwab allow many types of option spreads that some brokers might not. Covered calls and protective puts on long positions are broadly available within IRAs. Interactive Brokers and TD Ameritrade both waive the 2-day settlement requirement on trades in IRAs so if you plan to do frequent trades they would definitely be worth a look.

For a more general treatment on trading in IRAs see “Top 15 Questions About Trading in IRAs.”  The rest of this post will deal with free riding and how to avoid it.

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Getting the correct greeks for VIX options

Many software packages that report option Greeks (e.g., delta, gamma, theta, implied volatility) report incorrect values for VIX options (Fidelity, Schwab, Ameritrade , LIVEVOL and Barchart (free subscription) are notable exceptions). Depending on the date and state of the market they can vary from almost correct to widely wrong–giving truly nonsense numbers.  These packages assume that the VIX index is the underlying for the VIX options.  This is wrong.  The best underlying to use is the corresponding VIX future for that month (e.g., January VIX futures for January VIX options).

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Thirteen Things You Should Know About Trading VIX options

If you want to trade options on fear I’ve listed some things below that you should know.  If you are interested in other volatility investments besides options see “10 Top Questions About Volatility“.  Regarding VIX options: Your brokerage account needs to be a margin account, and you need to sign up for options trading.   There are various levels of option trading available (e.g., the …

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FAQ on VIX, the “Fear Index”

Why do they call the VIX Index the “Fear Index” or “Fear Gauge” Because the VIX almost always goes up when the market goes down. The scarier the decline the higher the VIX tends to go. In the worst part of the 2008/2009 bear market it went as high as 80. In strong bull markets it historically bounces between 10 and 15. How can I …

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