	You Can Make Money in this Market… Here's How
	Volatility Rising
	Can the 'Smart Money' Outsmart This Market?
	OK, Market–Make Your Move
	Election Considerations

Andrew Houghton and Nick Atkeson work together to identify options trading opportunities on the institutional level through their hedge fund and, now, for OptionsZone.com readers. They are the editors of Big Money Options, an options trading service that provides one to two new opportunities each week based on their findings.

You can check out more
about their trading strategies at TradeBigMoneyOptions.com

You Can Make Money in this Market… Here's How

Lots of traders and investors are asking, "How can we make money during this time of economic and financial market crisis?"

There are plenty of opportunities to profit, especially – and, perhaps, only – if you're an options trader.

To have a real chance of building profits, we will need to understand the trading landscape to find the "sweet spot."

Where Should You Start?

The sweet spot is the part of the market where – by using repeatable, quantifiable investing methodology – we can consistently make money because the structure of the market works in a predictable fashion. It is clear that many of the tried-and-true forms of investing from the past 25 years will struggle in a market that has and will continue to structurally transform.

The big question is whether anything really changed and, if so, how. Investors generally do not recognize the market high or low until it is well past and the chart image is well-established. If it is difficult to assess if we are at a low or high, then it is even more difficult to know if the world has changed and, if so, in what ways.

One important change that has occurred on what looks to be a secular basis is that market volatility is on the rise. The root causes and ramifications of this change are becoming much clearer.

Volatility Rising

At the end of 2006, the VIX was at about 12. For much of October 2008, it was at 70 or higher. It is very likely that 70 is a range-end high. But it is also very likely that the VIX trades on average substantially above its ten year average measured from 1996 to 2006. In fact, since mid 2007, the VIX has spent considerable time above 25. Not so long ago, a VIX of 30 or higher was considered a measure of extreme fear.

vix chart

Why should we expect volatility to rise on a secular basis? From a broad array of possible global issues, we will only address what we see in the financial markets.

The financial markets are more globally linked today than ever. Large, developed, mature markets will become less stable because they are more tightly linked with the immature, emerging markets of developing nations and countries where capitalism is just now being discovered (e.g., China, Russia). When the foreign markets rip up and down, global money managers make position changes that add volatility to our markets.

We have had an explosion in the development of newly created levered financial instruments. Collateralized debt/mortgage obligations and credit-default swaps are examples of financial instruments that have experienced logarithmic growth over the past decade. This "leverage on leverage" inherently drives volatility higher.

The concentration of assets in hedge funds has increased volatility. Hedge funds tend to be active traders and, lately, seem to be crowding too much money into asset classes that do not allow for orderly liquidation when everyone wants out. The run-up and collapse of commodities is an example of what a crowded hedge fund trade can do to pricing on a short-term basis.

There has been tremendous growth in black box, statistical model computer trading. Concentrated institutional orders being driven by very similar software rules go a long way to explaining the wild intraday and end-of-day market volatility. These computer-controlled trading systems change the structure of the market's trading activity and permanently add to volatility.

After a multi-decade trend of rising credit availability and declining borrowing costs, hard assets of all types experienced tremendous inflation. To add to the upward pressure on hard-asset prices was the belief that the developing world had an insatiable demand for oil, lumber, copper, etc. With input costs rising, hard assets only went higher. However, all of the above has now gone the other way, at least in the minds of investors, and hard assets are experiencing deflation. This could be a multi-year trend that further adds to stock price volatility.

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