The fear factor

Wed Jul 30, 2008



Market turbulence brings volatility trading to the fore

By Pete Gallo

Volatility traders, who thrive on market fears and pricing turbulence, needn't be calling for the four horsemen of the apocalypse to come shake up the markets. Three of those horses - inflationary fears, surging commodity prices, and credit concerns - are already doing enough to wreak havoc.

"This is the best environment for volatility trading since the tech crash [in 2000 and 2001]," says Russell Abrams, portfolio manager at New York's Titan Capital Group, which oversees roughly $750 million in volatility-trading strategies.

The market's main indicator of investor anxiety, the Chicago Board Options Exchange Volatility Index (VIX), climbed to 37.7 in March, roughly triple where the fear-and-trepidation benchmark stood just a year earlier. Even after slipping to 16 in May in the wake of a brief equity rally, the index had bounced back to 21 as of mid-June. That's more than...

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