Bernie Schaeffer's guest column in Barron's this week is headlined "How to Profit in Volatile Times," a topic that should certainly be of interest to anyone following the market in 2010. In a year marked by an April peak, a May flash crash and a June swoon, volatility is certainly developing as one of the dominant themes.
Bernie suggests that "the simple and straightforward strategy of buying straddles is uniquely suited for a market where the tail routinely wags the dog."
Bernie acknowledges the reluctance of some traders to pay a double premium for this two-legged trade, and that some may view the trade "as a cop-out for the lack of a sufficiently strong directional view."
But he argues that the "straddle buy is a very legitimate tool for expressing a volatility forecast in a market where sharp trend reversals in response to external events, overseas market action, and the vagaries of computer-driven traders and derivatives hedgers have become routine and often devastating to the single-direction option buyer."
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