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Cutting Risk in an Extremely Volatile Market

Last Friday on CNBC, Brian talked about volatility numbers, mainly how they have come down since the panic numbers that we saw in May. Right now volatility is around 27 and one of the reasons for this is because the credit market has improved since May. The better the credit market, the lower volatility goes. However, in the month of July we have seen some increased volatility compared to the rest of the year and Brian thinks one of the reasons for this is banks are borrowing at the discount rate, causing volatility in the market because we aren't getting the liquidity that we normally see from banks. Brian also touched on the correlation between the VIX and the market. The VIX will spike about 4% for every 1% down move in the market. Brian's trade here takes advantage of the volatility and relative rise in option prices. Taking a look at Visa, he suggests selling the Jan. 80 call for $4.40, taking in 5% premium in stock, capping your upside and getting called away at $80. In the meantime, you collect 5% income and you can still participate 10% on the upside. This is a good play to reduce risk in your portfolio in volatile times such as these.

Limiting risk in the market

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