As you can see from this graphic, from a high of 14,198 last October to 7,885 this October, the Dow has lost a staggering 6,313 points. That translates to a whopping 44% loss and a boatload of pain for just about everyone out there.

It gets worse. For the Dow to recover from its low of 7,885 to its high of 14,198 — in other words, to regain all of its recent losses — it would have to book an 80% gain. That’s nearly twice the size of its original loss and a mammoth amount of upside action.

But if you think now’s the time to throw in the towel, think again: While stock owners are taking it on the chin, option players are faring much, much better. Take a look…

This is a chart of the VIX index from the Chicago Board Options Exchange, the granddaddy of all options exchanges. Without getting into a bunch of mathematical jargon, the VIX measures the volatility — or expected price changes — in the broader U.S. stock market. And because volatility leads to uncertainty and uncertainty leads to fear, the VIX is sometimes called the “investor fear gauge.”

As you can see from the chart, the VIX is through the roof. In fact, at a level of 76, the VIX over twice the threshold of 30, a key level that indicates skyrocketing fear and uncertainty. And this is good for options traders for two big reasons…

First, high levels of volatility and uncertainty mean the time value part of your options’ prices are likely headed way, way up. Why? Because with time comes uncertainty. And as an options owner you’ll be compensated — often handsomely — for bearing that uncertainty.

But that’s not all: With the VIX at these nosebleed levels, market sentiment is so uncertain, so negative that there’s no way a recovery can be too far off. In other words, a high VIX level can indicate a contrarian move in the market is very, very likely. And in our case, that contrarian move would be to the upside.

Best wishes,

Wayne Burritt
November 4, 2008

P.S.: I started Easy Money Options to open the lucrative options world up to everyone. It doesn’t matter if you never traded a single option in your life or you’re a seasoned pro, my service is right for you.

How to Hedge Your Penny Stock Plays was originally featured in the Penny Sleuth.