Put simply, companies are beginning to find it more difficult and expensive to borrow money. Cheap debt has been the great phenomenon of the financial markets in recent years. Central banks lowered interest rates to help the global economy recover from 9/11 and the dotcom crash, since then, private equity firms have borrowed cheaply to buy well-known companies on a broad range. Cheap debt has also been used by a number of big companies to fund share buybacks and higher dividends. In fact, cheap debt has been at the root of just about everything that's been going on.  

It has been getting harder for big corporates to secure financing in the current climate. At the moment it is difficult to tell whether the problems are the beginning of something, the end - or just an extraordinary blip. Interest rates have been rising in the , the and Europe . That has a knock-on effect on the price of all bonds and loans. But the crisis in sub-prime lending has also played a part. The sub-prime lending crisis is more involved than Americans with poor credit histories, struggling to pay off their mortgages. The issues around sub-prime mortgages in the are profound. Ben Bernanke, the chairman of the US Federal Reserve, warned recently that the sub-prime crisis would cost banks hundreds of Billions of dollars. That has financial implications that will be felt around the world. 

The problems that have emerged in the sub-prime market have shown that all in the garden might not be quite as rosy as had been thought. Most of this mortgage debt was parcelled off into bond-like structures, known as CDOs, which are sold to different banks, hedge funds, pensions funds and other institutional investors. The credit ratings applied to many of the pools of sub-prime debt now appear to have been rather on the generous side, investors have begun to question whether they have been paying the right price for all the other types of debt that they have been buying.  So is the Sub prime crisis nearing its end ?  Not really, many of the consumers who bought sub-prime mortgages were lured in on "teaser" deals - typically a low interest rate for two years which then switched to a much higher variable rate. Those consumers hardest hit, who are now having their homes repossessed, were the ones who took up these deals. The jump in interest rates they are facing has been too much for many homeowners.. And as more repossessions hit the headlines "contagion" from this sub-prime crisis has spread.

Will inter-bank lending put a stop to the crisis.   

The head of the International Monetary Fund (IMF) says he hopes the actions taken by governments will be powerful enough to persuade banks to start lending again. Speaking at the G20 meeting in Washington , Dominique Strauss-Kahn says this would bring an end to the credit crunch, but he has warned that the global financial system is near to meltdown, saying the IMF has been calling for co-ordinated action on the crisis for some time. Mr Strauss-Kahn says the crisis is not limited to advanced economies and the IMF is ready to lend to any country that needs help.  

"The fund has asked for weeks, if not for months, for more co-ordination in action, arguing that in such a crisis that it was impossible to look for domestic solution," he said."Action taken in some countries without coordination with other countries can hurt more than it helps."  

 The G20 group of leading economies has agreed to coordinate efforts to respond to financial turmoil in world markets and says it will use all means available to ensure the stability of the global financial system. In a joint statement the group emphasised the need for nations to communicate to ensure that benefits to one country do not destabilise other economies.

Will all this work? Well only time will tell but we should adopt a cautious stance until it does.

VIX is the ticker symbol for the Chicago Board of Exchange Volatility Index and it provides a general indication on the expected level of Implied Volatility in the market over the next 30 days. Traders will use the VIX as an indicator or to simply trade or hedge against volatility directly. Volatility is integral when considering Options Strategies and understanding what VIX is and how you can use it to your advantage can result in better and more consistent options trading results. 

Faced with big swings in these volatile market conditions, trading derivatives requires patience and good timing. High levels of volatility creates higher option premiums, this can be a disadvantage when trading debit strategies, buying high levels of Implied Volatility is costly and means a much higher breakeven point for every debit options strategy entered, making it harder for them to make money. On the other hand, higher volatility also makes credit options strategies extremely profitable due to the disparities in pricing as a direct result of inflated volatility. Without a means to measure the level of volatility in the market, options traders would not be able to make a completely educated decision on the options strategy to use for the prevailing circumstances. This is why being able to quantify and measure volatility is so important in options trading and what makes the VIX so essential. 

Generally speaking, an upwardly trending market will create moderate levels of Volatility when Call options are traded more than Put Options and, conversely, when a market is falling higher levels of volatility will enter the market place as more Put options are bought than Call options. The Put / Call Ratio, along with the VIX, provide any investor with a good understanding of where volatility can be measured in the market and are often recognized as "investor fear gauges". It is true to say that, as an indicator, the higher the VIX, the more bearish the market is and conversely, the lower the VIX, the more bullish the market is.

It would be timely to point out that since the VIX was first introduced on the CBOE in 1993, it hit record highs after last Thursday's session reaching a staggering 81%!

As the Global Credit Crisis picks up pace and tightens its grip of fear, can we turn to humour for escape? Of course we can, and now it’s the financiers who are the butt of our jokes. Here’s a few that popped up recently. 

“ What’s the difference between an investment Banker and a Pigeon ? The pigeon can still make a deposit on a BMW.”

“ The similarity between Wall Street and the Olympics ? Syncronised Diving.”

“ The definition of Optimism “ A banker ironing 5 shirts on a Sunday night.

As we find ourselves in the Christmas Quarter of the year, the opportunity to trade Volatility has again been very apparent. Our latest Strategy is in the FTSE 100 index and our Ratio Spread more or less picked itself.

Taking full advantage of the discrepancy in pricing of out of the money options, we entered a ratio Put Spread on the 16^th October for a credit of 12 points. We will keep you posted as to how the trade performs over the next few weeks.

For a more comprehensive explanation on how our successful trading strategy works in these market conditions, please contact us and our Investment Manager will be happy to discuss all aspects of our trading strategy with you.