Some 250 traders have spent the better part of this week attending — guess what? — a risk management conference on the West Coast, sponsored by the Chicago Board Options Exchange. Naturally, they have been brushing up on strategies designed to avoid the kind of thrashing that most endured last week. Too bad they didn’t meet a month ago.

What have they learned? A trader with Group One and the designated primary market maker in volatility index options at the CBOE, Ben Londergan, says one focus was the use of BuyWrite strategies and the use of VIX options. One of the speakers at the conference, Michael Oyster from the Fund Evaluation Group, addressed the conference on a new study that argues the merits of investing in the CBOE DJIA Buy-Write Index (BXD) and also looks at the value of trading VIX options.

Both approaches, according to the study commissioned by the CBOE, are shown to boost risk-adjusted returns and to provide meaningful diversification to portfolios.

Both might have come in handy over the past 10 days.

The BuyWrite index is a measure of the performance of a theoretical portfolio in which an investor writes call options on the stocks of the Dow Jones index. A buy-write is the same as a covered call. Writing calls on stocks in a portfolio is a proven method of raising risk-adjusted returns by reducing volatility. The investor is, in effect, capturing the premium that someone else is willing to pay to have the opportunity to buy the stock at a specified price over a period of time.

The study showed that allocating 10% of a portfolio to the BXD could have resulted in higher risk-adjusted returns for many types of portfolios. Between October 31, 1997, and November 30, 2006, the annual compound return on the BXD was slightly lower than the DJIA — at 7.4% compared to 7.7%, but it was obtained with 25% less volatility or risk. Over the same period, the Russell 2000 racked up gains of 8.1%, but with 50% more risk than the BXD.

Over the course of the study period, the average monthly options premium received amounted to 1.84%, or an annualized rate of 24.5%. An offset to this enhanced income stream is, of course, somewhat diminished capital gains, as stocks may be called away as the market goes up.

The study also takes a look at the performance of the DJIA volatility index, or VXD. I have written extensively about the VIX in the past, which is the same concept applied to the S &P 500. Both purport to measure short-term expectations of volatility — for either the Dow Jones or for the S &P 500.

Both the VXD and the VIX are computed through a mysterious analysis of the prices being paid for options on the underlying index, and both have become widely regarded as faithful indicators of near-term market sentiment. In short, if investors expect the market to gyrate nervously, the VXD and the VIX go up. If investors are calm, both go down. Simple, yes?

The new study concludes that including a 10% allocation to the VXD could have lowered the volatility of an equities portfolio by approximately 26%, “without materially affecting returns.” Significantly, the study concludes that the VXD and the DJIA are inversely correlated. That is, when the DJIA goes up, the VXD goes down, and vice-versa. Earlier studies claimed the same tendencies for the VIX. That’s called diversification, and it comes in mighty handy when the market tanks.

So much for the theory. How did holders of these products fare last week? In short, quite well. No options are yet traded on the VXD, so I will focus this discussion on the VIX, as more investors are likely to trade VIX-related products.

Before the market started jumping around this past week, the VIX was slightly below 11. It rose to a high of 18.7 on Tuesday when the markets came unglued and ended the week at 16.5. In other words, it was about the best trade in town. The VIX hit a recent high on Monday, as renewed selling overseas rattled investors who thought the worst was over.

Astonishingly, the VIX has slipped right back down under 15, responding to one good trading day. I am not alone in thinking that investors are easily soothed.

Mr. Londergan reports that last week saw heavy trading in VIX options, and that as much as 80% of the activity was from retail investors. “I was shocked. By Friday, there were a lot of options selling at the same level as we saw on Monday, before the market selloff. Uncertainty was already going away.”

A spokeswoman for the CBOE, Lynne Howard, reports that the price for a March 14 call went to $2.05 bid on Tuesday, February 27, from $0.25 bid on Monday, February 26. By Wednesday, it had dropped to $1.10. A week later, the same call was priced at $1.70. As Mr. Londergan said, “People definitely made some money.”

Going forward, these products may become standard fare for both retail and institutional investors seeking to add a little protection to their portfolios. Even in absolute terms, the VIX appears an attractive trading opportunity.

A report by Credit Suisse published in December concludes that “surprisingly … the VIX has been a strong indicator of direction since its inception in 1993.” The surprising element, to the authors of the report, is that the predictive capacity of the VIX has become common wisdom but is still true.

If you share my view that the world is not a very steady place, and that generally we will not be able to predict major events (think tsunami, September 11 attacks, bird flu), it seems a great idea to buy the VIX when everything seems to be going well. Like Mr. Micawber, I think something will turn up. Unlike my favorite Dickens character, though, I do not always assume it will be good news.

peek10021@aol.com