The airwaves are full of talk about volatility. But what does volatility mean? It refers to wide up and down swings in the market -- for instance, last Thursday the Dow swung 759 points from its low point to its close. At 11:10 AM it traded as low as 8220 but it closed at 8979. A measure of how big investors think the swings will be is the Volatility Index (VIX) which closed Friday at a record 70.33.

If you believe that the VIX is likely to remain high or get even higher, there is a way to profit from the volatility. That's by creating a trade called a straddle. Before getting into the details of a straddle, here are its payoffs:

• The most you can lose is the price you paid for the calls and puts -- called the net debit;
• There is no limit to how much you can gain;
• The trade breaks even if the stock falls to the strike price minus net debit; and
• The trade also breaks even if the stock price rises to the strike price plus the net debit.

So how does a straddle work?

Emotionally, it's felt to me like the markets have made their final lows. However, I've said that to myself several times in the last few weeks. Truth is, though, we most likely haven't.

Most of the experts I've listened to or read believe this to be the case because they are waiting for a big charge in the CBOE Volatility Index (VIX). According to this article, we're not even close to a Vix value that would indicate an upward trend is around the corner. As I write this, the Vix stands at around $23.50. Many believe it needs to be something like 50% higher to indicate the towel has been thrown in by traders and investors, thus signaling a potential bottom.

This is tough on the investing psyche. People are looking at stocks like Citigroup (NYSE: C), Disney (NYSE: DIS), Coca-Cola (NYSE: KO), and General Electric (NYSE: GE) and saying to themselves, "How much lower can this go, this has to be a bottom now!" Nope. Volatility is king of this domain, and it will need to spike before institutions and hedge funds believe that it's time to put cash on the sidelines to work. Until this happens, fresh 52-week lows may be the order of the day for a long time.

Volatility Index S&P 500 Options: VIX up 3.30 to 27.90.

Volatility Index NASDAQ 100: VXN up 2.55 to 30.05.

Financial Select Sector: XLF March volatility at 51; 26-week average is 34.

Option volume leaders today were: Washington Mutual, Inc. (NYSE: WM), Citigroup Inc. (NYSE: C), Merrill Lynch & Co., Inc. (NYSE: MER) and The Bear Stearns Companies Inc. (NYSE: BSC) according to Track Data.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Biogen (NASDAQ: BIIB) announced on 10/12/07 that its board of directors authorized management to evaluate whether third parties would have an interest in acquiring the company at a price and on terms that would represent a better value for stockholders. BIIB is recently up $3.06 to $77.05. BIIB December 90 calls are bid 50 cents. BIIB December 75 straddle is priced at $7.20, above a level of $5.55 from two hours ago. BIIB January option implied volatility of 53 is above its 26-week average of 36 according to Track Data, suggesting options traders expect movement.

Volatility Index (VIX) up 0.36 to 21.03; FOMC lowers Fed Funds rate 25 basis points to 4.25%.

Volatility Index: down 3.28 to 23.04 after FOMC lowers rates to 4.75%. VIX 10-day moving average is 25.19.

Volatility Index NASDAQ 100: down 3.77 to 24.97 according to Track Data. VXN 10-day moving average is 27.62.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.